Real estate investment involves the commitment of funds to property with an aim to generate income through rental or lease and to achieve capital appreciation. Thus, it involves the purchase, ownership, management, rental and/or sale of real estate for profit.  Real estate refers to immovable property, such as land, and everything else that is permanently attached to it, such as buildings. When a person acquires real estate, she/he also acquires a set of rights, including possession, control and transfer rights.

Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage ) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort.

Understanding real estate investment is crucial because it usually involves a substantial and long-term investment. Moreover, the real estate market can be unpredictable. This is particularly important when one goes beyond buying a home to actually ‘investing’ in real estate. There are a number of ways in which an investor can participate in the real estate market.

When is the right time to Invest?

When the right time to enter into realty is is a kind of intuitive decision and can’t actually be described in words- it is more or less based on judgment considering the past facts. As per the present scenario, it would be good for the small investors to wait for around 8 to 1o months if they plan to invest in certain areas within larger cities like Mumbai since a correction is expected there in the midterm.

However, if planning to invest in other cities, the right time would probably be now. Since this view is always subjective, one must study the local market and inquire into the expected dynamics and prevalent there.

A proper measure is affordability. Since realty is not a one day investment, one should plan well his wealth and then invest into the market. Also, taking a back seat and using the policy of ‘wait and watch’ should be a game of experts, who on one hand hope for the profit do have the bravery to bear loss, if any.

Investment for rental purpose

One can opt for real estate investment with an aim to rent the property out to a tenant. The owner earns a continuous stream of rent from the tenant, but is responsible for paying the mortgage, taxes and any costs associated with maintaining the property. The owner also benefits from capital appreciation i.e. a rise in the value of the property over a period of time. The landlord runs the risk of not finding a tenant and could suffer negative monthly cash flows

i.e. mortgage payments and maintenance expenses. As compared to owning stocks and bonds, rental real estate requires a significant amount time and effort to be devoted by the landlord.

Typical sources of investment properties include:

• Market listings (through a Multiple Listing Service or Commercial Information Exchange)
• Real estate agents
• Wholesalers (such as bank real estate owned departments and public agencies)
• Public auction (foreclosure sales, estate sales, etc.)
• Private sales

Sources of investment capital and leverage

Real estate assets are typically very expensive in comparison to other widely-available investment instruments (such as stocks or bonds). Only rarely will real estate investors pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself. The amount of the purchase price financed by debt is referred to as leverage.

Risk management

Management and evaluation of risk is a major part of any successful real estate investment strategy. Risk occurs in many different ways at every stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.

Risk – Mitigation Strategy

Fraudulent sale: Verify ownership, purchase title insurance

Adverse possession: Obtain a boundary survey from a licensed surveyor

Environmental contamination Obtain environmental survey, test for contaminants (lead paint, asbestos, soil contaminants, etc.)

Building component or system failure: Complete full inspection prior to purchase, perform regular maintenance

Overpayment at purchase: Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment

Cash shortfall: Maintain sufficient liquid or cash reserves to cover costs and debt service for a period of time,

Economic downturn: Purchase properties with distinctive features in desirable locations to stand out from competition, control cost structure, have tenants sign long term leases

Tenant destruction of property: Screen potential tenants carefully, hire experienced property managers

Underestimation of risk: Carefully analyze financial performance using conservative assumptions, ensure that the property can generate enough cash flow to support itself

Market Decline: Purchase properties based on a conservative approach that the market might decline and rental income may also decrease

Tax Planning: Plan purchases and sales around an exit strategy to save taxes.

Real Estate Investment Groups

Real estate investment groups are similar to small mutual funds. They are set up for rental properties. While an investor may own one or more units, a professionally managed company acquires builds, maintains and lets out all the units on the properties in exchange for a percentage of the monthly rent.

Real Estate Trading

Real estate traders hold properties for only a short span of time (less than four months), aiming to sell them at a profit. This process is called flipping properties. Investors aim at purchasing significantly undervalued or very hot properties. Such owners may or may not invest money into improving the property before putting it back on sale. A bear market could result in substantial losses for a real estate trader, since the investment is large.

Resources

Listings of available REO properties are a great starting point to exploring available real estate investment opportunities.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a corporation that invests in real estate. REITs trade on major exchanges. A REIT uses investors’ money to acquire and operate properties.

The benefits of REITs are:

• REITs provide fairly regular income.
• Investors gain exposure to non-residential investments (like malls and office buildings).
• REITs are highly liquid.
• REITs are required by law to distribute 90% of their taxable income in the form of dividends to shareholders.

Before making a choice regarding the kind of real estate participation, an investor must evaluate his/her investment capacity and risk appetite.

Indian Real Estate And It’s Future

Indian Real Estate Market has grown with time. The main reason for the accelerated growth can be contributed to the fact that the industry is very flexible in nature.

The development has caused higher aspirations for better standards of living and a good quality of life.

The rapid increase has been because of the relaxed policies of our government regarding Foreign Direct Investment which favors economic development of the country as well as easy Home Loan terms and conditions with an increase in the income of people, degree of urbanization, and their purchasing power. All this has helped shape up the Indian realty sector.

For FDI:

Some of the factors that have given a boost to the Indian Real Estate Market are the FDI policies have increased the amount of Foreign Investment in India. Owing to this our country ranks second most preferred location for Real Estate Investment in the world.

After Agriculture Industry, Real Estate has become the second highest employer.

Real estate whether Residential, Commercial, Retail is being developed on full scale in many different cities of the country.

The large number of people getting education in India will demand over 100 million sq feet of office and industrial spaces.

More so, India has been a host to Fortune 500 companies which in turn attract more companies to make this country their operational base which will also require more office space in future.

Thus it is evident that the Real estate Industry in India will see a lot of work in the years to come.