Month: April 2021

Real Estate Return

Real Estate Return vs Mutual Fund Return

Real Estate has remained the favorite Investment of Indians across generations.
I work in one of the Indian IT company. The main agenda of everyone is to reach onsite and make money. The money earned at the client location is used to buy real estate. The real estate can be in the form of land, a flat or a commercial property. The more the no of onsite trips, the more the number of real estate properties.
According to me, the only property that you should purchase is the one in which your family lives. Everything cannot be judged or weighted according to the money. This is why we will ignore the money used to buy a home for your family for the purpose of discussion.

Real Estate

Investing in a Second Property

Now, the problem is when people invest in second properties or flats and call them as an Investment. These second properties are very far away from being considered as good investments. I’ll show below all the calculations to prove my point.
In one of our previous articles, we had covered as to why investing in mutual funds is better than real estate. After reading that article, one of my friends was still not convinced. The observations of my friend were as below:
Real Estate is a physical asset which one can see and pass across generations Real Estate can give us Passive Income The first point mentioned above is totally an emotional one. Just because you can see and feel an asset, doesn’t mean it is the best investment. Dividing a physical asset has never been an easy task. Getting a correct price at the correct time is very tough. And if left among the family members or siblings, it is a different story altogether. I am not saying that only negative scenarios happen. But each one of us has heard many stories about disputed properties.

Real Estate as a Passive Income

The second point raised above needs more discussion and with numbers. In cities, a major proportion of the people are investing their hard earned money in buying secondary flats for the purpose of passive income.
The main points put forward by them for their investment decision is as below:
Since IT companies don’t have pension, they will help us to give passive income in the long run They can give their flats to Kids after they get married The second point above is again an emotional one. Also, it is based on too many hypothetical situations to come true for the second point to become valid.
We will discuss more on the first point. Passive Income is important in later stages of life as there would be no job or pension. We need to plan in very early stages of our lives to sort out this important concern. But, many people delay this assuming that they have a lot of time left. We will discuss a case study below to understand the returns from passive income of the real estate.
Case Study 1
I am taking a case of a person who is of age 50. He has Invested Rs 50 lakhs to buy a new flat. The flat is in an average society in one of the Metros of India. For the purpose of calculations, I am taking a period of 25 years.
In this case study, I am going to take the Best case scenario with the below assumptions:
Rent would increase continuously at the rate of 8% every year Property price would increase at the rate of 6% every year(Increase in property price has been calculated by studying the average increase in the price of 10 major cities of India. The period is for the past 5 years.
There would be no maintenance required for the apartment for a period of 25 years No property tax to be paid There would be no month where the flat is vacant Initial Starting rent is Rs 15,000 per month For the purpose of simplicity in calculations, I am assuming that Rent money is paid as a lump sum to the owner.

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As we can check from the snapshot above, the first year returns are 3.6% of the Invested amount. It would reach a maximum of approx. 6% of the property amount in the 25th year.
Also, at the end of 25 years, you would have a 25-year-old apartment worth Rs 2.02 crore. Now ask yourself one question. Would you ever buy a 25-year-old apartment worth Rs 2.02 crore?
I conclude three points from the above discussion:
Assumptions are too good to be true and there can be a number of external factors which can increase the expenses Maximum return achieved as percentage of property price was 6%And a 25-Year-Old flat in average society. The resell value of the apartment is notional. There is no guarantee that you can find the buyers at the price you want. Case Study 2
Now in this scenario, another 50-year person decides to invest Rs 50 lakhs in Mutual funds. He has heard about a facility known as SWP. SWP stands for Systematic Withdrawal Plan where every month a pre-decided amount would be credited to your account.
In this case study, I am going to take the worst case scenario with the below assumptions:
Money withdrawn per year would increase by 10% YOY The return from Mutual Funds would be 12% YOY Per month withdrawal would be Rs 15000 in the initial year Money left at the end of the year forms the Initial amount for the next year For the purpose of simplicity in calculations, the return credited and the money debited for SWP would take place at the end of the year.

Mutual fund return

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As can be seen from the snapshot above, the person would be having Rs 2.95 crores in liquid money at the end of 25 years. This is because his money was invested into high growing assets of Indian economy.
I conclude 3 points from above discussion:
Money withdrawn at the increasing rate of 10% would easily beat the inflation Return expected from Mutual funds at the rate of 12% is easily achievable by a combination of debt funds, balanced funds, and large cap funds Assets at the end of 25 years is purely liquid and can be easily converted to Cash Analysis: Monthly Money Paid
I would like to do one more comparative analysis on the amount of money credited per month in both the scenarios.

real estate vs mutual fund return

There is a difference of approximately Rs 45 lakhs which were paid extra in the scenario 2.
In a comparison of the Best Case scenario (Real Estate) VS the worst case scenario (Mutual Funds), the MF scenario exceeded the return of real estate by Rs 1.5 crores.

CONCLUSION

The results are pretty straightforward. Investments in mutual funds over a longer period of time handsomely beat the return of real estate.
The next time you want to buy any real estate, run the required analysis and then make an informed decision.
Buying a real estate should not be an emotional decision but a calculative and a practical decision.

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Real Estate Investing 101: A Beginner’s Guide To Investing In Real Estate

Investing in real estate is not a groundbreaking or new thing. It is a true, tested and legitimate business that can certainly earn you a great wealth if you play it right. Like any other investment, real estate investing also demands understanding of the basic concepts on your part. When you learn it right, buying property, generating rent and avoiding bankruptcy become as easy as playing monopoly. This article will help you understand the real estate investing basics in the simplest way.

❖ Getting Started In Real estate Investing

Generally, the new investors are more comfortable with real estate investing. It is simple to understand and offers plentiful opportunities to earn good fortune. But before you invest your money into this wealth-building vehicle, it is important that you find out the right properties and understand the real estate community well. Make sure that there is no scope left for making mistakes because if you make them, you will lose everything that you have ever had.

❖ Why Invest in Real Estate?

There are many reasons why real estate investing is considered very fruitful. Here are some of the ways you can benefit from this investment:

➣ Appreciation: Real estate appreciation refers to increase in the value of a property over time. When the land around your property becomes busier or scarcer or if the real estate market changes, your property becomes more valuable. But it is completely unwise to invest in real estate to make money only on the basis of appreciation.

➣ Tax Benefits: You can deduct the operating costs of your property from your income. These costs include:

Repairs and maintenance
Interest on loan
Agent’s fees
Insurance
Rates and taxes
Building depreciation
Travel to and from your property in order to facilitate repairs

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These deductions can be claimed on your tax return.

➣ Rental Income: Rental income that you get through your property can be a means of positive cash flow. You can rent your property for a specific period of time. When this rental income covers all the expenses like insurance, taxes, mortgage, fees with nothing left over, you become break-even. Positive cash flow is when the rent exceeds the expenses. You can also earn through rent appreciation that is increasing your rental income every year.

➣ Improvement:  You can earn better price and more profit from your property by improving its functionality and appearance. Keep upgrading your property from time to time to help retain its value.

➣ Leverage:  You can use Other People’s Money (OPM) to invest in real estate. You get enough time to pay back the mortgage and you can also structure your deal in such a way that no money is invested from your pocket but the benefits are all yours.

❖ Types of Real Estate Investments

After understanding how beneficial real estate investment is, let’s find out how many ways are there to invest in it:

➣ Commercial Real Estate Investing: These are mainly the office buildings. You can lease out the individual offices in the building to small businesses or companies and collect rent.

➣ Residential Real Estate Investing: These buildings include houses, townhouses, apartment buildings and vacation houses that are rented by a family to live.

➣ Retail Real Estate Investing: Strip malls, shopping malls and other retail stores are included in these types of buildings. Along with getting the base rent on these properties, you can also collect a percentage of sales from the tenant store that is used in maintenance of the property.

➣ Industrial Real Estate Investing: These are the properties that generate sales from the customers, who use the facility for temporary use, for example – car washes and storage units.

➣ Real Estate Investment Trusts (REITs): You can invest in real estate through these trusts also. They own a portfolio of underlying real estate and trade like stocks.

❖ Models of Real Estate Investment

There are 3 different ways through which you can generate money for your real estate investment. You can rent or lease your property to a tenant or can sell it. Here is how these models work:

➣ Leasing and Renting: When you rent a property, you allow a tenant to live in the property. In return, they give you a monthly fee. When you lease a property, you give it to the tenant on rent for a guaranteed amount of time that is decided with a prior contract.

There is just one drawback of this model that in spite of giving it on rent and allowing someone else to live in there, the maintenance of the property is your responsibility. If you have more than one property and you rent all of them, the amount of maintenance can be huge. Also, you may have to get the property completely repaired or maintained before selling or renting it again to get it into good condition.

On the advantageous side, you can earn good fortune through rental income if you have more than one property.

➣ Flipping: This means selling your property to earn net profit. With this model, you buy a low priced property, improve it and then sell it for a profit. Though it yields the most reward, it can be very risky for a beginner investor because you will have to predict which property would be sold for profit in the minimum time.

To get the deal right, it is important that you find out the right property that can be flipped for profit. Then you will have to invest in its repairs and remodeling. For this part, it is important that you have sufficient money in your hand so that the repairing work can be completed in the shortest period of time. Since the property is still owned by you, you will have to make the monthly payment on it. That’s why it is important that you complete the remodeling work in the shortest period of time.

Thus all these approaches work efficiently for generating money from your real estate investment. If you are ready for dedicated and hard work, you can definitely make decent profit through real estate investing 101.

❖ In The End

Though investment in real estate can bring you huge profits but if you are a beginner in this field, you should be very careful when you actually put your money into it. Never enter this world with stock market mentality, which is assuming that the past trends will be repeated in the future. Refrain from buying real estate blindly by following everyone’s advice. Always accumulate cash reserves before investing in real estate, especially if you are renting your property. This will save you from unnecessary pressure of shoddy repairs, accepting unqualified tenants and giving into their demands.

You can do well in this business only if you act rationally and don’t assume that real estate is a way to get-rich-quick. Consider it as a business that will take good amount of time to flourish and only then you will be able to reap the maximum benefits out of it.

Overseas Investing

10 Things You Need to Know Before Buying Property Overseas

Did You Know?

Spain, France, and Nova Scotia are favorite destinations among Americans looking to invest in a property overseas.

You are on a vacation to a European or South American destination, and you love everything about the place. The weather is nice, food is great, people are hospitable and friendly, it is not crowded like New York or London, plus the prices are comparatively low by American standards. You like the place so much, that you’ve considered living here. If not that, at least buy a decent apartment or a condo, so that you can visit whenever you like.

Purchasing a property overseas is exciting, but only after you are clear about one rule – the heart should never rule the head where money is concerned. Also, it is essential that you follow the right procedure, and avoid using any unfair means in securing real estate. Consider doing all the things you would do if you were buying real estate in your homeland. Here are some tips that you can follow.

Know the Market Thoroughly

Be aware of rising and falling trends of the market. Knowledge about the rates can be helpful if you want to buy when prices are down, and sell as soon as the market sees an upward trend. Also, some countries have strict rules that prevent or limit property ownership to foreigners. Hence, it is good to know whether or not you have the legal right to purchase property in that country, to avoid any scams or disappointment. It is important to do your homework before stepping in the market of an alien country.

Beware of Impostors

The global real estate market is filled with impostors who con people, and often get them involved in a financial and legal mess. Even so, this doesn’t mean that everyone you come across is a thug, but being aware of what is right and wrong is a smart move. If you are dealing with a real estate agent who does not carry business cards, and does not have an office, he/she is probably someone you should avoid. Also, there are certain countries that don’t regulate their real estate industry; hence, agents don’t even require a valid license. Be extremely careful here, and proceed only after doing thorough research.

Only Purchase What You See

Real estate agents are idealists. They will make you dream about well-built roads, world-class amenities, and other facilities that are nowhere in plain sight. The catch here is, once you have signed the contract, you are the owner of the area and the illusions surrounding it. I have nothing against agents here, but it sounds risky to invest your hard-earned money for just barren land. Consider all the things that can go wrong here. Hence, only buy what you see.

Always Seek Professional Assistance

Great deals at an affordable price can be achieved if you buy a property directly from the owner. Nevertheless, don’t forget that you are in a foreign land, and taking the help of a reliable professional can be useful to avoid various pitfalls when buying property in a foreign land.

Signing a Contract

Never sign a contract that you don’t understand. Always ask for two versions of the contract – one in English, and the other in the local language. Bring along your legal adviser to confirm that the English version is a true translation, and does not contain any errors, extras, or omissions. Read the contract thoroughly, and ensure that you and the seller both agree to the different terms and conditions decided.

Try to Pay Cash

If you really like the property and know that this is the final deal, try paying the owner cash. It is a tough decision to take, but it is important to understand that financing mechanisms, like mortgages, aren’t as stable in foreign countries as they are in the US. In most European vacation spots, property transfers are mostly done in cash. For those who can’t do without a mortgage, seek the help of your real estate agent and lawyer to know more about such destinations.

Overseas Investing

Verify the Title

In the US, if you acquire a property you get a warranty title that states you are the legal owner. However, in countries outside the States, this title can create quite a problem. This is highly possible in European countries. You see, World War II had created many boundaries in the world, and it is quite possible that once you purchase the property, a recent descendant of the family can suddenly appear to claim his/her property. The situation sounds dramatic, but it can surely happen. This crisis can be avoided by taking the help of a notary. A notary can help verify legal documents, and also ensure that there are no gaps in the property’s history, and you are the rightful owner.

Knowing the Native Language

Relocating to a country without knowing its native language can get quite difficult. The best thing to do is to join a language course, and get things in motion soon. However, if you are not up for this challenge, a better idea would be choosing a country where English is spoken in large numbers.

Valuating the Property

Property valuation is an important step, especially in a foreign land. You need to know all the pros and cons of the property before signing the papers. Hence, ensure that an independent valuation of the property is carried out in your presence.

A Local Bank Account is Necessary

You will have to open a bank account in the country where you have chosen to live, and apply for a Certificate of Importation, so that bringing in money from your home country won’t be a problem. Also inquire about online money transfer facilities, so that you can pay the bills and taxes associated with the house from time to time.

Try to bargain if you are good at it; chances are you might get a great deal at a low price. Also, don’t shy away from seeking professional services that can ensure a smooth transaction overseas.

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Real Estate Business 6 Deadly Mistakes

Investors in the real estate business can make mistakes when the market is up as well as when the market is down. When the market is down the results of those mistakes tend to be even worse.  Just because you have all cash or plenty of back-up does not mean that you cannot make mistakes.

The investors with the least money tend to “hype it up” when trying to get others into their deal.  Every person that has something to do with the deal needs to have some “skin in the game”.

Here Are 6 of the Most-Common Deadly Mistakes Investors Make

1. Violating the Securities and Exchange Commission laws:  Wanna get in Hot-Water with your real estate business? Many investors get so caught up in trying to make a big profit that they try to get a number of other people involved in their deal.  The SEC violation comes when you promise a Guaranteed Investment yield on real estate.   There are people in jail right now for making this deadly mistake in their real estate business. There are ways to involve others in your Real Estate business financially and one of those ways is to have all parties have some sort of direct ownership in the property. It’s called getting Private Money investors. They’re good for the Real Estate business, but there are certain govt. regulations about how you go about finding them. Read more on Private Money Investors

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2. Not Doing Adequate Due Diligence: You can lose your shirt by omitting one little piece of real estate business information.  Zoning and Environmental laws can be a big issue, so do not ignore finding out about these potential restrictions, regulations that may affect you as the new owner. Many current owners are ‘grandfathered in’ and so newer laws might not apply to them, but as soon as ownership changes hands, the new laws / regs come into play. Don’t miss this one.  A few years ago I found a property where I wanted to build a small apartment building. Everything seemed to be going well then I found out that there was an endangered bird near the property so I would not be able to build. (of course I sent an angry Tweet to all my investing buddies:) Lesson: If you’re going to get into the Real Estate business, do your proper due diligence and be mindful of these 6 deadly mistakes.

3.Building-Renovating-Or Making Additions Prior to Permit Approval: Many building departments will allow you to start building your structure when you get the site plans approved, even before all the plans for the project are approved.  Don’t expect one department of the government to actually talk to another department.  You may have as little as a 50% chance that everything about your plans will be approved. A contractor friend of mine got a permit to install 150 windows.  In the middle of his project the county changed the requirements and he had to change all the windows he had already installed. Seasoned contractors and investors have all learned that this little part of the real estate business is one to keep a close eye on.

4. Not Getting a Survey Done Before You Buy: Wow, this is a huge problem-area for properties that have not changed hands in a long time, where a ‘good-ole-boy’ hand-shake deals were the norm. These days any easements or special arrangements regarding the property are recorded at the courthouse. But years ago, they weren’t. This is also still true in many small-country-towns have not come into the 21st Century and stuff is still not recorded. Be sure to get a current survey, including all easements, utility crossings, etc.  The real estate business has a way of making the un-prepared lose their shirt. But you can avoid that by getting up to speed.   Here’s How

Property lines is another issue, they need to be established clearly before you purchase. Any possible disputes or problems need to be handled before you take the next step. The former owner may tell you that there is enough land for you to build your mini storage unit complex.  He could be right about the past zoning, but the property laws may have changed since he last checked. The zoning laws may now require a lot more land to build your complex. Sellers are not usually out to take advantage of you but it is not their responsibility to do your due diligence. This is one good way to kill your real estate business permanently, dont’ leave this out.

5. Expecting Someone Else to Do Your Due Diligence:  This is especially a problem when you get involved in an investment in another state or out of your area.  Keep in mind that no one cares as much about your money as you do, its’ YOUR real estate business…treat it as such!

 You may know the laws and problems in your area or state but you may not know the laws in the state you are looking to invest.  If you have a partner who lives in the other state then send him a very long list of things that you want answers to before you take the next step.  Never assume that someone else, even a partner, will get all the answers you need and want.  For larger purchases, I’d want to lay my eyes on the property before closing at some point, even if my team did allot of the pre-work. (Several of the Niche Videos we have cover this in good detail. See Nich Video Series in the right hand column)

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6. Not Properly Analyzing the Local & Regional Economy:  Just because your area population can continue to support an apartment building does not mean that the area where you are looking to invest can continue to support all of the apartment buildings in that local area. Find out about the unemployment rate, other properties that are selling, plans in the county, growth trends in the area and much more.  What good is it to own an apartment building if there are no renters? This can result in a huge drain of money. Notwithstanding  all the other problems that come with a low occupancy rate. Believe me, this is no way to run a real estate business if you actually plan to make money.

You can make the transition from single family investing to commercial (or start with commercial) and many of the same rules apply. However, there are key differences and you need to make yourself aware of them.

You cannot imagine the problems that you can encounter, especially when you are not prepared.  When you go into the real estate business prepared for all

 kinds of things, you will do a lot better, make more money and not have a heart attack in the meantime just because you did not cover all your bases.

The more you get up to speed on how to safely invest in commercial real estate for a profit, the better you will be prepared.  Just because you have all the education, experience, money and experts to help you there is no guarantee that you will not run into problems.

Here are 5 easy steps to making good profits from commercial property. Learn these critical must-dos through our Free 7 step email series. 7 Steps to Profits

The Real Estate Business can be fun and profitable, but as with anything, there are deadly mistakes and it’s important to know how to avoid them

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