Real Estate – Residential
Welcome to the first of two chapters on Real Estate investments.
In this chapter, we look at the Residential or Retail Real Estate investments market.
The real estate market attracts the maximum attention among all investment avenues when people think of long-term assets. The sense of ownership of one’s own home also boosts other factors that influence our lives from health and wellness to a sense of a better quality of life.
But investments in real estate is a bit more complex than owning one’s own home. Let us look at the residential market and see if it makes for a smart investment.
Investment in the residential real estate market can be for two reasons:
- For personal use and
- For investment purposes or renting
The scenario in both cases is entirely different.
Residential Real Estate for Personal Use
There are quite a few reasons why real estate investments for personal use are considered a good bet but in the last decade, dissenting voices have also emerged that talk of renting one’s home as against buying it as a better option.
Though a rough calculation of renting a house versus buying does show that financially renting makes sense, buying and having a home to call one’s own is still a better option for the psychological benefits it offers.
On a side note here, it is good to remember that anything that makes you happy, does not hurt anyone and increases your overall sense of well-being gives you better psychological control over yourself. This lets you accomplish most of the things you want to attain in life.
Owning one’s home is one such booster that pushes you beyond others who do not yet own a home. A Harvard study reveals homeowners are more likely to:
- Be satisfied with their homes and neighbourhoods;
- Participate in voluntary and political activities; and
- Stay in their homes longer, contributing to neighbourhood stability
Here are some benefits of owning one’s own home:
Less Stress
If you can make your home loan (i.e. mortgage) payments on time, you will feel less stressed. Having to pay rent creates a sense of acrimony within most of us. Very few of us feel that the house rent we give is a steal. Rather, we feel we are the ones from whom money is being stolen.
On top of that, a tenant usually feels the house owner is being a bit nosy even if they simply inquire if everything is fine. We also compromise on the rental place since we feel we will not be here long enough but just for a few years.
A home, on the other hand, is purchased after you check all the details and feel right about it. Unlike a home, it is not something you will buy because you are making a compromise. This sense of ownership creates a sense of privilege and a good life, which makes us feel more secure and in turn, transcends into a less stressful life.
You now have control over your environment and can create the home that you love. From painting a wall or hanging a shelf without asking permission, you can make everything suit you. Since we are all sensitive to our environment, a sanctuary in your home will also make you feel less stressed.
Moreover, as you don’t need to move house every few years, there is a sense of stability that brings its own mental peace. A home also makes us a part of a society, a community. This creates a strong sense of community and leads to lower stress levels.
Also, the home loan repayments are to a bank rather than an individual. Therefore, the acrimony levels are lesser than renting.
Better for Your Children
Research shows that having your own home helps your children. Positive results can range from better performance in school to behaving better as they have fewer behavioural problems than children of non-homeowners. The reasons for each are different.
Having your own home gives your children stability and routine and both help them thrive. Having the same friends, knowing what to expect, having the same neighbourhood and seeing the same people reduces their stress levels and they perform better in school.
Your happiness and your children’s happiness are positively correlated. This means if you are happy, they are happy. If you are sad, they are sad. Since owning your own home makes you a happier person, your positivity affects your children and they become better-behaved individuals.
A Healthier Lifestyle
There are quite a few things that we humans have messed up. From living in polluted cities to eating vegetables and fruits rich in pesticides, our health is compromised in numerous ways. But having your own home allows you to make a healthy choice.
You can, for instance, choose wall paint that does not give off toxic fumes. You can choose to do away with false ceilings that are a magnet for harmful insects and dust. You can also create kitchen gardens where you can grow your own vegetables. If you choose to stay in a home away from the city, you can have small lawns and gardens where you can grow fruit trees. Owning your home can make you healthy if you make some of these healthy choices.
Financial Security and Wealth Growth
Though the direct financial effects of owning a home are questionable since the tax benefits of House Rent Allowance usually take care of any negatives of paying rent, the overall financial positive effects of having your own home are unquestionable. For instance, your home loan repayment does not rise like house rent. So you have better control of your finances. As your income rises, you have more money to invest and grow your wealth which makes you financially more secure.
What Kind of Home Should You Buy for Yourself?
Experts suggest that you look beyond ‘location, location, location’ – the rallying cry for smart real estate investments – when you plan to buy your home. Here are a few pointers you need to keep in mind.
Buy the Best You Can Afford
Research shows that prices of higher price apartments escalate faster. This means you should buy the best you can afford.
See what you can buy if you can cut down on your expenses. Also, have a realistic view of your income growth. If your household income is around Rs. 8-9 lakh per annum, then you ought to make an estimate of how much it will rise in the future. If you expect it to rise to around Rs. 12 lakh per annum in 3-5 years, then you can think of a higher-priced and thus a better home than what you can think of at current income levels.
However, if you think it will not rise that much then you ought to find ways to increase your income by enhancing your skill sets. A positive side effect of the pandemic has been the rise in online learning. Some of the best universities now offer online courses and modules at reasonable prices. Use these to enhance your knowledge and skills.
Choose a Quality Builder
This cannot be stressed enough. Choosing a builder that makes compromises on quality is one of the worst mistakes you can make. However, thanks to the lure of real estate many bad builders have now become respectable with a façade of wealth and luxury. Avoid such builders.
Some bad builders also offer a higher commission to brokers, which means if you choose to buy through brokers, then these real estate agents will push the builders to you through sales pitches or even discounts. Again, something to avoid.
If you are going for a stand-alone property rather than an apartment in a housing society, then ask for references of earlier constructions and go and have a long talk with the owners of those properties. Asking these owners for feedback and problems will give you enough information to decide if a builder or a property is the right one.
Maintenance is the Long-Term Headache You Would Want to Avoid
If you are buying an apartment in a housing society, then remember to look in detail at the maintenance. This is one of the most common things that most buyers neglect to check. Check the maintenance in other housing complexes built by the same builder. Read online forums and join a few real estate groups on Facebook or WhatsApp. You will soon get a very good idea of the problems.
Also, have a good idea of maintenance charges. The cost of maintenance in housing societies can be quite high and unscrupulous builders tend to charge rates that are profitable for them not for the residents. Since this is a regular payment you will be making, you ought to know the outgo and understand the cost you will have to bear.
Look for Problems
Look at issues faced by existing owners. There may be numerous small problems that you will not find at the outset. Small things that help in every day running of a household can help in tremendous ways. From the placement of the kitchen sink to space for the washing machine, or from good quality materials to sunlight coming into the bathrooms, these are points that you need to check. Make a list of what you would like to have and what would be good to have when you visit the property.
In addition, there may be other problems such as approvals from different authorities, distance from markets, presence of infrastructure facilities like schools, petrol pumps, hospitals, etc. are important factors that you need to see.
Choose a Neighbourhood You Want to be In
Your neighbourhood can have a strong impact on your sense of community. If you stay in a neighbourhood, where you cannot connect with or relate to different people around you, then it may be a problem over the years. Staying among like-minded people also helps in other ways to give you a strong social network.
Don’t Make it Too Far from Your Workplace
It is important that you look at time in terms of money. Putting it simply, if you divide your yearly income by the hours in the year, you get an idea of the value of your time. (If you want to think long-term, make a conservative estimate of all your income over your working life and divide it by the number of hours in those years.)
The reason we are repeating it here in this context is that you lose quite a decent amount of money if you stay far away from your workplace. The daily commute can eat away at your time one day at a time until you realise you have spent an equivalent of a working month each year on your daily commute.
(Note: Calculated as 2 hours of total commute each day for 21 working days in a month, for 12 months, which means 504 hours. Divide this by the hours in a day, i.e. 24, and you get 21 days; i.e. the days you work in a month.)
Try to limit the daily commute to less than an hour. If you cannot reduce it, then spend the time listening to podcasts in the morning and relaxing music or talks on the way back.
Do the Maths on Tax Savings and Other Payments
Though tax slabs and saving opportunities change every year, you should try to see how much tax breaks you can get from your investments. Buying a home in the name of the wife usually has a lower registry charge, as against buying it in both husband’s and wife’s or only the husband’s name.
The standard charges that will add up to your purchase price are:
- Stamp Duty
- Registration
- Brokerage (if you buy using a broker)
- Advocate Fees
- Home Loan Processing Fees
- Society Registration and Administration Charges
Residential Real Estate for Investment
Residential real estate for investment can give a mixed bag of results. On one hand, it gives you an immovable asset from which you can earn rental income or use as collateral for other investment. On the other hand, the returns are less than what you get from other investment options including even low return options like fixed deposits.
Research shows that the average yields from rental income can range from as low as 1.8% to 4.4%. Of these, the higher yields come from the affordable homes segment and not the other segments like the mid-level or luxury. This makes sense if you consider that investment is less and returns are not going to be so low.
There has also been an indication that specialised living spaces such as co-living (basically a more trendy form of Paying Guest accommodation), serviced apartments and senior living, offer better returns.
A smart way to get better returns is to not look at the investment less as a source of passive income and more as a side business. If you invest in a residential property and work on its exteriors and interiors to make it a better than similar properties in the market, then you will likely be able to charge a premium both in rent and in sale price. However, this means you will have to wade deep into the market and know its ins and outs – from the price of paint to the price of kitchen racks, from knowledge of areas that are likely to see premium paying customers to different taxes and charges, you will have to know it all.
A key point you need to remember. Don’t invest in areas that have high unsold inventory. As of now, Mumbai and Delhi NCR head the list in overall unsold inventory though there are specific areas that still offer investment opportunities.
The real estate market in India is now more mature. So, you are not going to see the 60-80% returns that existed in the years 2004-2008. Also, there is now more reliable information thanks to the growth of the internet, and so all opportunities will be well known and you will not find the deal of your lifetime.
All this means the chances of your real estate investment giving you exceptional returns are more of a pipedream and not reality.
Nonetheless, if you want to buy real estate for investment, then do so after you have spent some time understanding it and know how to seek out and capitalise on opportunities. Not before.
Summary
If you want to buy residential real estate to live there yourself, then go for it.
But if you want to buy it as an investment, then tread with caution.