The Indian real estate sector is poised to contribute nearly 13% to the country’s GDP by 2025 and will reach an estimated market size of US $9.30 billion by 2040. This can be attributed to rapid urbanization, growing demand for spaces in the healthcare and education sectors, FDI inflows, and government initiatives like the Smart City Mission. Moreover, with the introduction of investment vehicles like REITs, opportunities worth billions will be generated in the coming years. This explains why investing in different types of real estate investments can be fruitful in the long run.
While benefits are vast, have you ever wondered what types of real estate assets exist and how you can invest in them? Here is a guide that explains different types of real estate assets and the benefits you will accrue by investing in them.
Why Should you Invest in Real Estate?
Before delving into the different types of real estate investments, let us first gauge through the benefits that you can reap by pooling your money in residential, industrial or commercial properties.
1. Enhanced Transparency and Accountability
The enactment of the RERA act has ushered a new wave of transparency and accountability in the real estate sector. Provisions such as mandatory registration of the real estate projects and agents, the formation of regulatory authorities in every state, a cap on advance payment, after-sales liability, etc makes the sector more organized.
2. Foreign Direct Investments
FDI in the real estate industry in India is governed by the provisions enumerated in the RBI’s 2005 circular, Foreign Exchange Management Regulations-2000, and the FDI policy created by the Department of Industrial Trade and Promotion. The current norms stipulate 100% foreign direct investments (with certain conditions) through automatic route in the built-up infrastructure, housing, real estate broking services, township, and construction-development sector.
Here are some reasons why investing in different types of real estate investments with FDIs will be fruitful in the long run:
- Creates umpteen employment opportunities
- Generates long-term capital inflows
- Brings cutting-edge technologies to the host country
- Increases the level of competition in the domestic market
3. Generate Additional Income
Be it residential or commercial assets, a vast majority of passive income is generated through rental properties. Since the properties are leased out for a longer duration, you will receive fixed periodic income from rental properties.
4. Easy to Finance
When you decide to invest in stocks, you have to provide a 100% upfront payment. This means that all your funds are tied up in one specific type of investment.
This, however, is not the case in the real estate sector.
You can purchase a home priced at Rs. 60 Lakhs by just paying some amount. The rest will be borne by the bank you take a loan from. In the meanwhile, the funds you saved can be invested in other asset classes.
5. Excellent ROIs
With the development of social and physical infrastructure, a property’s value appreciates over time. Additionally, real estate assets act as a hedge against inflation. With an increase in inflation, the prices of commodities increases. This, in turn, increases the rental income. Hence, you stay protected against short-and long-term inflation-induced effects!
Unlike mutual funds, stocks, or bonds, real estate assets are less volatile to market-induced fluctuations. Apart from the advantages mentioned above, investing in different types of real estate investments will help you earn tax benefits on the depreciation of the asset.
5 Types of Real Estate Investments
From the points discussed above, it is clear that real estate investing can reap long-term benefits for you. Now let us take a look at different types of real estate investments and understand their advantages.
1. Residential Real Estate
From condominiums and family homes to one bedroom apartments and villas, residential real estate assets are everywhere. By leasing or renting out your properties, you receive a stable and continuous income source.
In fact, you can even offer your real estate assets to vacationers through websites like Airbnb and earn short-term rentals. You can not only charge on a per-night basis and earn more, but you won’t even have to worry about tenant evictions! However, vacation rentals do come with their set of disadvantages. This includes, but is not limited to, offering utility services and fully-furnished apartments.
2. Real Estate Mutual Funds
Real estate investment requires a lot of capital influx. For those of you who feel reluctant in residential or commercial property investment, real estate mutual funds is the most viable alternate investment option for you.
Mutual funds are not only liquid but they also provide the flexibility of diversifying your portfolio. What is important to note is that unlike tangible real estate assets, there are market risks associated with mutual funds. Moreover, since the interest rates have a direct bearing on borrowings, a slight increase in IR can make the investment a burden.
3. Commercial Real Estate Assets
Any property that is used for business or commercial purposes is known as a commercial real estate asset. Co-working spaces, office complexes, malls, hotels, shopping and food centres, and hospitals are some of the major examples. Apart from long lease periods, the vacancy rates are generally lower in commercial spaces.
Additionally, if you end up signing a Triple-net (NNN) lease with tenants, then they will be responsible for bearing additional expenses over and above the rent. Although this type of real estate investment has multiple benefits, there are a few factors that you must consider before purchasing a commercial property:
- Conduct a detailed market research
Before investing in a commercial real estate asset, it is important to gauge through the market dynamics and trends. This includes demand and supply, taxes applicable, interest rates, technological advancements, vacancy rates, etc.
- Mind due diligence, always
Losing an investment opportunity is acceptable if it doesn’t suit your requirements; however, investing in a wrong asset may increase your financial burden. This is why examining the market is important.
- Plan your finances in advance
Take EMIs, property and capital gain tax, operational and maintenance costs, lease structure, etc into consideration before proceeding with the investment.
Real estate investing is not restricted to residential or office spaces, but you can also explore REITs. Although the concept is relatively new in India, REITs have become one of the most popular types of real estate investments across the world.
REITs or Real Estate Investment Trusts are companies that own, manage, or fund properties that generate income. These investment trusts are gaining impetus because they can be purchased as shares, they are regulated by SEBI, and offer a diversified portfolio. Generally, there are 3 main stakeholders in REITs: Sponsor(s) [who establish a REIT and appoint a trustee]; Trustee who manages the assets; and a Manager who oversees the trust operations.
Quick Fact: The Embassy Office Parks, India’s first real estate investment trust raised its IPO in 2019.
5. Farm House
Serving a residential purpose in an agricultural setting, farmhouses have become an ideal weekend getaway destination for scores of families and individuals. A farmhouse is a building that is constructed on agricultural land for tethering cattle or storing farm produce. Although you don’t have to convert the agricultural land for building a farmhouse, you cannot use it for commercial purposes.
Alternate Investment Source
Although agricultural lands cannot be classified as real estate assets, if you covert it for non-agricultural use, then it is a great way of diversifying your portfolio. If you want to continue to use the land for farm purposes, then crop cultivation, organic farming, dairy farming, cattle rearing, etc are some of the activities that you can use the lands for. Enlisted are a few advantages of investing in agricultural lands:
- It is an excellent source of creating long-term wealth.
- Income accrued from farm produce is not taxable.
- The land does not depreciate with time.
- Just like other types of real estate investments, agricultural lands also act as a hedge against inflation.
While there are a plethora of advantages of owning agricultural land, there are a few things you must know. You cannot use agricultural land for commercial purposes. For that, you have to get a conversion certificate issued by the concerned authorities. Additionally, to ensure that the land is free from any financial or legal liabilities, examining property documents like revenue records, title deeds, RTC extracts, encumbrance certificates, etc. is important. Do note that you cannot put agricultural land to commercial use.
Note: The process and eligibility for purchasing agricultural lands in India vary from one state to another.
Hence, if you want to earn passive income from other asset classes, then real estate is an ideal choice. With different types of real estate investment available, you can diversify your portfolio and pool funds in multiple assets. Since each type of investment has its own sets of pros and cons, conducting thorough market research and evaluating the risks before investing is crucial. Because if the demand for residential or commercial spaces is not as high as your expected, then your investment might turn into a burden.