There are tons of eye-catching $0 to million-dollar real estate investment success stories on the internet.
But the method to earn passively from real estate property is not new. The method is simple – buy a property and wait for price appreciation.
For example, the Manhattan condo in 1970s cost was $45 PPSF (price per square foot) which is around $1,952 in 2019.
That means a 550 square feet condo which was priced at $24,750 in the 1970s is now available for approximately $1.08 million.
Earlier, people used to generate real estate income by giving a room on rent or agricultural land for cultivation in exchange for money or goods.
The present-day real estate earnings are in the form of rentals, Leasing and Real Estate Investment Trusts (REITs).
REITs are trusts like mutual funds. Where the pooled money is invested in creating a portfolio of different types of property. REITs lease the property spaces collects rents and then distributes the income as dividends to shareholders.
The traditional method of investment was restricted to constructing the property and handing over for commercial or residential use.
The present-day idea is to start afresh with low real estate investment in such a manner that it is ROI positive with minimal attention or involvement.
Which you can do by buying a hot commercial property early and developing for long-term lease, investing in REITs for earning passive dividends or just by listing the property on Airbnb.
Flipping the property or property broking is a full-time effort, a better option will be to place all the money in a bank FD for an 8% returns.
When approached correctly, real estate can be a reliable and passive way to generate positive returns. One just requires proper evaluation skills and an eye to identify the hot property.
As per IBEF, the market size of real estate in India is projected to be $1,000 billion by 2030.
If you start today, you can earn decently working passively.
How to Invest in Real Estate in India 2020
Starting with a short-term rental strategy for Airbnb or buying a real estate property for the long-term is solely up to you.
But you should always know your financial condition, investment goals and market conditions.
You can invest and earn money in the following ways
#1. Residential Rentals
Residential rentals are the easiest to understand. Which involves earning passively through rentals. Renting is ideal when you have substantial capital to finance up-front maintenance costs and cover vacant periods.
People with renovation skills and those who have the patience to manage tenants can start residential rentals without much hassle.
#2. Commercial Real Estate
As you gain experience and with higher initial capital you can look for a bigger profit by investing in commercial real estate.
Commercial real estate involves dealing with companies for a longer-time horizon usually 10 years+ and requires more risk-taking abilities.
But the cash flow will be steady as there will be no yearly change in the tenants and the returns are also higher than the residential real estate.
In commercial real estate, financial commitments are higher and you may want to look for partners in the investments.
Lastly, the most passive way is to buy a hot property at an upcoming marketplace when the market is down, hold the property for substantial capital appreciation and then sell out for gains.
#3. Vacation Rentals
If you are risk-averse or want to start out with minimal investment then you can start with vacation rentals.
Vacation rents are easy to approach and require much less expertise and supervision than the residential or commercial real estate.
Vacation rentals are for short-term periods. Further, the aggregators like Airbnb and VRBO facilitate the booking and takes care of the rental process. Thus, you can earn passively through vacation rentals.
Pre-Investment Tips to Start an Investment in Real Estate in India
#1. Gain Market Insights
Markets offer various types of real estate deals in all sizes. But before you start investing it is better to compare the deals that you find. The insights regarding the demand for the property and the rentals that the property can fetch are valuable.
You can find these trend details & insights from the research reports of real estate firms like JLL, CBRE, Knight Frank, Colliers and industry bodies like CRISIL & FICCI.
You can also find the local property market details (for specified cities) on portals like Magic Bricks and 99Acres. A snapshot of the property prices and trends from 99Acres is as under.
#2. Seek Expert Guidance
In case of any dilemma or doubt seek expert advice who can help you see the pros and cons of the proposal. But, do make sure that you get an unbiased review by hiring someone who is not a part of the deal.
These experts are the real estate lawyers and reputed property consultants. You can take their services while evaluating a real estate investment proposal.
#3. Keep Realistic Expectations
Real estate is not an overnight money-spinner. The mistake most people do is expecting a hypothetical X amount of returns on investments.
The best way to make money in the real estate business is to keep a steady cash flow instead of waiting for a huge capital appreciation.
#4. Location is Everything
A good locality has access to various amenities and infrastructure plus the property enjoys good connectivity to other parts of the city.
In real estate investments, the returns (monthly rentals or gains on selling) hugely depend on the location of the property.
#5. Good Neighborhood Matters
Good neighborhoods with developed infrastructure and facilities nearby is a big factor in price appreciation. A good option is to look for property on the outskirts of the city.
#6. Check Developers Reputation
A good developer will have attributes like
- Timely completion
- Quality construction
- Good property design and ambiance outside layout
- Quality fittings & fixtures
Buy real estate property from a reputed developer/ builder with a track record of project completion.
#7. Invest During the Project Launch
At project launches, developers gauge the public’s interest and hence the prices will be 10% to 20% lower. But remember to check the response before buying.
But investing during the project launch stage has more risk and hence not advisable for a person with low risk-taking ability. Because the developer has basic approvals and his idea is to test the property demand. Chances are that the project may not receive a favorable response.
Before investing in property during the project launch, check basic approvals like
- Building plan approval
- Conversion certificate (Agriculture to non-agriculture land)
- Commencement certificate
- Khata certificate and Khata extract
- Encumbrance certificate
A better idea is to look for the projects approved by reputed banks. Because banks do the due-diligence for new projects.
Look for the past records of the developer/ builder for a similar kind of launch and project completion so that you know the chances of the property getting built timely.
#8. Avoid Oversized Property
The smaller sized properties are often better valued for money for the investor. A 2BHK scores above 3 BHK for reasons like:
- A lesser amount of money is locked with one property.
- Liquidations in the case of smaller property are easier.
- There will be a bigger range of buyers for small properties.
#9. ROI (Return on Investment)
The ROI in real estate investment depends on the risk and the cost it takes to maintain the property over and above the EMIs and expenditures.
The income or the rentals which you are receiving more than the above investments, then only the property will generate positive cash flows. Buy cash-flow-positive properties.
Post Investment Tips to Manage Real Estate Investment in India
#1. Check Your Tenants
Knowing tenants before renting your property matters the most in the real estate business. This gives you the assurance that the property is going in the right hands.
Check the tenants’ background, get the police verification done and ask for other things like family details, educational and employment status, permanent address and a local reference from a relative or office.
#2. Keep Money for Maintenance
Real estate investments come with lots of overheads and repairs. Keep aside money for repairs, renovation, upkeep and municipal taxes.
#3. Money Management
Real estate will involve a certain period of vacancy and uncertain cash flows, which will require prudent money management. Keep aside some money for an uncertain period.
Make a note of all the money that goes into investment, expenses, the profits and re-investments. Tracking all components will help you manage real estate investments better.
Different Ways of Investment in Real Estate
#1. Buying a Property as Sole Owner
The advantage of being a sole owner is that you have the flexibility to make decisions regarding investments, location, tenants and managing the property.
The drawbacks are that either you have to run for all the repairs and upkeep or have to hire a property management company. Both of which are time or money consuming.
#2. Buying Property in Partnership
Investing in real estate through partnership involves optimizing the profit and minimizing cost. All the rental incomes and EMIs and other costs get divided between the parties and hence expense per person decreases.
The risk of investment gets lower when the costs get divided among partners.
The drawback is that the partnership largely depends on the relationship with the partners, goals, future plans and the legal laws.
The process for the partnership for real estate investing would be
- Financial Contribution
Which means establishing a partnership, investment and ownership relationship. Make sure that the agreement is written and is clear to each of the partners.
- Allocation of Expenses, Profits and Responsibilities
Depending on the share of the investments, some of the partners will get a bigger profit, but will also have to face bigger expenses. Also, distribute the working areas and responsibilities and working hours. Making these decisions in advance will help in the long run.
- Exit Plan
Make sure you have an exit plan and the mechanism in place in case if one of the partners dies or wants to leave.
#3. Sub-Rental Investment for Earning Money
Sub-rental is where you invest in a larger property like taking the whole of the building or property on lease or purchase more number apartment and then can give each unit on rentals.
The trend is quite active in metro cities like Mumbai, Bengaluru, Hyderabad and Chennai. The business model is quite similar to service apartment companies.
The drawback is that you need to establish connections with corporate companies for renting and accommodation.
#4. Commercial Property as OYO Hotels
If you already have a commercial property or can develop one then you can have tie-ups with OYO Hotels.
Note: Due to Covid-19, OYO is going through a bad financial phase. Don’t invest right now in OYO hotels but just learn what could be the potential.
According to the Business Line, OYO Rooms has delivered a 15x annual growth with 2.3 million booked room-night transactions in the year 2016.
OYO gets into long-term agreements with hotels, asks the owners to set up basic standards and amenities for the hotels and invests in up-gradation and training staff.
With the use of apps and technology, OYO helps in running the hotel business more efficiently by driving customers to hotel property. The hotel owner increases room utilization and generates more revenue.
Further, the partner hotel enjoys the benefits from brand building, which they could not have done by themselves.
#5. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts are the mutual funds of real estate where you can buy units or shares. The trust invests all the funds in different types of properties.
REITs can be bought and sold on the stock exchanges. REITs are ideal for investors with the lowest investment capital and who want exposure to real estate without a traditional real estate transaction.
REITs are essentially dividend-paying stocks whose core holdings comprise a portfolio of commercial real estate properties with long-term, cash producing leases.
Through REITs, investors can afford non-residential investments, like malls or office buildings, that are generally not feasible for individual investors to purchase directly.
Ways to Earn Money Through Real Estate
#1. Regular Earning Through Rent
Rentals earnings through residential property are the easiest and a familiar way to start real estate earnings.
Rental properties can provide regular income while using available capital as a margin for the bank loan. The only catch is that the rentals need to be high enough to cover the EMI.
Moreover, expenses on residential property are tax-deductible, and any gains from other investments can offset the losses. Once the loan gets paid off completely, then most of the rent becomes a profit.
The drawback is that unless you hire a property management company, rental properties require some time and effort to manage. In worst-case scenarios, the tenants can damage the property or there can be stretched periods of vacancy.
#2. Lease Contract
Leases contracts are for longer periods ranging from three to 10 years. Leasing gives more liquidity because you can collect security deposit and rent upfront for the entire year.
On completion of the lease terms you can either renew the lease contract or sell the property to the lessee at a predetermined price.
For example, Suresh has a property and is just starting with real estate investing. Instead of selling in a low property market he decides to give the property on lease with an option for the lessee to buy after three years.
Suresh finds Avinash who has just started his career and is in need of residence but he can not buy upfront as he does not have money.
Suresh can give the property on lease to Avinash with an option to buy after three years at a predetermined price.
Suresh can collect an upfront security deposit, monthly rentals for three years and can sell off the property after completion of the lease contract. For Suresh, it turns out to be a passive real estate investment.
#3. Vacation Rentals (List on Online Portals)
Vacation rentals are commission-based short-term quick earning models giving you better utilization of the property. The method gives a higher rental income as you can set fluctuating rates depending upon the locality and season.
In vacation rentals, you have the flexibility to give availability dates. Generally, there is less wear & tear or damage to the property as the guest stays for a few days to a week.
However, there can be regular maintenance or upkeep costs involved to make the guest stay pleasant. The other drawback is the seasonality of the business where the peak season can be hectic and lots of vacancies at other times.
While you can adjust rates to compensate for seasonality but income and bookings are not guaranteed.
Before listing the property for vacation home online you need to have
- A set of high-resolution images & a video tour of the property. High-quality images and videos are the key element and can make a huge difference between your property and the property nearby.
- Description of the property while listing. Optimizing the title and description to make them catchy, relevant and informative.
- Rates and availability to ensure that the availability calendar is updated in real-time, and always set the rent price considering factors like season, location, and facilities.
List of Online Portal where you list your property.
|Trip Advisor Holiday Rental Network|
#4. Commercial Real Estate
Commercial real estate is a long-term asset where one can earn higher rentals and returns.
The rate of appreciation for commercial estate property is higher than the residential property giving you more gains. The rate of appreciation depends upon the inflation rate, local supply and demand conditions, interest rates, and other factors.
You can utilize the corners and leftover space of your house to create a secondary income stream. For instance, if you buy a small building, you might rent out the ground floor to a retailer, restaurant, travel agency or other business.
However, on the other side commercial real estate investment requires higher financial commitments upfront. The property needs to be of the required minimum size upwards of 1000+ sq. ft to be commercially viable.
Due to the bulk nature offloading commercial real estate is difficult as there are fewer buyers in the market.
#5. Higher Profit While Selling Property (Long Term Investment)
While you collect rentals on your property, the value of the property increases many folds over the time period because of the demand and the rising inflation. Thus generating higher profits in the long-term when sold in a good market.
However, all increase in real estate value is not linear. But depends on the type of property, location, growing the economy and the demand for the property.
#6. Early Buying the Hotcake Property
From the returns perspective, whether you buy property for personal use or as a passive investment option, one must not wait to buy a good property, especially at a premium location if available for a reasonable price.
Rather, the appropriate way would be to buy real estate and wait for appreciation.
Honestly, If I have money, I would invest in the Stock Market rather than real estate investment because I see a bigger ROI and less risk in the share market. I would buy a property for my own use (like agriculture land or residential home) but not for the investment purpose.
Some people have a deep desire to possess land, building and property. Real estate investment, if done properly, has the potential to generate long-term positive cash flow and a passive source of income.
You should invest in real estate only when you don’t understand any other better way of making money.