– by Anil Pharande, Chairman – Pharande Spaces
Through ups and downs, pandemics, and other calamities, housing never loses its sheen as an investment option in India. It may currently not be as lucrative as equity stocks, but the fact is that Indians do not invest in residential real estate just for returns on investment. An owned home has tremendous psychological appeal because it is the foundation of all financial security for the owner and their family. They can either live in it or give it out on rent, and it always retains its value. This is why second homes are very popular in India.
However, keep in mind that you cannot make a quick profit on a residential property. In previous years, Indian residential investors would try the Western approach of ‘flipping’ properties – buy low and sell high within a year – but this doesn’t work anymore. Those were years when the Indian housing sector was less regulated, and many parts of the country were hotbeds of speculative buying and selling.
Today, such investors have vanished almost completely. Like the matured markets of the West, investors have become more realistic in their expectations of returns on property investment. They could often get more than 100% annual ROI in the property market in previous years. Today, supply and demand adjustments and stricter regulations keep housing prices in check. You can expect 4-5% capital appreciation per annum on good properties, but no more than that in most cases.
Other than to live in it, the best reason for investing in a residential property is to earn regular rental income. If you’re buying a second home to rent out, it is important to understand what kind of house will be in most demand from tenants. Let’s look at some of the qualities of a house that can give a good rental income.
The most important quality of a good rental property is its location. It must be close to or adequately connected to the city’s major office districts. For instance, Pune’s Hinjawadi is a major workplace hub. This means that areas like Punawale and Moshi, which are well-connected to Hinjawadi, are in high demand from IT employees looking for rental homes.
The second thing to consider is what kinds of homes most tenants are looking for. In most Indian cities, 2 and 3 BHK flats are generally affordable and most middle-class tenants look for such flats. It makes little sense to invest in a bungalow or villa located in an area where there is no demand for homes that are too costly to rent. If you want to invest in a big luxury property, look at areas where people can afford to rent such a home.
Thirdly, look at the price of the property. If you’ve paid too much for it, you will find it very difficult to earn enough to cover your initial costs and make a rental profit. At the same time, don’t look for the cheapest homes. Such flats will be either too small to be interesting for tenants or in locations that are in low demand. Also, study the property prices now versus 4-5 years ago. If you decide to sell the property after 5-6 years, you will want to profit from the sale.
Fourthly, take a hard look at the infrastructure in the area. By this, I mean everything from road and rail connectivity to the availability of schools, hospitals, and shopping districts nearby. Think like a tenant and ask yourself the right questions to decide whether a property can get a good rental income.
For example: would you be happy living here? Would life be convenient? As a middle-class tenant, would you be able to afford to live in this area and this property? Can you reach your office easily from there? If someone in your family falls sick, can you quickly take them to a nearby hospital? How long would it take your kids to get to school and back every day? All these factors contribute to a decent lifestyle.
Remember that some projects and properties are more attractive than others, even in the same location, because they have better amenities and facilities. A 2 BHK in an integrated township offers a much better lifestyle than a 2 BHK in a small project. A project with a clubhouse, swimming pool, and jogging track is more interesting to tenants than another project which may have cheaper homes but lacks these facilities.
All the best on your property investment journey. You will not regret it if you choose the property intelligently and keep reasonable expectations. Buying a good residential property is still the best investment decision you can make in India.