Making Profits from Real Estate Investment

In this blog we will see the ways how to increase the profit of your property.

Let us explore the ways how someone profits from a real estate investment. In India investing in Real Estate is virtually risk free considering the ever-increasing population which is increasing at the rate of 1% (Source World Bank, 2015), secondly, the steady movement of the rural population (Source: to the larger cities and thirdly, the cultural change of the shift to a nuclear family which requires a new home.

This are facts which makes real estate sector to grow and give handsome benefits to their investors.

Let’s see the various scenarios by which a real estate investment makes profit and how to maximize from it.

In this blog we will explore the ways to make profit from your Real estate investment in residential property. For Commercial property the game becomes more complex with more options which the property owner can explore. This is the subject of a future blog – stay tuned.

The ways how an investment in a residential property can bring in profits are listed below:

1.Capital Appreciation

    • Short Term
    • Long Term

2. Rental Income

3. Increase in value of property through renovation and changes

4. Loan against property (If the loan can be invested further to make profit)

5. Setting up your property for vacation rentals (the highly successful  model)

Let us explore the ways one by one the above list in more detail

1. Capital Appreciation of Property

    •  Short Term Appreciation

The short-term model of capital sell and purchase has provided handsome profits to property buyers in almost all the major cities in India. Buying a property while in launch phase and selling the property to a prospective buyer when the property becomes “ready to move in” is a common occurrence and it provides a handsome profit. The purchaser in this case is taking the risk of the property being delivered on time as promised during purchase and launch by the Builder of that property. The risk is less substantial for reputed Builders who have a proven track record. This gives a good amount of profit to the initial purchaser and even a 10-30% appreciation in the price of the property is not uncommon.  The period of investment is the time the property is being build which usually varies from 3 to 5 years and the returns are quite handsome.

With a developing country like India, development of infrastructure during this period around the property in terms of infrastructure and city amenities do boost the profit margin in a substantial way.

This short-term profit from capital appreciation of the property not only happens during the building and complete phase, but can happen even after the property is fully built and operational. Improvement of infrastructure in the locality, development of other residential and commercial projects in the near vicinity do help in boosting the price of the property.

    • Long Term Appreciation

The long-term property appreciation in India is not a surprise considering the demand for houses in Indian cities (Tier 1,2 and below) and the good opportunity of capital appreciation of the property. This method brings in considerable amount of profit if coupled with a renovation/upgrade of the property which adds to the profit margin. See below for a graphic representation. Though capital gain is taxable, reinvesting the proceeds do give relief in terms of Income Tax as per the Indian Tax laws.

Capital Appreciation in real estate investment is a lucrative option.

2. Rental Income

The demand for rented homes is always on the rise in Indian cities considering the ever-increasing influx of working population from all over the country. The rule of thumb of matching the rental income with the equal monthly installment aka EMI (a rule of thumb measurement used in many countries) to judge the property price doesn’t hold good in India like in other developed countries. This is due to the ever increasing demand for homes in Indian cities and the opportunity of capital appreciation of the property without any significant further investment to augment the property.

Having said that, in India a property investment usually factors in the capital appreciation along with potential rental income to complete the calculation.

Renting a property in India is not a challenge in any of the cities in India – even the smaller ones are a safe bet.

Though the rental income is generally fixed in terms of the type of property, locality and the associated amenities, nevertheless there is an opportunity to get higher rentals as well with some smart investments. More details in the next section.

Rental Income from real estate is the established way of continuous flow.

3. Increase in value of property and the overall cash flow through renovation and upgrade

This is one key point which is often overlooked by property investors in India as in many cases we see little or no further investment is made to the property (there are exceptions when the landowner stays in the property itself). There is a good opportunity that gets lost as renovation and increasing the facilities can greatly enhance the overall cash flow “in” from the property.

Let’s consider three scenarios when a say, a 1 crore INR is invested to buy a property and to keep parity we consider the land owner decides to sells the property after 3 years in all the three Scenarios.

Scenario 1:

The property owner doesn’t invest anything further to the property. The property Owner makes a profit of 20.8 lakhs after year 3.

Cash Flow Scenario when no renovation is done to the property.

Scenario 2:

The property owner augments the amenities of the property just before selling off at year 3. The property Owner makes a profit of 29.5 lakhs after year 3.

Cash Flow when renovation / augmentation is done just before selling off the property.

Scenario 3:

The property owner augments the amenities of the property just after purchase.

The property Owner makes a higher profit of 32.8 lakhs after year 3 compared to 29.5 lakh from Scenario 2. In this case the overall profit realization is the maximum. Here the property Owner augments/ improves the property just after purchase and this results in higher rental income for all these 3 years he stays invested in the property resulting in higher profit realization considering the overall cash flow.

Why there is such a big difference when we compare Scenario 1 with Scenario 2 & 3. We will not go deep into a psychology analysis. But it is sufficed to say that the sum is greater than it’s parts and the renovation and improvements done allows the home owner command much higher price with the renovation compared to the invested amount. The owner and who has invested further in the property speaks for itself about the care and value for the property which further translates to higher price of the property.

4. Loan against property (If the loan can be invested further to make profit)

Getting a loan from property and investing the loan further into profitable ventures is our 4th avenue of making profit. This depends on many factors and should be carefully considered before the venture. It can be a double-edged sword. On the one hand, making profit from the loan amount gives double benefit in terms of income.  Profits from the investment adds up along with the income generated from property. Over and above, the investor can benefit from the capital appreciation of the property, if he or she chooses to sell it off. On the other hand, losing money on the loan which is further invested in other ventures can result is even loss of ownership of the property. Careful consideration must be given before venturing in these types of scenarios.

5. Setting up your property for vacation rentals

Investing in a property and turning it into a vacation rental property has become a profitable option. With the success of the Airbnb model, this has opened up a new avenue of income globally for real estate property owners. The profitability of the property investment depends on careful consideration of many factors like the type of property, its location, how it is being managed and how it is marketed. But this has become a good source of income, with more earning potential than traditional renting. Of course, it comes with a price of additional efforts of marketing, upkeep and managing the property on a day to day basis.

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