Modules for Investors
Alternate investment options in India outside of pureplay financial instruments
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India's favorite alt investment: Real estate
If there is one asset other than gold that your parents diligently saved up for, it has got to be their own house. As the real estate market picked up in 20th century India, generation X and early generation Y lost no time in saving up for buying their own home. It was a symbol of prestige and pride, to have one’s own residential property to reside in.
A decade or two later, real estate investments are still just as popular, even if the purpose for property investments may have changed over the years. Today, investors include real estate in their portfolio mainly because it can help beat inflation and offer some reliable diversification to their portfolio.
If you are also considering making a property investment some time soon, you will no doubt want to know all about the options available to you. Let’s begin at the basics and go on to discuss the many real estate investment options that you can choose from in today’s India.
What is real estate investment?
The term real estate refers to property such as land and buildings. Real estate investing involves the purchase of land and/or buildings, improvement of the said assets and sale or letting out of the property. One of the most basic forms of real estate investments is buying your own home.
In fact, it is the point at which most people begin their journey of property investments. Saving up or taking a home loan for purchasing or constructing your own house is probably a part of your financial plan too.
But that is not the only way in which you can invest in real estate. There are several other avenues to add real estate investments to your portfolio, and not all of them need to be purchases of physical, tangible assets. Curious to know what that means? Well, to understand this better, take a look at the many different ways in which you can invest in real estate.
What are the different ways to invest in real estate in India?
When you think of real estate investments, you probably think of a house or a bungalow. But that is one of the most basic ways to invest in property. Today, there are so many different channels of real estate investments available to interested investors. Check out the options below.
Rental residential property
Rental residential properties are among the most preferred sources of passive income for investors in the real estate market. It is also one of the easiest investment avenues to understand, making it ideal for first time real estate investors too. By purchasing a property in a residential area and letting it out for residential purposes, you can set up a steady stream of passive rental income. This income can help you meet your family’s increasing expenses, tackle inflation and even substitute your primary income when you retire.
Rental commercial property
Commercial rentals work much like residential rentals, with the primary difference being the purpose for which the let-out property is used. In this case, rental commercial property can be an office space in a busy area of your city, a land in your name rented out for building a commercial space or even a small plot or property you rent out to your local retailer. Commercial rentals are typically higher than residential rentals, so you enjoy a higher amount of passive income.
House flipping is not for beginners to the real estate industry. But if you have a fairly good understanding of how the industry works, you can go the fix-and-flip way. This essentially involves buying a real estate property, fixing it and then reselling it within the short term for a much higher price, thereby bringing in good returns on your investment. However, to be successful at this, you need to have sufficient funds to fix and repair the property before reselling it.
Vacation rental investments, as the name indicates, is a strategy where you invest in a property that is located in a popular vacation or travel destination. This is different from a long-term residential rental, since the income from your vacation rental will likely be seasonal, rather than available all the year round. But the income from a vacation rental can be higher, depending on where it is located. On the downside, the costs of managing the property can quickly add up over time.
Real Estate Investment Trusts (REITs)
If you want to invest in the real estate market without actually having a tangible property to manage and maintain, you can invest in property via REITs. A REIT is a Real Estate Investment Trust that uses the investors’ funds to invest in income generating properties. These REITs often trade on stock exchanges, and you can invest in them via these channels. The gains from the portfolio of the trusts are passed on to the investor in the form of dividends. The primary upside of investing in REITs is that you can invest in a wide range of income generating real estate investments without physically holding any property yourself.
Real estate stocks
If you are quite savvy about the markets, you can choose to invest in real estate by purchasing the stocks of companies in that industry. This includes companies involved in the development, construction and maintenance of residential and commercial properties. The upsides and risks of investing in real estate stocks are pretty much the same as those associated with investing in the markets.
Given that there are so many options available for you to choose from, investing in real estate can be an interesting journey. Check out the investment channels out there, compare them and choose the one that best suits your financial needs and your investor profile. And if you are looking for more alt assets for your folio, then check out the details of venture capital investments and angel investing in the next chapter of this module.
A quick recap
- The term real estate refers to property such as land and buildings.
- Real estate investing involves the purchase of land and/or buildings, improvement of the said assets and sale or letting out of the property.
- You can invest in real estate via residential or commercial rental properties, or by investing in vacation rentals.
- Alternatively, you can fix and flip houses or invest in REITs or real estate stocks directly.
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