Invest In Apartments: India's Real Estate Guide

Investing in apartments in India can be a profitable and rewarding experience, but it requires careful consideration and planning. Here are some key points to keep in mind:

- Traditional Investment Model: The simplest way to invest is to buy or lease an apartment for the long term and rent it out. This requires a significant initial investment and maintenance costs. Ensure the property is legally sound and follow registration procedures, especially for commercial properties.

- Real Estate Investment Trusts (REITs): REITs are companies that own and manage properties, allowing investors to own expensive real estate and receive dividend income. REITs offer high liquidity and are traded like stocks, but they may have higher fees and provide fewer tax advantages.

- Crowdfunding: Crowdsourced real estate platforms, such as Fundrise, allow multiple investors to own a portion of an apartment building. This method helps avoid market volatility and managing tenants, but it may have limited liquidity.

- Partnerships: Consider teaming up with a partner to share risks and responsibilities. Partnerships can provide additional capital and expertise but may require compromise on decision-making and profit-sharing.

- Syndications: Syndications are similar to partnerships but involve multiple investors pooling funds to purchase an apartment building. The syndicator, or general partner, manages the property, while investors, or limited partners, collect distributions and profits.

- Real Estate Funds: Real estate funds raise capital to invest in multiple apartment buildings, offering more diversification. However, the minimum investment tends to be higher, and you may not know the exact properties you're investing in.

Buy a physical property

This is the simplest way to invest in real estate. You can buy or lease a residential or commercial property for the long term and then rent it out to tenants. This process requires a significant initial investment and involves yearly maintenance and upkeep costs.

• Fix a budget, location, and requirements as per your personal or family needs.
• Verify the property title to confirm its existence, validity, and that it is free of any mortgages or previous unpaid dues. Scrutinize documents for at least 12 years, and up to 30 years for any legal discrepancies.
• Verify the seller's identity by scrutinizing valid legal documents such as a PAN Card or Aadhar Card. If the seller is an organization, check for legal documents related to the company's registration, TAN number, etc.
• Ascertain the type of land (residential, commercial, industrial, etc.) and check that it complies with state and national laws. If the land has been converted from one type to another, look for land conversion documents.
• Verify construction approvals by checking the building or layout plan and ensuring it is sanctioned by the relevant authorities.
• Ensure the seller obtains an Occupancy Certificate (OC) before transferring the property titles.
• Check for any mortgages or other claims on the property and verify that the seller has not defaulted on tax payments.
• Conduct a physical survey and access the property to examine its measurements, route to the site, surrounding areas, connectivity options, etc.
• Ask the developer/seller for copies of No Objection Certificates (NOCs) issued by various departments, such as the Pollution Board, Environment Department, Sewage Board, etc.
• Check if the property is registered under your state's Real Estate Regulatory Authority (RERA) and look for any complaints filed against the developer.
• If there is a loan outstanding on the property, perform due diligence and check the relevant documents before signing a deal.
• Check the construction quality of the property by inspecting the strength of the walls, window frames, flooring, paint, bathroom fittings, etc.
• Research the rental and resale value of the property by considering the locality, accessibility to social infrastructure, and connectivity to other parts of the city.
• Understand the fine print and read all the clauses and their implications before finalizing the property deal.

Team up with a partner

Teaming up with a partner to invest in apartments in India can be a great option if you have limited real estate knowledge or experience. It is also a good way to pool capital, allowing you to purchase a property that may have been out of your individual budget.

A partnership can also provide an alternative perspective and help with the overall workload. An experienced partner may have an extensive network to help with raising money, sourcing tenants, and finding quality property management.

However, there are some potential downsides to be aware of. Firstly, you will be splitting the profits, and there may be coordination challenges or conflicts if responsibilities are not clearly discussed. Additionally, mixing business with friends or family can strain the relationship.

If you do decide to team up with a partner, it is important to go in with eyes open and document and discuss everything beforehand.

Invest through a real estate fund

Investing in apartments in India through a real estate fund is a passive way of investing in real estate. Here is a detailed guide on how to go about it:

Real Estate Investment Trusts (REITs)

REITs are companies that own and manage income-generating real estate assets. They are similar to mutual funds, as they allow multiple investors to pool their money and invest in a portfolio of properties. By investing in a REIT, you can gain exposure to a diversified selection of real estate investments, including offices, malls, hotels, and apartments.

REITs are traded on major exchanges, and they are required to distribute at least 90% of their income to investors as dividends, making them a common investment choice for those seeking regular income.

Advantages of REITs:

• Low investment cost and high liquidity: REITs offer a relatively low entry point for investors, and they are easily tradable on public stock exchanges.
• Regular income and capital appreciation: REITs provide consistent dividend income, and over time, the value of the underlying real estate holdings is expected to appreciate.
• Professional management: The REIT company handles the management and operations of the properties, making it a passive investment option for individuals.

Disadvantages of REITs:

• Low tax efficiency and regulatory restrictions: REITs may not offer significant tax advantages, and they are subject to certain regulatory requirements and compliance costs.
• Market and performance risks: As with any investment, there is a risk of market downturns and fluctuations in performance.
• Limited control: Investors have limited control over the specific properties and assets the REIT invests in.

Real Estate Mutual Funds

Real estate mutual funds are another way to gain exposure to the real estate market without directly owning properties. These funds are managed by professionals and invest in securities of companies engaged in the real estate sector, such as developers, builders, and financiers.

Advantages of Real Estate Mutual Funds:

• Low investment cost and diversification: Mutual funds offer a relatively low entry point and provide access to a diversified portfolio of real estate-related investments.
• Professional management: The fund is managed by experts who make investment decisions and handle the day-to-day operations.
• Transparency: Mutual funds provide regular updates and disclosures, allowing investors to understand the fund's performance and holdings.

Disadvantages of Real Estate Mutual Funds:

• No direct property exposure: Investors do not have direct ownership of physical properties, which may be important to some investors.
• High expense ratios and exit loads: Mutual funds may have higher fees associated with them, including management fees and potential exit charges.
• Market and performance risks: As with any investment, there is a risk of market fluctuations and performance that may impact returns.

Exchange-Traded Funds (ETFs)

ETFs are another type of investment fund that tracks a specific index or sector, in this case, the real estate sector. Real estate ETFs provide exposure to a diversified portfolio of real estate stocks and REITs.

Advantages of ETFs:

• Low investment cost and high liquidity: ETFs typically have low minimum investment requirements and can be easily traded on exchanges, providing flexibility and accessibility.
• Passive management and transparency: ETFs are passively managed, tracking a specific index, and they provide regular updates on their holdings and performance.

Disadvantages of ETFs:

• No direct property exposure: Similar to mutual funds, ETFs do not provide direct ownership of physical properties.
• Tracking errors: There may be discrepancies between the performance of the ETF and the underlying index it tracks.
• Market and performance risks: As with any investment, there is a risk of market fluctuations and performance that may impact returns.

When investing in apartments in India through real estate funds, it is important to consider factors such as your investment goals, risk tolerance, liquidity needs, and the level of control you desire. Each investment option has its own advantages and disadvantages, so it is crucial to understand the specifics before making a decision.

Invest through a REIT

Real Estate Investment Trusts (REITs) are companies that pool investors' money to manage income-producing real estate properties they own. They are a great option for those who want to invest in apartments in India.

REITs are similar to mutual funds, in that they hold properties instead of bonds or stock options. They are also highly liquid, as they are bought and sold like stocks.

There are several types of REITs, including:

• Equity REITs: These invest in offices, residential complexes, industrial estates, and hotels. They buy, manage, set up, and sell real estate, distributing income earned as dividends.
• Mortgage REITs: These loan money to buyers of real estate and extend mortgage facilities. They generate income in the form of interest on the money lent.
• Retail REITs: These invest in the retail segment, such as shopping malls, grocery stores, and supermarkets, renting out space to various retail tenants.
• Residential REITs: Residential REITs buy and operate apartment buildings, gated communities, and other housing.
• Healthcare REITs: These invest in real estate for hospitals, medical establishments, and health clinics.
• Office REITs: Focused on office properties, earning through rental income.

REITs offer investors the opportunity to own high-priced real estate and earn dividend income. They are suitable for both big and small investors. Small investors can pool their resources with other investors to invest in large commercial real estate projects.

There are several benefits to investing in REITs:

• Steady dividend income and capital appreciation: REITs provide substantial dividend income and steady capital appreciation over time.
• Diversification: Being traded frequently on stock exchanges, REITs offer investors an opportunity to diversify their real estate holdings.
• Transparency: Regulated by SEBI, REITs are required to file audited financial reports, providing transparency on taxation, ownership, and zoning.
• Liquidity: As REITs trade on public stock exchanges, they are easy to buy and sell.
• Risk-adjusted returns: Investing in REITs offers individuals risk-adjusted returns and a steady cash flow, even during high inflation.

However, there are also some limitations to consider:

• No tax benefits: Dividends earned from REITs are subject to taxation.
• Market-linked risks: REITs are susceptible to market fluctuations, so investors with a low-risk appetite should be cautious.
• Low growth prospect: REITs return 90% of their earnings to investors, reinvesting only 10%, which limits their growth potential.

In India, there are currently three options for REITs: Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust. Investors can purchase units through a Demat Account or explore IPOs to invest in new REIT launches.

Invest through crowdsourcing

Crowdsourced real estate platforms offer their investments to multiple investors at a lower price. This method of investing in apartment buildings can help you avoid market volatility and tap into capital appreciation. It also means you don't have to deal with tenants or physically maintain the property.

How to Invest in Crowdsourced Real Estate

If you want to start investing in apartment buildings with higher returns, consider looking into crowdsourced real estate investing platforms. Here are some of the best ones:

• Fundrise: Requires a minimum investment of $10 with average returns of 5% to 22% and average fees of 1%. Open to all investors.
• Groundfloor: Charges $0 in fees. You essentially act as the bank, giving out loans to people looking to fix and flip residential homes.
• EquityMultiple: Requires a minimum investment of $5,000 with average returns of 18.7% and average fees of 1%. Only open to accredited investors.
• Streitwise: A privately traded REIT catering to both accredited and non-accredited investors with a minimum investment of $5,000 and average returns of 8% to 9% and average fees of 2%.
• RealtyMogul: Offers 2 types of REITs with a minimum investment of $5,000 and average fees of 1% to 1.25%. Open to both accredited and non-accredited investors.

Other Things to Consider

When investing in apartment buildings, it's important to consider the location. High-value tenant markets are typically clustered around cities with good infrastructure and a growing job market.

Additionally, investing in apartment buildings without going through a syndication or crowdsourced platform can have some cons. Tenants may refuse to pay rent, be difficult to deal with, or damage the property. There may also be issues when it comes to selling the property.

Frequently asked questions