Real estate has the potential to deliver very high returns in the long run. It can provide a steady cash flow and enjoys several tax benefits. Here are some of the many advantages that real estate offers over other investment classes.
Steady source of income
Demand for rental housing is rising. With offices opening up, Magicbricks’ Rental Index mirrors this trend in the second quarter of 2022. Rental housing demand has grown 29.4% q-o-q and 84.4% y-o-y, while average rents have risen 8.4% q-o-q in the April-June quarter. This demand is expected to increase in coming years, making rental units a steady income source.
Real estate is also an effective tool against capital loss if the purchasing power of the currency depreciates due to inflation or other macroeconomic trends. RBI data shows that property rates increased by an average of 15.1% across the major cities between 2011 and 2021 , well above the inflation rates which averaged at 6.15% during this period . Despite hiccups like the global financial crisis of 2008, introduction of RERA, demonetization and the pandemic, demand for real estate has bounced back strongly, bringing renewed investor confidence in the sector. The latest Magicbricks’ PropIndex Report corroborates this trend.
Aggregate demand across the 13 cities tracked by the index shot up 16.9% q-o-q and 27.7% y-o-y while average residential rates in these cities increased 2.4% q-o-q and 8.0% y-o-y, displaying the strength of the sector.
Provides ample liquidity
Property is also used as collateral to raise loans. Since these loans against property (LAPs) are secured, they are cheaper than personal loans (unsecured) and available for longer tenures. LAPs are popular among customers and the market is forecast to grow at 14% CAGR by 2025-26. There is also reverse mortgage financing arrangements for senior citizens who can get a loan against their property, without having to relinquish its ownership.
Real estate has always been a big-ticket investment, but things have changed in recent years. Investors can now take a smaller exposure through real estate investment trusts (REITs). REITs are companies that own, operate and finance income generating real estate assets. They are popular as they are SEBI regulated, offer liquidity as they are publicly traded, and require as little as `300-400 per share. Currently only for commercial property, REITs might be allowed to extend to other assets such as malls, warehouses, industrial parks and possibly housing.
Power of leverage
One big advantage of investing in real estate is that it can be financed through debt. Unlike assets such as bonds, mutual funds or stocks, one can invest more than his current net worth in real estate. Most lenders require only 20-30% as down payment. This leverage makes property investment a viable opportunity for aspiring investors. What’s more, this leverage comes at a very low price because at 7-8%, home loans are possibly the cheapest form of credit. It gets even better if the house is self occupied or given out on rent.
In the 30% tax bracket, the tax benefits on the interest reduce the effective cost of the loan to barely 5-6%. To sum up, real estate helps diversify the investment portfolio and neutralise the impact of volatile investments such as stocks and equity funds. At the same time, there are challenges such as illiquidity and transparency. Therefore, the importance of background checks, due diligence and comparative price evaluations cannot be undermined. Buyers should also refer to data reports and credible expert advice to make the right decision.