[ecis2016.org] We get an expert’s opinion on why investing in real estate may prove to be more lucrative than investing in other asset classes, especially following the Coronavirus pandemic
The COVID-19 pandemic has led investors to rethink their investment options. As the economy has been unstable in recent months, investors are seeking options, which will offer them both, stability and eventual returns, in these uncertain times. Of the options available, traditionally, the stock market or mutual funds have been the first priority for investment. In India, real estate is viewed as a safe and stable asset, rather than an investment.
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However, over the years, the preference towards owning a property as an investment has grown, as it provides much more stability and offers better returns, in comparison to other asset classes. Also, due to reforms like the Real Estate (Regulation and Development) Act (RERA) and the Goods and Services Tax (GST), investment in real estate has become more transparent and attractive. Moreover, the government has introduced several schemes and incentives, to make home buying affordable for all.
Financial experts recommend that one should provision around 10% to 15% of one’s gross income towards investments. This way, one can comfortably set themselves up for retirement and also achieve long-term financial goals. With the stock market witnessing a lot of fluctuation in these times of uncertainty, a lot of people are considering investing in a property as a stable option and a long-term asset. A real estate investment allows investors to benefit in several ways.
Income from real estate
A majority of people who invest in real estate, are able to generate a second source of income in the form of rentals. Depending on the location of the property and social infrastructure in its vicinity, one could earn a significant amount, to develop a stable source of passive income. The gradual appreciation of the property too adds to the investment and if invested wisely, the money earned can be reinvested to buy additional property, which will create a steady cash flow and diversify the investment portfolio.
[ecis2016.org] Tax on rental income and applicable deductions
Property as a hedge against inflation
Inflation is the rate at which prices increase in an economy and an inflation hedge is something that protects an investor from its impacts. Unlike most other forms of investments, real estate reacts proportionately to inflation, as the value of the property appreciates over a given period of time. This, in turn, gives higher returns on investment.
Leveraging funds via home loans
Being able to leverage investments, is what makes real estate so popular. Leverage in real estate allows one to borrow money from a lender to purchase property, instead of covering the entire expense. One benefits from returns, without putting much of their own capital into the property. For instance, if the rate of return on an investment property is 10% and the buyer is borrowing at 7.5%, then, one potentially earns 2.5% as the difference.
Tax benefits on property purchase
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Another advantage of investing in real estate is its tax benefits. The Income Tax Act allows for exemptions for investing in a property, which results in the effective tax being significantly lower and also helps build an asset, simultaneously.
Low home loan interest rates
The Reserve Bank of India (RBI) has reduced the repo rate to 4%, making home loans significantly attractive. This will lead to a reduction in the financial burden and presents a lucrative buying opportunity for home buyers. Consequently this may be the best time to capitalise on this opportunity and invest in a property.
Considering that economies across the globe are slowly preparing recovery plans following the Coronavirus lockdowns, the Indian real estate market too, is likely to witness a similar scenario. Hence, this may be the best time to consider having real estate as an asset in your investment basket, as compared to a highly volatile stock market, as it offers more reliable options and steady returns. Although real estate provides good yields, it is important for the home buyers to consider the location, valuation of the property, appreciation, expected cash flows, the purpose of the investment and most importantly, ensure that the development is by a reputed and an established developer, to ensure that the investment yields the best results. Times are tough but it also presents an opportunity to shuffle your portfolio, to better yielding options. One who makes the right investment now, would surely reap benefits in the long run.
(The writer is business head – west and east zone, Godrej Properties Ltd.)
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