Is investing in property a good option?

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Is investing in property a good option?

There are pros and cons to every investment, and only a financial professional can advise on what’s right for you. If you're looking for general information, we’ve outlined some of the advantages and risks associated with investing in property. This will give you an idea whether investing in a property is a good option.

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For many, this seems a good option. But a person with some knowledge of finance, investment, and returns will think twice. When people retire, we often hear about investing in a property as an investment for retirement planning. It could be a flat, an independent home, or a condominium. For long, residential property has been a useful way to generate a sure shot and inflation-proof regular income in the form of rent. It has also been looked upon as an asset for later years. Is it true?

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With the demand for housing in urban areas going up, rentals have been soaring. But every house may not provide good rental value. The neighborhood area, the housing complex, and the amenities accessible in the locality play a major role in the value and rent. Families wanting to rent are particular about many things and want to have access to markets, malls, hotels, schools, hospitals, bus stands, or railway stations. But in smaller flats for students or working bachelors, their requirements are not great. As long as the house is comfortable and close to their college or work place, with basic needs available at a close distance, they are okay. though some may be choosy.

From a financial perspective, rental yields (annual rent/value of the property) of 2-3% are not attractive. Even with the appreciation in the property price, investors can expect 7-8% per annum in returns overall: some. This is because real estate investment in India can generate both passive income and can be a long-term investment option. An important motive of many real estate investors is to earn passive rental income from the property investment. The rental income, however, varies according to city, location, demand, and property type. Generally, commercial properties have a higher rental yield than residential properties.

There are pros and cons to every investment, and only a financial professional can advise on what’s right for you. If you're looking for general information, we’ve outlined some of the advantages and risks associated with investing in property. This will give you an idea whether investing in a property is a good option. It's up to you to decide.

Let’s take a look at some of the biggest pros and cons of owning a rental property today. Many people invest in rental property for a number of reasons, such as to diversify an investment portfolio, generate rental income, and have more direct control over their investments. Potential drawbacks to owning a rental property include lack of liquidity, dealing with tenants, and deteriorating neighborhoods. Investors who understand the pros and cons of owning a rental property can better decide if investing in real estate is the right move. Some argue investing in financial instruments is less cumbersome; fixed deposits can fetch around 7.50-7.60 percent annually. Why invest and block a big amount in a property and get into all the hassles of documentation, lawyers, paperwork, dealing with society matters, brokers, tenants, repair, and maintenance? And you are tied down with the property, while depositing in a bank or investing in stocks or mutual funds keeps you free to do other things, for example, travel to new places without bothering about society, tenants, or upkeep.

Properties can represent a short- or long-term investment opportunity. Investment properties are not primary residences or second homes, which makes it harder for investors to secure financing. Selling an investment property must be reported, and may result in capital gains, which can have tax implications for investors. And this is one major issue for some who invest to sell it after a period to earn some additional amount. Here, by selling the property, one expects around 25–30 percent gain, but normally it works out to around 10 percent depending on how old it is, the condition, location, and area of the property. Some property professionals suggest commercial property offers better returns, and property in the form of plots of land offers still better returns.

Adding an investment property to your financial portfolio can be a good option to build wealth. However, real estate investments come with a lot of work, especially if you decide to invest directly in a property; not everyone is cut out to be a landlord. One has to deal with society matters, brokers, lawyers, documentation, repair, and maintenance. These are tedious and time-consuming. Unless you are prepared for all this, then you should only go ahead and invest in property.

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Investing in property, put simply, an investment in real estate earns just 3 to 4 percent per year historically; on the contrary, investments in the stock market post about 10 percent annual returns and FD in banks offer around 7.60% to senior citizens. and that too without the hassles of all the paperwork, documentation, dealing with brokers, lawyers, repair and maintenance work, and a nagging tenant.

Also, if you have bought property to live in it, it is not considered an investment because there are no monetary benefits. Real estate investment is also more expensive than stocks, as the former involves making heavy down payments. Many of us buy the second house to earn the rental income and also to capture the price appreciation. However, there are many costs that are not taken into account at the time of buying or after buying it which drags down the returns from buying a house. A layman is not aware of these costs.

How to calculate real returns from your property:

*Cost of the property *Gross rental income (12 months) *Property Tax * Net rental income *Rate of return (exclusive of Income Tax) * Income Tax, will give you the rate of return.

In most cases, it works out to be around 3-5 percent. It could be less or more depending on the size, amenities, area, and location of the property.

Investment in a second house is usually done with the objective of creating wealth, an additional source of income, etc. For many, this additional source of income comes in the form of rental income, i.e., they rent out the second house. If you are planning to buy a second house property for rental income, consider factors like challenges associated with maintenance of the property, inability to sell a part of the property/investment, inability to liquidate the asset faster, etc. Further, with the current work from home arrangement, wherein many employees have gone back to their native places, away from their otherwise work location, finding the right tenant, especially in Tier-1 cities, could really become difficult, at least for some time.

Moreover, there are fixed expenses that need to be incurred on the second or third house, irrespective of whether it is generating rental income or not, like monthly maintenance charges (in case of flats or houses in a housing society), property tax, home loan EMIs (if loan is taken to buy the house), upkeep/repair cost, etc. Hence, while the monthly rental may sound sweet to the ears and being an owner of more than one house property may give a sense of achievement, the real returns may not be as expected when one calculates the returns practically.

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Other risks impacting returns would be property being vacant, tenant not paying up on time, and other repair expenditures, which may be an additional cost, which may be unanticipated and hence, could lead to a reduction in the returns expected. The value of the property may not be steady or as expected. What should one do? Hence, before you plan to invest into a property to generate a passive income, a deep study or consulting knowledgeable friends or a professional about the details is very important. One must make the necessary calculations to take an informed decision about whether a particular property will be a valuable investment or just another one on your list. Owning a rental property is an active approach to invest for the future and requires time, dedication, and involvement. There is much work involved in identifying, analyzing, buying, and managing a quality rental property to keep the real returns on the higher side.

Investing in property can be time-consuming, especially when it comes to finding tenants and keeping the property in good condition. Some property investors may prefer to hire a professional manager, who will generally take a percentage of your rental income, thereby reducing your return.

Rental homes are a popular way for investors to supplement their income. An investor who purchases a residential property and rents it out to tenants can collect monthly rents. These can be single-family homes, villas condominiums, flats in apartments, townhomes, or other types of residential structures. Income-generating properties don't always have to be residential. Some investors—especially corporations—purchase commercial properties that are used specifically for business purposes. Maintenance and improvements to these properties can be higher, but these costs can be offset by bigger returns. That's because the leases for these properties often command higher rents. These buildings may be commercially-owned apartment buildings or retail store locations.

The main reason people purchase rental property, as well as any other asset, is to make money and build wealth over the long term. As with any other market, housing prices and demand for rental property can fluctuate up and down, depending on the real estate market cycle. However, just because owning a rental property may sound like an attractive investment, investing in real estate may not be the right decision for everyone.

What is the best return on investment on rental property? In most parts of the world, the best return on investment on rental property hovers around 10% annually. However, in reality, anything between 5% and 10% is acceptable as most people perceive it to be passive income. Unfortunately, rental yields are one of the lowest in India. Retired people planning to invest should be careful before investing. Firstly, they should be physically fit enough to handle all the hassles mentioned above and need to check about the returns. If they are satisfied with it, they can go ahead and invest. Some argue that if the return is not more than 5-8 percent, why get adventurous and get into all these hassles at old age when banks, LIC, stocks, or mutual funds give you better returns? It's purely a personal choice, and I hope this blog has given readers a proper perspective on making a decision.

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Henley Passport Index 2024: What is India's ranking?

Recently, the Henley Passport Index 2024 was released on Wednesday, highlighting the power of passports in 199 countries. The index, which ranks countries based on the number of destinations that allow visa-free entry to their passport, was topped by France, Germany, Italy, Japan, Singapore, and Spain. Passports for all these countries have visa-free access to 194 destinations, three more than last year. Japan and Singapore have continued to top the list for five years now.

South Korea, Sweden, and Finland rose one spot to take joint second place, with access to 193 countries. Austria, Denmark, Ireland, and the Netherlands shared third place, allowing travel to 192 places. The UK and US passports ranked fourth and seventh, respectively, with access to 191 and 188 destinations.

Where does India stand? According to the latest ranking, India stands at the 80th rank in the list of most powerful passports. Its passport has visa-free access to 62 nations, including Angola, Barbados, Bhutan, Bolivia, Djibouti, El Salvador, Jamaica, Jordan, Kenya, Malaysia, Mauritius, Nepal, Qatar, and Zimbabwe. India shares a rank with Uzbekistan.

In 2023, too, India's passport was ranked at the 80th spot, up five places from 2022. However, the number of visa-free destinations has jumped from 57 to 62 this year. India has a lot of catching up to do to further improve its ranking considering its influence and financial clout. Surprisingly, China is nowhere on the list.

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