Most of us dream of building our dream home and living it up with the family. Most often the dream remains just that –a dream. Why? The answer is simple. Dream homes are driven by dreams and reality is something very different. Investing in real estate, needs to be a “real” activity that is well planned and executed as per plan.
If you have come across people who have made it big by investing in real estate, pause a while; study what they did vs what you did. They too began with a dream. However, the dream was founded on a sound understanding of how to finance investment in real estate.
Primarily, they were very clear about their motives for investing in real estate. They want to make money standing up and sitting down. They were desirous of generating a passive income to supplement their income from salary or other sources. They were out to acquire property that puts money into their pockets all the time. They were hell bent to ensure that the property fetches them a decent rent that pays any expenses on acquisition and puts some money into the pocket after taxes. They made sure the property value would appreciate and the sale of the property would come with capital gains that can be reinvested in other high value properties while defering taxes.
Most people “invest” in dream home mid career. They buy property, because they want to live in the property, ultimately after retirement. They may be a long way away form retiring and settling down, yet they build their homes in localities they would like to settle down instead of in localities that show a distinct growth potential. They are willing to pay higher prices for the property, though they could have got a better property at a lower price elsewhere and more rent in the bargain. They take huge loans from the bank and spend their lives repaying the loans using up all the rent and slicing off a chunk from out of their salary income. Additionally, repairs to the property, taxes on property and a score of other corrosives eat into their income and leave them wondering about the wisdom of their investment.
What should they have done? If they have several years to retirement, they should develop a real estate investment plan rather than jump into investing in real estate for retired living. It is like going to the Doctor today for an ailment you may have in the future.
Real estate investment plans begin small. The shoe must not pinch. The rent from the property must take care of loan repayments, taxes and all other charges arising from property ownership. Capital appreciation on property must be reinvested in newer and larger properties that generate a passive income for the owner and enable him defer capital gains tax on the sale. This will gradually result in a valuable real estate portfolio that can be used to buy the dream home and also remain invested in properties that you have no intention of living in!
So, it is time to come down from the clouds and get real so that you can build up your estate!
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I think most of the people are the kind that invest ina buying a home to live in it, let their kids grow up in it and then maybe live in it through their retirement to the end of their lives and maybe pass it on to their kids as an inheritance. The hard nosed investing as mentioned in the third paragraph of this article is rarely seen amongst the middle-income groups that form the great majority of real-estate buyers. As a person living in the US and member of the middle income group, it is only incidental to me when the value of my property goes up. An increase in the value is of no use to me when I have no interest in selling as my objective is all of the above mentioned. Iin the United States, where I live, I hear of instances of people walking out of their properties when the value falls significantly by say 30-40%. In India this is different, for one there is never such a big fall in the home values and two it is unheard of to abandon the property when the value of the property falls and let the mortgage comapany to seize and sell to recover their money. The hard nosed investing that is mentioned is primarily by people of the higher income gropus who have a huge surplus income that they want to use to make more money. The middle income group base their decision from the heart.
One sure route to getting rich and upgrading to the “higher income group” is wise investment in real estate. That was the whole point of the post. The so called “walking out on their property” phenomenon is something that happens to people who have purchased a liability thinking it is an asset. The property is drawing out more money from their pocket than it is putting in to it. The value of property going up does not matter when you have a “liability” that has to be discharged monthly. It makes a lot of difference when you have an asset. The real investor buys assets and not liabilities. If you read closely, you will realize that it is not about surplus income or having money to spare for investment. It is about getting real about investment. To distinguish between assets and liabilities and to invest in that which yeilds an income and not puts you into debt.
The problem of property prices falling and rentals not being realized was very much a problem in India during the recession as anywhere else in the world. However, the scale was slightly less. That is all. Real estate investment round the world is the same in many ways.