For a person looking to make long-term investments, key asset classes available include commodities, fixed deposits, equities, and real estate. From an asset allocation perspective, experts advise that one should spread out their investments to reduce risks and ideally have a mix of physical investments as well as financial assets present in the portfolio. When it comes to physical assets, real estate has always been among the top favorite for investments.
Factors to keep in mind when investing in real estate
Research: Do a thorough homework on the location, configuration, the returns expected of the investment, the rental yield and then zero in on the project. Do check on the upcoming locations as they may be less expensive to purchase presently and may give you good returns in future. Ensure you enter into real estate transaction with a reputed RERA certified branded developer.
Plan your financials: Of the total money that you have allocated to invest, first decide on how much you want to divert to real estate and then take action accordingly. Unlike other asset classes like mutual funds or fixed deposits, entering into real estate is a large investment and mostly requires borrowing. Thus, it can occupy a large part of your overall financial portfolio, which can be risky if not well thought of. Transaction costs like stamp duty and registration need to be factored in.
Why investment in real estate helps?
With limited availability of land, increasing population and people migration from one city to another, realty investment has an upside potential. Moreover, the government’s push for affordable housing, tax rebates and subsidies offered, as well as lower rate of interest offered by banks, makes real estate an attractive investment. One can benefit by real estate investment in multiple ways. You will earn rental yield and also its value will appreciate with time and development of location.
Secure investment: Compared other investment assets, real estate is less volatile since it is not traded. A study undertaken by Jordà-Schularick-Taylor Macrohistory Database funded by the Institute for New Economic Thinking (INET) asserts that ‘residential real estate, not equity, has been the best long- run investment over the course of modern history’. Additionally, with the rate of interest on home loans being lowest ever in the past 15 years, now is good time to invest in real estate.
Currently, the net rental yields in Mumbai, Bengaluru and National Capital Region (NCR) are around 2- 3% per cent, according to 2019 Knight Frank and Khaitan & Co report. With the national average of 3% percent, the rental yields in India are higher than in Beijing, Singapore and Hong Kong. Generally, investing in affordable to mid-segment properties will bring you higher rental yields, provided external factors like location, reputation of the builder, infra development are aligned.
Additionally, with the government drafting a new rental law, interests of investors will be protected with the rules and regulations in the rental segment streamlined. Also, there are a couple of tax benefits while calculating tax on rental income.
Real estate investments have a lot of tax benefits attached to it including section 80 C where you can claim benefits on paying the principal amount of the home loan, section 24, where you can claim tax benefits on the interest on the home loan that you pay for. Also, first time home buyers can claim a tax deduction on interest paid under section 80EEA. However, this facility is for investing in a property in the affordable housing segment whose value is Rs 45 lakh or lesser and other conditions need to be fulfilled.
Unlike mutual funds, diversification is difficult in case of physical real estate.
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