Real estate investment has long been a favoured choice for Indians looking to grow their wealth. This is because real estate has traditionally been seen as a safe and secure investment. However, before you jump on the property bandwagon, it's essential to take a closer look at the numbers. Does it make sense to invest in property, especially for those considering a second home for investment purposes?
The Challenge of Low Rental Yields
Rental yield, which is the annual rental income divided by the property's market value, often serves as a primary indicator of the profitability of real estate investments. The average rental yield in India is around 2-3%. This means that for every ₹100,000 you invest in a property, you can expect to earn around ₹2,000-3,000 in rent each year.
So, for a property worth 1 crore, you can expect to earn a rent of around 3 lakhs a year. However, you will not get to keep all of this money. You will need to pay society maintenance, property tax, and income tax. This means that the actual rental yield will be much lower than 3%.
Home loan rates are also relatively high, currently around 9%. This means that you will have to pay a significant amount of interest on your home loan, which will wipe out any profits you make from renting out the property.
But what about capital appreciation?
Capital appreciation is the expected increase in the property's value over time. The capital appreciation of property in India has been relatively low in recent years. This is due to a number of factors, including the glut of real estate properties, as there has been a lot of construction in recent years, but not enough demand to absorb all of the new supply, and the economic slowdown, which has led to a decline in demand for housing.
In the last 10 years, the average annual return on residential property in India has been around 4%. This is lower than the returns on other asset classes, such as equity, gold and even FDs.
Is Investing in Indian Real Estate Worth the Hassle?
Investing in real estate comes with its own unique set of challenges that often require more time and effort than other investment options like mutual funds, gold, or fixed deposits. We call this concept the "Return On Hassle." Return on Hassle is a measure of the amount of time and effort required to manage an investment and the potential financial gains that can be achieved.
As a property owner, I've encountered a range of challenges, including:
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Delayed Rent Payments: Following up with tenants for delayed rent was often a hassle.
Society Restrictions: Flats cannot be given on rent to bachelors and foreigners.
Leakage Issues: There was leakage from the apartment above. Initially, we believed it was the responsibility of the flat owner living above us, but it turned out to be an external leak. This meant that we had to follow up repeatedly with the society's management to get it fixed.
What if the tenant refuses to vacate?
Tenants who refuse to vacate after their lease ends can be a nightmare for property owners. The legal process to evict them can be expensive, time-consuming, and mentally agonizing.
REITs: A Way to Invest in Real Estate Without the Hassles
Real estate investment trusts (REITs) are a way to invest in property without the burdens of physical ownership. REITs are companies that own and operate income-producing real estate. They are traded on stock exchanges, so they are more liquid than property. This means that you can buy and sell REITs more easily than you can buy and sell property.
So, is it a good idea to invest in property in India?
While property ownership can offer emotional comfort and peace of mind, it may not always be the most financially sound choice. Given the low rental yields, high home loan rates, and the challenges of being a property owner, alternatives like mutual funds, sovereign gold bonds, and REITs are becoming increasingly attractive investment options. It is important to consider your financial goals and risk tolerance before investing in real estate. This will help you choose the right investment for you.
FAQs
Overview of Real Estate Growth in India
Real estate growth in India has been growing steadily since the start of 2021, and investors are eagerly anticipating even better prospects for 2023.
Is real estate a good investment in India 2023? ›
The residential real estate market has been recovering in 2023, significantly contributing to India's growth story. The industry is strong, with an expected 15-25% increase in new property launches in 2024.
Is investing in real estate in India a good idea? ›
Real estate is generally considered a lower-risk investment compared to the stock market. Property values tend to be more stable over the long term, and the physical nature of the asset provides a sense of security.
Is 2023 a bad time to invest in real estate? ›
Many potential homebuyers are holding off on purchasing their next property because of two little words: interest rates. From a short-term perspective, this makes sense: Mortgage rates reached their two-decade high in 2023, with a high-average of 8.45%. However, from a long-term view, rates aren't that bad.
Should I buy a house now or wait until 2024 in India? ›
This depends on your investment strategy and market conditions. If you find a property with significant potential for appreciation or strong rental income, it might be worth investing now, despite higher interest rates. Conversely, if interest rates are expected to drop, waiting could reduce your financing costs.
Is it wise to buy property in India? ›
If you are buying a residential property to live in, it is advisable to go ahead. However, if you are buying a second home for investment purposes, you may consider exploring options, including commercial property, REITs or even fractional ownership. Commercial property is preferred for higher rental yields.
Which is the best city to invest in real estate in India 2023? ›
The top Indian cities for property investment include Mumbai, Bangalore, Pune, Hyderabad, and Chennai. Find the best place for investment with significant rental demand, economic development, and growing infrastructure. Emerging localities in these cities often offer good potential for appreciation.
What is the outlook for real estate in India in 2024? ›
In 2024, the residential real estate market is expecting a strong influx of new launches, with an estimated range of 280,000-290,000 units, as per a report. This has set a good path for 2024, which shows that the sector is not only rising but also promising further growth in the coming years.
Is real estate going to boom in India? ›
India's luxury real estate market is experiencing a significant transformation, with an expected CAGR of over 5% in 2023-2028. The demand for high-end residential properties is increasing due to the allure of opulent living spaces, cutting-edge amenities, and prime locations.
What are the disadvantages of real estate investment in India? ›
Disadvantages of investing in real estate
- Long Grid. You can expect the return from the real estate fund ideally after a long time. ...
- Unpredictable Market. Real estate has a very unpredictable market. ...
- Higher Transaction Cost. ...
- Bad Location. ...
- High maintenance Requirement. ...
- High Vacancy Rates. ...
- Negative Cash Flow. ...
- Low Liquidity Funds.
The most common risk is the risk of finance. Every party involved in a Real Estate transaction faces some financial risk. For example, people take loans to buy a property, and hence the lenders and institutions face a risk of borrowers not making their monthly payments on time.
Is 2024 a bad time to invest in real estate? ›
Interest rates are expected to decline in 2024, which improves the real estate investing conditions, so if you are intersted in investing, start looking now.
What is one major problem with investing in real estate? ›
Liquidity risk
Investors consider real estate investments illiquid because they cannot easily convert them into cash. Selling a property can take months or even years, depending on market conditions. This lack of liquidity can be a problem if you need quick access to your capital or want to diversify your investments.
Should I not buy a house in 2023? ›
Buying a home may not make sense in 2023 since mortgage rates are so high. Property values are also up in many parts of the country, so high home prices may price out many buyers.
Will house prices go down in 2023 in India? ›
Meanwhile, JLL Research has also echoed the bullish sentiment for the real estate sector. The luxury real estate market witnessed a remarkable surge in sales value in 2023, worth Rs 4,319 crore for homes priced at Rs 50 crore and above, a 1.5 times increase compared to 2022.
Is buying a house in 2023 a good idea? ›
Yes, home prices have eased a bit in 2023, but elevated mortgage rates and limited inventory remain major obstacles. At the end of the day, though, buying a home is ultimately a personal decision.
What is the future of real estate in India 2025? ›
The report further claims that the Indian real estate sector will have growth projections of nearly $1 trillion by 2030—a market size significantly larger than the US$200 billion one in 2021. This growth in the real estate market in India is expected to push up India's GDP by 13% on or before 2025.
