Photo courtesy Tierra Mallorca on Unsplash.
Our ancestors more than 15,000 years back were hunter-gatherers. They depended on the food from the plants, and the animals that they hunted down, to make a living. Many of the plants were seasonal so they had to move over a large area to get their nutritional requirements. The spread of knowledge was also slow because people rarely communicated outside their group; as a result, meeting with very few outside people in their lifetime.
Slowly these people moved towards the agrarian lifestyle. They settled in fertile plains and those who could defend the land could keep it. Soon the tribal leaders developed who would distribute land, settle the dispute, and were paid for by their subjects. There was a pooling of labor and many development works were carried out like the digging of irrigation channels and improvement of farming methods. The people settled down and could now have many children. The movement towards the agrarian system brought forth the concept of homeownership.
To this day people have a longing to invest in real estate or own a property. The place where they invest may depend on their financial conditions and the money they have to invest. The 5 best ways a person can invest in real estate is as follows-
1) Investing in physical Real Estate-
A person can invest in land and the things associated with it. Real estate is a land with many things connected to it like water, trees, minerals, buildings, bridges, etc. The five different categories of real estate are; residential, commercial, industrial, raw land, and land for special purposes like places of worship, schools, parks, etc.
The characteristics of real estate are that land supply is fixed and it is can’t be increased. There can be improvements that can be made on land and the location of the land along with the convenience and the facilities provided gives it the pricing power.
The real estate sector provides employment to millions of people through construction, financing, property management, architects, banks, insurance, surveyors, lawyers, accountants, etc.
Investing in real estate has many benefits. It can provide you with cash as you get the rental income. If the area of the property is selected wisely you can earn a good steady flow of income. The other benefit is that there would be an appreciation in the price of the property over a period of time. Investing in real estate is a hedge against inflation. With the increase in inflation, there would be an increase in rentals, as well as an appreciation in the price of the property. If you have taken a loan from the housing finance company you can avail of the tax benefits up to a maximum of Rs. 2.0 lakh under section 24 of the income tax act. The same house if used for a living gives you a sense of security and a roof over your head where you can live throughout your life.
2) Real estate investment trusts (REITs)-
Real estate investment trusts (REITs) are a type of pooled investment vehicle that owns and operate real estate investment that generates income and is managed by a professional manager. There are at present 3 REITs in India-
- Embassy REIT.
- Brookfield India Real Estate Trust REIT.
- Mind space REIT.
The REITs have a three-tier structure similar to that of a mutual fund comprising of-
- The Sponsor- Responsible for promoting the REIT with his money.
- The fund management company- Responsible for managing the assets.
- The trustees- Responsible to ensure the funds are managed in the interest of unit holders. They keep an eye on the activity of the management company.
The different types of REITs available globally are;
- Residential REITs.
- Retail REITs.
- Healthcare REITs.
- Office REITs.
- Mortgage REITs.
Advantages of investing in the REITs are-
- An investor can diversify his portfolio to maintain asset allocation like he can invest in gold funds, debt funds, equity, crypto currency and REITs. This reduces the volatility and maximizes returns.
- A real estate investment requires large sum of money in Metro and tier-1 cities while investment in REITs IPO can start with Rs. 10,000 to Rs. 15,000.
- 90% of the income generated by REITs is distributed among the investors.
- Professional managers manage the REITs which reduce worries for the investors and the REITs are regulated by the SEBI guidelines.
3) Real Estate Stocks-
Investments can be made in real estate stocks if you are comfortable with the volatility of the stock market. When the stock market performs well the real estate stocks too perform well.
The real estate prices in India have gone nowhere in the last seven years and the people who had invested have not got much appreciation in their investments. If a person doesn’t have a large sum of money to invest in real estate he can consider investing in real estate stocks. The returns by the realty index in 2021 have been 73%, in expectation of a pickup in residential property demand.
The investor should have a good knowledge of the company that he intends to invest in. Some of the strong real estate companies in India where a person can consider investment in consultation with his stockbroker are Godrej property, Oberoi Realty, DLF, Macrotech developers, Shobha, Prestige estate, Suntech realty, Kolte Patil, etc. The real estate reforms carried out in the last few years would benefit the companies that have good corporate governance.
4) Real Estate Mutual Funds-
Real estate mutual funds are another option if you don’t have time to track the performance of stocks. Real estate mutual funds are sectorial funds that invest in stocks of the real estate sector. Investors who are deterred by the huge investment they would have to invest in a property can invest in real estate mutual funds. If a person finds that the real estate sector has the potential to grow in the future he can invest in these funds. The real estate fund can invest in REITs or real estate companies.
It is important to note that the investors who consider investing in this fund should consider an investment horizon of three to five years. There are no hassles of maintaining a property and the fund is under the guidance of the fund manager who tries to provide value to your investment through his research. There are other factors that can affect the real estate sector like the interest rate or the demand for properties. The other advantages are-
- The real estate mutual funds are highly liquid and can be sold when required. If you have a property it may take months before you find a buyer.
- Whenever there is inflation the value and the rentals of a property increase. This leads to increase in the value of the fund also.
- These funds can bring a diversification in a person’s portfolio.
Some of the real estate mutual funds are:-
1. ABSL global real estate fund.
2. HDFC property fund.
3. ICICI Pru India opportunities real estate fund.
4. HSBC-managed solution growth.
5) Real Estate in Metaverse-
Metaverse is a digitalization of the world with the help of technologies like virtual reality (VR), augmented reality (AR), and video. It allows users to live in a virtual universe that allows working and keeping in touch with friends through their avatars. Many things can be done in the metaverse like holding conferences to taking a trip around the virtual world. People can buy plots on the metaverse platform and rent them to others or to companies.
There have been many property deals in metaverse that have caught the attention of the investors.Tokens.com a Canadian company purchased $2.4 million of digital land on the platform ‘Decentraland’ and a New York-based company Republic Realm bought $4.3 million of digital land through ‘Sandbox’ which is a virtual site. The prime land by Tokens.com is in Decentraland’s fashion street district where people can walk in with their avatar and ask questions. The virtual land and the artwork in Decentraland is in the form of non-fungible token. There are many benefits of owning land in Decentraland-
- The price of the virtual land would appreciate in value with time. The land has appreciated many times in value in the last few years.
- The virtual land can be rented out to earn money as it is easy to find tenants. Many brands are entering metaverse and they need the space to make people aware of their brands.
- There are not many stringent rules and the price of virtual land is cheaper as compared to physical properties.
The thing to worry about is that if a metaverse platform closes down your whole investment will vanish. You don’t have a property like the real world to fall back on. Another issue is volatility. The value of the cryptocurrency used in the metaverse is not stable so the value of the property also fluctuates.
To make a purchase of real estate on metaverse you need to sign up with a platform like Decentaland or The Sandbox and convert your currency to cryptocurrency or the native currency of the platform. Log in to the platform and select the piece of land which you want to purchase. Read the details of the land and link your digital wallet to the property platform account. After selecting the land and funding your wallet you can purchase the land. The digital land is now stored as NFT in your digital wallet.
The 5 best ways discussed above can be considered by a person to invest in real estate. Whether it is physical property or the digital one a person can invest according to his comfort to diversify his portfolio. But this should be done with proper research and understanding so as not to be taken by surprise and in the long run, make good returns on his investment.