When Planning Your Wealth Goals, Here's How to Think about Property...

Imagine you are 10 or even 20 times wealthier than you are now.

You're living your dream life on a beach with friends and family. You have a golf course by your house and you give the ball a hard whip.

Now, give a thought how you made enough money to achieve all of this.

Keeping inheritance aside, it's you made all this money through...

A)Your Business

B)A Highly-Paid Job

C)The Stock Market

D)Investing in Property

Whenever we think about the future, we think about our savings and search for diverse ways to multiply our wealth.

Now, there are various investment options and ways to make it big.

And one of the safest options which comes to your mind would be real estate. Sure, gold and stocks are on the list but the top position is dominated by real estate.

This should come as no surprise that real estate is king when it comes to wealth creation.

We Indians have known for a long time that real estate is among the best investments one can make in their lifetime. It's not for any silly reason that most Indians prefer property as their ideal investment choice.

Back in August 2017, RBI published its 'Indian Household Finance Survey' report which highlighted that the average Indian household holds 84% of its wealth in real estate.

Real estate is a tangible asset. It gives you peace of mind. Prices may go up or down, but your piece of land or home will always have value.

If you bought real estate right, even the bursting of the 2008 bubble would not have given you too many jitters.

People in their twenties and early thirties have one huge advantage to grow their wealth: Time.

The longer the money remains invested, the better it works its compounding charm.

There's an old saying which says...

• The best time to plant a tree was twenty years ago.
  
  When's the next-best time? Now.

That especially applies to investing in real estate as buying a property can pay off big time if you invest wisely in your 20s.

Owning a property (residential, commercial or a vacation home) could be either active or passive, depending on your preference.

And the most common way to invest in real estate is to own your own home.

For many people, this investment represents a substantial portion of their net worth.

Here's why we are in favour of investing in real estate...

Strong hedge against inflation

People living in 1970s or early 1980s would understand the nature of inflation. They know how inflation sharply reduced their buying power when inflation was running wild.

In recent decades inflation has been muted.

But there are growing fears that inflation may be coming back...and coming back big.

Therefore, you need a hedge.

While we have gold and other investment options, here's how real estate investing helps in beating inflation.

When you purchase a property with a mortgage, you pay today's housing prices and interest rates.

The 'real value' of your loan at the time of borrowing is much higher than its 'real value' when it is repaid. As the loan amount is not adjusted for inflation, the borrower is the beneficiary.

In the same way, for people who are earning income from rental properties, they can mitigate the effect of inflation by raising rents.

Moreover, limited land availability (in select localities) on top of rising population will generally increase housing demand, and therefore, prices over time.

It's due to these reasons real estate is often considered a strong hedge against inflation.

Diversification of Your Portfolio

Different asset classes perform differently during a changing market environment.

For example, when a high risk asset like stocks is performing well, a low risk asset like gold typically won't. When stocks are down, gold is generally stable or up.

In the same way, real estate is largely driven by almost completely distinct set of factors than what drives stock prices.

Since all investing comes with risk, diversifying your portfolio through property can help smooth out your wealth building journey.

'Don't put all your eggs in one basket'. Don't risk everything by committing to one asset class.

The trick is to diversify or ensure your wealth is spread well across categories. This will go a long way towards helping you reach your financial goals with less risk.

By the time you retire, your wealth will be protected if you have diversified in property, equities, debt, and cash.

Financial Security for a Long Time

Investing in real estate will give you long term financial security.

Also, think of the emotional fulfilment and joy you get when buying your first home.

Tax Benefits

Now this is icing on the cake.

One of the main perks you get to enjoy by owning a rental property is the tax exemptions. For instance, the loan you take to buy your property has tax advantages linked to interest and principal repayment.

Additionally, you can set off the interest on loan, property maintenance and insurance against the rental income from that property.

All these deductions save you a decent amount of money that otherwise is paid towards your taxes...while at the same time allowing you to create an asset.

Finally, when you sell your property, then there's the tax advantage on capital gains. A capital gains tax may be assessed when you sell an asset for a profit.

To obtain this tax exemption on your capital gains, you can invest the profits in bonds. Or you can reinvest the proceed into another property to avoid the tax.

Now, it's not all rainbows and butterflies when it comes to investing in property.

There are a few drawbacks.

Property can be expensive to maintain. Sometimes one can go overboard with a loan...resulting in large interest payments.

And of course, if interest rates move up higher, the interest outgo goes up too...and if that's something one has not planned for it could be quite a challenge to manage.

Therefore, a checklist of some sort always comes in handy before making big decisions.

So, when planning your wealth goals, here's how you should think about investing in real estate.

You should buy property in an up and coming neighborhood.

Location continues to be one of the most crucial factors.

It's natural to want to purchase property near popular work, dining, shopping and entertainment options. Even if you are buying the property as an investment option, you want to own it in a desirable area.

Now you can't know for sure that the neighborhood is poised for growth. However, there are a few things to look for. New construction of properties and close proximity to a big city are two of them. Talk to locals and find out who lives in the area, who is moving to the area and why. Analyse the history of property prices.

The second thing you must consider is your investment rationale and investment horizon.

Investing in property is a high-value investment. Before making any decision, you must have clarity of your investment purpose and your investment horizon.

Whether you are buying for self or renting, and whether you are buying for the short term or long term.

Planning all this will avoid unexpected surprises and financial distress.

Then come interest rates. For example, the urge to get a house is more than ever now, with cheap home loans and work from home becoming an accepted long-term norm.

Consider scenario 1 (2017): On a Rs 15 m house at an interest rate of 10% for 15 years, it would mean an EMI at Rs 162,000.

Now in scenario 2 (2020): On a Rs 15 m house at an interest rate of 7.5% for 15 years would mean an EMI of Rs 139,000.

That's a Rs 23,000 saving/month only due to 2.5% reduction in interest rates.

On the other hand if the interest rates move against you, that's an additional Rs 23,000 payments/month that you need to meet.

The next important thing is to be careful with leverage.

Cheap home loans may seem convenient now but they may come at a big cost.

You commit your future income to get utility today at the cost of interest spread across many years.

Whether your goals are focused on the short-term, long-term, or if they are a mix of both, there are several ways in do so in real estate investing.

Do ample research before dipping into your savings. This will go a long way to ensure you make the right choices. Always do a thorough research about the project, developer, the amenities, and affordability.

Examine the market rates and trends.

A good strategy for wealth building is to keep your housing expenses as low as possible so you don't tie up all your wealth in your home.

Or rather than investing in physical assets, make indirect investments in real estate.

These include investing in real estate investment trusts (REITs).

Since 80% of the underlying assets in REITs are required to be operational as well as income-generating, these have emerged as one of the most viable investment options as compared to conventional property purchase.

You can also invest in real estate stocks and real estate sector-focused mutual funds, and ETFs.

To conclude...

Increasing property value and rental income are just two 'most common and known' ways to profit from real estate.

There's a whole bunch of other benefits, which are worth learning, on how real estate creates 'real' wealth.

Annual cash flow and yield and increase in cash flow if improvements are made are just a few of them.

In real estate, there's an old saying which goes... 'Profit is made when you buy, not when you sell'.

It means, when investing in real estate, you don't need to worry about the price at which you may sell, if you know what you're doing.

It's about doing the due diligence.

It means that you start your wealth building journey from the time you buy your property below the market value.

For example, suppose the going market value for a property is 50 lakhs and you get a good bargain at 45 lakhs.

That's a profit of 5 lakhs even before you have bought your property.

There's also an assumption in India which says that because residential real estate returns have been weak over the past few years, they can yield better returns going forward.

Will this point of view sustain? Maybe. Only time will tell.

But before investing in property, you must ask yourself "why". If it's to get rich quick, then this isn't for you.

In conclusion, investing in a property offers a host of benefits and it should be a part of your overall asset-allocation. The mode of investment and weightage to it may differ based on your personal needs, financial wealth, and your risk appetite.

But do make sure you have an exposure to this lucrative asset class when you plan your wealth goals.

Happy Investing!