How to Make Real Estate Investments Profitable

Most people are hesitant about investing in real estate because, they think investing in real estate can be daunting. Many people haven’t learned about this type of investment. We’ve been taught that loans are bad, but why? It’s a common misconception that paying money to others is a loss. But why? Why don’t they realize their salary is also an expense to someone else? Somebody’s expenditure is someone else’s income. This thinking might be inherited. Let’s challenge it.

Some investments require loans, like real estate or large businesses. Individuals can’t always raise the necessary funds. There’s nothing wrong with borrowing from banks or financial institutions, especially when you pay interest.

Let’s try to change this thinking and think differently. Let’s shift our perspective. Start by reading my blog “Eight Facts About Any Type of Investment.” It outlines key considerations for any investment. Then, explore the ‘seven homework steps to take before buying real estate’. Finally, we’ll learn an advantage of real estate investing and how to make real estate investments profitable in this blog.

1) Under construction Property

The best strategy is to buy under-construction property from a reputable builder. This reduces the risk of project delays. As the building nears possession, your investment appreciates. If you choose a CLP (construction link plan), your initial interest cost is lower.

How CLP Works

An investor pays a downpayment as a booking amount. Then they proceed with property registration. Investors pay for taxes and charges like stamp duty, registration fee, TDS, and advocate fees. As the developer completes each slab, they demand further payments for the work done. This is called the Construction Linked Payment Plan (CLP). You only pay the EMI for the disbursed amount. So, the interest is charged only on that amount, making it lower than paying the full property cost upfront.

In the first year, you may pay 50-60% of the total cost. The next year, you pay 20-30% more. In the third year, you pay the remaining 10-20%. If you take a loan of Rs.10,000,000 at 8.60% p.a., you pay a maximum interest of Rs.15,00,000 in three years.

Advantages and Disadvantages of Under Construction Property

Disadvantages

1. Late Possession: You get possession only after the property and project are complete. Projects may get delayed, but with RERA, this is unlikely. If delayed, the developer pays 9% p.a. interest on the cost paid.
2. Developer Bankruptcy: If the developer goes bankrupt, the project may be delayed. Due to RERA, another developer will take over, and the project will complete on time. Choose a reputable developer to avoid this risk. Reputed developers usually deliver on time and fulfil promises.

Advantages

1. Lower Cost Advantage: This is the biggest advantage. Under construction properties are sold at a lower price than ready-to-use properties. For example, a ready 2BHK might cost Rs.2,00,00,000, while under construction it costs Rs.1,50,00,000 to Rs.1,60,00,000. At possession, you gain Rs.40,00,000 to Rs.60,00,000.
2. Lower Financial Burden: You don’t bear the full cost of the property from day one. The EMI continues only on the disbursed loan amount.
3. Choice of Inventory: You can choose the side, area, floor, and entry-exits. The cost varies with premium choices but can be negotiated.
4. First Ownership: You benefit from being the first owner. For more, read my blog ‘Seven Homework Steps to Take Before Buying Real Estate’.

Note on Market Trends

Real estate trends can change. As of 23rd July 2024, the Union Finance Ministry of India increased long-term capital gain tax from 10% to 12.5%, removing the indexation benefit. This can impact investment returns. Always study and seek expert advice before buying under-construction property.

2) Don’t be emotionally attached

Never be emotional when buying or selling property. Indians often have special attachments to their homes. This can be due to ancestral ties, first property sentiments, or childhood memories. Before getting emotionally attached, think about the property’s significant advantage.

When be emotional –

1. Heritage Property: Built centuries ago, still holds strength and pride.
2. Gifted by Royal Family: If gifted by royalty or any government.
3. Already Prime Property: If it’s a prime property and you don’t want to earn capital gain, don’t sell. This should be your only property or you should have another one where you aren’t emotional.
4. Earning High Income: If the property is your main income source, don’t sell. You are settled there, and moving might affect your customer base. By high income, I mean significant earnings from renting or business use.

Losses on being emotional –

1. Financial Burden: Investors may pay interest throughout the loan tenure unnecessarily. It’s worthless to keep property not used personally or for business. If it’s not gaining significantly then consider selling it.
2. Stop Loss: If the gain is insignificant, the property is worthless to hold. Insignificant earning means rent isn’t covering interest or the property isn’t appreciating. Use the concept of ‘stop loss’ in real estate. Read my blogs on real estate and investment to avoid ‘Stop Loss’ situations.
3. Opportunity Loss: Holding onto an unprofitable property means missing investment opportunities elsewhere. This could be other properties or investments like mutual funds.

Other Expenses: Unnecessarily keeping property incurs costs like maintenance, electricity bills, breakage losses, and property taxes.

3) Buying two properties

As per my opinion, buying two such prime properties at a time or simultaneously with little time gap is worth. How and why? Who will incur interest cost and taxes? Let’s understand and challenge the fear and traditional thinking; by following these steps –

1. Initial Payment: Ensure you have enough money for an under-construction property’s initial payment. Such under-construction property will give answer to the question, how to make real estate investment profitable.
2. Search for Prime Property: Refer to my blogs on selecting real estate to find a prime property.
3. Start Small: If your budget is low or you’re unsure, select a smaller property.
4. Arrange Debt: Go for the property, arrange for the debt, and start regular payments to the developer.
5. Second Property: After a year, arrange for another under-construction property. If not, that’s fine. However, avoid booking multiple properties in single project to reduce the risk of failure.
6. Wait for Construction: Let the developer complete the property and give you possession.
7. Sell the First Property: Study the market rates and sell at the current rate. This relieves you from debt and helps you accumulate cash. You can gather, your own contribution money (roughly Rs.15,00,000) + profits (ranging from Rs. 15,00,000 to 40,00,000 or even higher) = roughly Rs.25,00,000 to Rs.50,00,000 or even higher.
8. Profit Calculation: Assume the flat cost is Rs.1,00,00,000, interest cost is Rs.12,00,000, loan amount is Rs.85,00,000, and selling price is Rs.1,35,00,000. Your earning is Rs.23,00,000 (1,35,00,000 – 1,12,00,000). When you repay the entire debt after selling the property, what remains with you is a big cash. Investor should focus on the cash initially than on profit. This cash would be (Rs.1,35,00,000 – 85,00,000[loan] = Rs. 50,00,000 – Rs.5,00,000[expenses incidental to sale] = Rs.45,00,000 in cash.
9. Second Property Investment: With Rs.45,00,000 in cash, go for another under-construction property. Repay the debt of the second property if already purchased. This saves capital gain tax as well, as per rule.
10. Reduced Loan: Assuming your second property has similar property cost, your loan reduces from Rs.85,00,000 to Rs.60,00,000-70,00,000 (Rs.1,00,00,000 – Rs.45,00,000). If your property is already purchased as a part of overlapping strategy, your loan could be reduced to Rs.40,00,000 (Rs.1,00,00,000 [cost] – Rs. 15,00,000[initial payment] – Rs. 45,00,000[cash from 1^st property]).
11. Repeat the Process: After possession of second property, repeat the process to buy a third property.
12. Generate More Cash: This time, you can generate more than Rs.70,00,000 in less than five years. In fact, had you overlapped the properties, you already own a cash worth Rs.60,00,000 invested in property. See point number ‘X’ above.
13. Debt-Free Fourth Property: You probably can buy your fourth property debt-free and the fifth one with a smaller loan.
14. Ten Properties Goal: Aim for ten properties, with at least three being debt-free.
15. Extra Income Sources: Repay loans with bonuses, increased salary, extra income, spouse income, or children’s income.
16. Control Expenses: For at least ten years, control your emotions, expenses, and costs. Generate extra or second income.
17. Overlap Property Purchases: Overlapping property purchases can help, but you need at least Rs.30,00,000 in cash.
18. Commercial Property: Try buying at least one commercial property.
19. Believe in the Process: Trust the process; it may work for you as well.

Disclaimer and Notes

1. Personal Experience: These calculations are based on my personal experience. They may not work for you and do not guarantee wealth accumulation.
2. Individual Differences: Your risk tolerance and income may vary. Consider your financial situation before proceeding.
3. Seek Expert Advice: Consulting with experts is recommended.
4. Location-Specific: The examples provided are specific to properties in Mumbai and its suburbs. Calculations, costs, and appreciation may differ in other areas.
5. Income Assumptions: The calculations assume an income of Rs. 85,000 per month or more. This strategy is not advisable for those earning less or for High Net-Worth Individuals (HNIs).
6. Geographic Limitations: This approach may not work outside Mumbai or India.
7. Personal Discretion: If you choose to pursue this or any other investment strategy, it is at your own discretion. We do not support or compensate for any losses incurred.