Investing Handbook for Indians: Chapter 6

Read this before you seal the house deal.

Owning a property is the ultimate sign of prosperity, security and stability. Having your own house, irrespective of the dimensions inducts you into a new league altogether. Post getting my first pay, I recollect my father doing the math as to what would be the best time for me to buy a house & by when will I be done paying off the huge a*$ debt that comes with it.
Quid pro quo
As repulsive as their words were to me, this is how majority of the world lives. They keep accumulating bad debt and keep working all their lives paying off loans and EMIs.
Enough of my cribbing though. Let’s talk real estate. From an investment POV, real estate is a crucial diversification and hedging element. One of the oldest and legendary sources of almost passive income. History does vouch for a lot but there are certain criteria we should evaluate against prior to sealing the deal.

Questions to ask before delving into real estate

1. Why are you buying?

There are 2 types of real estate purchases:

• Emotional: you plan on making a home out of it
• Investment: for rental or leasing purposes

Pick your why.

2. Do you have the corpus to buy real estate?

As lucrative and ever booming real estate is(or not: 2008, amen!), it demands a huge sum of money. A sum that an average Indian takes more than a couple years to pocket. With the best credit score and maximum amount borrowed(loan w/EMIs), you still need to pay ~10–20% upfront.

3. Have you covered your bases?

Investments are a great idea but do you have a stable source of income, liquid money for emergencies and most importantly, are you safe? Do not plunge into a commitment this big without a contingency plan and an emergency corpus, & the most important of all: Insurance. Also, make sure you do not have more debts to pay off. You will just end up disrupting your good night’s sleep.

4. What kind do you have your eyes on?

Now that’s a black-white zone. Commercial OR domestic.
If you have most of it working in your favour, your emotions directed likewise, I hope you find what you’re looking for.
Before that, take a few more minutes to complete this read.

Remember I said REITs? Let’s understand them.

Despite real estate being a part of the Indian economy since ages, it wasn’t an affordable asset class for retail and small investors like us. Contrary to what it used to be, investing in real estate is not a big deal anymore. and we can benefit from the instruments of this new age with amounts as low as 300–350 rupees.

Buying real estate with 350 rupees. You’ve read it right!

Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate. They offer investors the opportunity to invest in a diversified portfolio of properties, including office buildings, apartments, shopping complexes, hotels, and more.

Despite being a popular product worldwide, REITs were first introduced to the Indian markets in 2014. In India, REITs are regulated by the Securities and Exchange Board of India (SEBI). The regulatory guidelines were formalised in early 2019 with the first REIT offered by Bangalore based developer: Embassy Business Parks(backed by Blackstone Group LP) during it’s IPO offering. Here is what it looked like:

Making money from REITs: WHEREs

1. Rent: REITs own a portfolio of properties that are leased to tenants. The rent paid by tenants is a major source of income for REITs.
2. Interest on mortgages: Many REITs finance their property acquisitions with mortgages. The interest paid on these mortgages is another source of income for REITs.
3. Dividend income: REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. This provides investors with a regular source of income from their REIT investments.
4. Capital gains: When REITs sell properties for a profit, they can generate capital gains, which are another source of income.

Risks associated: WHAT-IFs

1. Market risk: The value of REITs, like other investments, can go up or down based on market conditions. If the real estate market in India experiences a downturn, the value of REITs may decline.
2. Interest rate risk: REITs often finance their property acquisitions with mortgages, which means they are exposed to changes in interest rates. If interest rates rise, the cost of borrowing for REITs may increase, which could impact their profitability.
3. Credit risk: REITs rely on their tenants to pay rent on time in order to generate income. If a REIT’s tenants are unable to pay their rent, it could impact the REIT’s financial performance.
4. Regulatory risk: REITs in India are regulated by the Securities and Exchange Board of India (SEBI), and changes in regulations could impact the REIT market.

Investing in REITs: HOWs

1. You can buy shares of a publicly traded REIT on a stock exchange, such as the NSE/BSE, New York Stock Exchange (NYSE) or the NASDAQ.
2. You can invest in a REIT mutual fund or REIT ETF, which allows you to own a diversified portfolio of REITs without having to buy individual stocks.
3. You can invest in a private REIT, which is not traded on a public exchange but is instead offered through a limited number of private placements to accredited investors.

Before investing in REITs, it’s important to carefully research the REIT and its management team, as well as the broader real estate market. You should also consider consulting with a financial advisor to help you determine if REITs are a good fit for your investment goals and risk tolerance.

As of July’23, there are only a few real estate investment trusts (REITs) available in India. Some of the REITs listed on the National Stock Exchange of India (NSE) or the Bombay Stock Exchange (BSE) include:

• Embassy Office Parks REIT
• Mindspace Business Parks REIT
• Blackstone-Embassy REIT
• Nexus REIT

Amusing & Interesting: to you can own a unit of each of the above 4 for a sum of 1k only!

I am so glad we have made it this far. Thank you for your patience & time.
Stay tuned with The Money Matter & hit the Follow button to get notified about our upcoming chapters.

If you haven’t already read the previous chapters, find them here:

1. Chapter 1 will get you started with making money work for you
2. Chapter 2 helps you stay on step ahead of emergencies
3. Chapter 3 to get a better grip on finance jargons
4. Chapter 4 gives you a wholesome understanding of credit cards
5. Chapter 5 is all about the gold

Here are some more reads I believe you would find interesting:

1. Get Finance Healthy
2. Building the Future starts NOW
3. Fixed Deposits: The Horror
4. Understanding Mutual Funds

Where can you find me:

• Twitter: https://twitter.com/Pronomita_Dey
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• Write to me: dey.pronomita@gmail.com