5 ways to make money on real estate investments – Forbes Advisor, India

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Here are five quick real estate investment and return options for the average retail investor or even someone with access to much more capital.

Traditional / traditional investment model

The easiest way to invest in real estate is to buy an asset or rent it out on a long-term lease and then rent it out to tenants – residential or commercial.

The process is simple, but requires a large investment in the beginning and includes annual maintenance and repair costs. Make sure the asset is free of any legal problems, lease it, buy it in advance or on credit.

If it is a commercial property, you will need to complete the required registration at the sub-registrar’s office along with two witnesses and follow the procedures outlined there.

After registering a property, you can send out advertisements or spread information about her job in the market. The tenant will have to accept and sign the lease, and then the monthly rent will be your passive income from the property.

It is a good idea to have tenants with overlapping lease periods in the same asset so that the property is never completely empty. It also helps to reduce the cost of timely service. You can even instruct a property management firm to do all of this for you, but you will have to pay a commission.

In case it is residential real estate, only a visit to the office of the sub-registrar is not required. Similar leases will need to be drawn up for each tenant and your investment income will be measured in terms of the monthly rent you receive.

Renting out part of an existing property

Even if you don’t want to burden yourself with huge investment costs right away, you can start small, such as renting out a room to commercial or residential tenants. If you have an unused entire floor of your current home, it’s best to rent it out.

However, you have to deal with the additional traffic generated. If this is a business to which you have rented a portion of the property based on what the product or service is, the conditions may not be suitable for living in the same location. All your conditions must be included in the rental agreement.

Fix and flip

This method of investing is gaining popularity among people who have experience in concluding general contracts.

If you have excess capital, you can invest in a commercial or residential property that requires significant maintenance, renovate it permanently, and sell the asset at a much better price to asset / property management firms. The ownership of the asset is granted for a relatively shorter period, but if someone has worked in the market beforehand, this type of investment can bring good returns.

Compared to permanent ownership of property, this method has fewer restrictions in terms of regular maintenance, registration work, and the like. However, it does require that you are familiar with the supply and demand of real estate on the market, as well as the cost of the renovation work that you intend to undertake. An experienced partner helps with this.

Investing in real estate through ETFs, mutual funds, REITs

All three are not the same, but they can be classified in the same category. You can buy exchange-traded funds (ETFs) and mutual funds that invest in real estate themselves. It is possible to buy ETFs that invest in real estate stocks such as public housing companies. There are ETFs that also invest in REITs (Real Estate Investment Trusts). You can find mutual funds that invest in developers and property management firms. While ETFs are passively managed by a fund manager, mutual funds are actively managed.

ETFs and mutual funds offer high liquidity and low costs, but the downside is that monthly dividends may not be available and you may not make any profit until you sell the highly rated stocks. The advantage of ETFs and mutual funds primarily lies in their low investment value.

On the other hand, REITs allow you to invest in multiple properties through one fund. Think of it as a mutual fund made entirely of real estate assets or loans secured by real estate. Several investors can pool their resources in a REIT, and the dividends received are distributed among the investors depending on the percentage of their investment in the fund.

While REITs also allow for a relatively smaller investment ticket, they rarely provide returns that can match or be better than stock-focused products. In addition, the investor cannot control the distribution of investments across all REIT assets.

All of these options are still related to real estate, so they will be relatively stable, however, the expected return may not match the long-term investment goal for many.

Fractional Ownership

This is gaining traction following the success of the REIT in India. Real estate is still one of the preferred investment options for Indians, and fractional ownership allows investors to place their money in real estate, significantly reducing investment costs.

Like a REIT, fractional ownership also involves multiple investors, but focuses on one asset at a time. Real estate or real estate investment firms that deal with fractional ownership often research assets based on detailed market analysis and historical rents in the area. Then the asset is further analyzed based on the profit that it can receive in the future. After it has been satisfactorily established that the asset has good growth prospects, the asset is listed on the firm’s website to be open for investment.

The firm sets up a special purpose vehicle (SPV) that manages the investments and transactions for a specific asset. Any maintenance and upkeep costs are also included in the management of the SPV. These investments are usually made for commercial real estate that has leases for three years or more.

Some specialized commercial properties can be leased for up to 10 years or more. For a longer investment, fractional ownership can generate rental income of up to 8-10%. This can be equivalent to an internal rate of return (IRR) of 16% to 20% over a five-year investment period.

Fractional ownership allows investors to diversify their portfolio across multiple asset subclasses, including commercial office space, warehouses, laboratories, parking lots, industrial floors, and more. It is easy to stop investing in shared ownership. You can use your own portal or the services of a management firm to transfer ownership through the sale of your own portion, or you can wait for new tenants to move in to make your decision to hold or release the asset.

Which option should you choose?

Real estate is a profitable form of investment, but it’s important to understand what works for you. Based on how much you are willing to invest, the liquidity you want, the regularity of your cash flows, and your appetite for risk, you can make a decision.

Owning, renting and renting real estate requires a lot of investment and experience, not to mention a deep understanding of the real estate market in the area. Additional responsibilities include hunting for tenants, looking after property and looking for buyers.

Mutual funds, ETFs are great for those who don’t like a one-time investment and prefer to do it slowly and steadily. However, there is no regular cash flow and liquidity depends on the value of the shares at maturity.

REITs mostly pay their dividends on a quarterly basis, and there may be some who may also pay monthly dividends. They are also not very expensive in terms of the minimum investment ticket size. However, the composition of assets in a REIT cannot be changed, any losses in assets must be covered by investors at the time of their investment. There is no way to selectively invest in profitable assets only.

Fractional ownership is gaining popularity as it helps investors choose a lucrative asset and sell their property if they feel their expectations are not being met.

Regardless of which you choose, understand that real estate is only profitable when you invest in it for the long term. Apart from the “fix and flip” option, you should stick with the asset for at least one to two years in order to reap the benefits of real estate investing.

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