Real Estate Funds In India: A Guide To Investing

Real estate investment funds are an excellent way to generate wealth. However, the high prices of real estate properties can be a deterrent for many investors. Real estate mutual funds in India are ideal for investors who want to benefit from the expected growth in the real estate sector without burning a hole in their pocket. These funds are a great alternative to buying an investment property, offering high liquidity and allowing investors to gain exposure to the real estate sector with a minimal investment. There are various ways to invest in real estate funds in India, including mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Before investing, it is important to conduct thorough research, diversify your portfolio, and monitor market trends.

Rental Properties

Location

When choosing a rental property, look for a location with low property taxes, good schools, and amenities within walking distance, such as restaurants, coffee shops, and parks. Accessibility and connectivity are also important factors, as properties next to roads or with good infrastructure will generally appreciate in value over time. Areas with low crime rates, easy access to public transportation, and a growing job market will also have a larger pool of potential renters.

Property Type

Due Diligence

Before investing, conduct thorough due diligence by inspecting the property, reviewing financial statements, and analyzing market trends. Ensure that all necessary legal documents are in place, such as the title deed, building plan, and occupancy certificate. It is also important to verify the authenticity of these documents and conduct legal due diligence to avoid any complications in the future.

Financing

Investing in rental properties typically requires a significant initial investment. You can choose to buy the property upfront, acquire it on a lease, or take out a loan. If you need financing, you can work with a bank or explore alternative options such as hard money loans. Remember that lenders typically charge higher interest rates on rental properties due to a higher default rate.

Maintenance and Upkeep

Legal and Tax Considerations

Familiarize yourself with the landlord-tenant laws in your state and locale. Both tenants and landlords have rights and obligations regarding security deposits, lease requirements, eviction rules, and fair housing laws. Additionally, consider purchasing landlord insurance, which covers property damage, lost rental income, and liability protection in case of tenant or visitor injuries due to property maintenance issues.

Tenant Management

Finding and retaining reliable tenants is crucial for a successful rental property investment. Overlapping lease periods can help ensure the property remains occupied and facilitate timely maintenance. Screening tenants, handling late rent payments, and managing tenant relationships are all important aspects of being a landlord.

Real Estate Investment Trusts (REITs)

REITs are a mutual fund made entirely of real estate assets or loans secured by real estate. They allow investors to pool their resources and invest in multiple real estate assets through a single fund. The dividends earned are divided among investors based on the percentage of their investment in the fund.

REITs are a good option for those uncomfortable with a lump sum investment and prefer to take it slow and steady. They are relatively inexpensive in terms of the minimum ticket size for investment. However, they rarely provide yields that can match or better than equity-oriented products.

REITs pay dividends quarterly, and some might also pay monthly dividends. The mix of assets in REITs must remain the same, and there is no option to invest only in profitable assets selectively.

How to Invest in REITs

You can invest in a publicly traded REIT, listed on a major stock exchange, by purchasing shares through a broker. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund (ETF).

Online Real Estate Platforms

Online real estate investment platforms are a relatively new concept that has gained popularity among investors looking to enter the real estate market without the hassle of owning and managing physical properties. These platforms allow investors to pool their money and invest in real estate projects, providing a convenient and accessible way to gain exposure to the real estate market.

One of the main advantages of these platforms is that they offer a passive investment opportunity, allowing investors to diversify their portfolios without dealing with the complexities and risks of owning physical properties. They also remove the burden of property management, such as finding tenants, collecting rent, and maintaining the property.

Some popular online real estate platforms in India include:

• Housing.com: This platform offers four key services: buying, renting, co-living, and plots. It has a web platform that connects all elements of a real estate deal, and provides a quality knowledge base covering guides, tips, and advice for property buyers.
• 99Acres: This platform covers every aspect of the real estate industry, facilitating information sharing between buyers, sellers, and brokers. It allows users to list their property online, browse properties, advertise through microsites, and access reports and insights on real estate markets. 99Acres is spread across 600+ cities in India, providing multiple options to choose from.
• Magic Bricks: This portal brings together buyers, sellers, and agents for efficient real estate transactions. It provides an easy-to-use dashboard for effective property finding and listing, and offers tips and advice on various property-related topics, including taxation and policy changes.
• NoBroker: This platform aims to remove the information asymmetry in the market, providing a marketplace for the free exchange of information without brokerage fees.
• Proptiger: This platform lists residential properties on both mobile and web platforms, covering various cities in India. It also offers home loan services in collaboration with banks and promises quality customer support.
• Makaan.com: This platform assures quality services to property buyers and sellers through a comprehensive online platform, providing access to a large database of options. It offers an easy way to compare properties, list properties, and get responses to inquiries, along with a mobile application that simplifies the process.
• Quikr Homes: This platform connects buyers and sellers, providing a listing of residential and commercial properties. It also allows sellers to advertise their properties to get the best deals. Quikr lists properties from key cities across India, making it one of the most comprehensive real estate websites.

Real Estate Mutual Funds

Features

• Long-term investment horizon: Real estate funds are typically recommended for investors with a long-term investment horizon of at least three to five years.
• Hassle-free investing: Buying a property can be time-consuming and tedious. With real estate funds, professional fund managers handle the complexities of the investment, allowing investors to benefit from the overall sector's performance.
• Diversification: Most real estate funds invest across a range of property types, including residential, commercial, and industrial. This diversification allows investors to benefit from the growth of various sub-sectors.

Advantages

• Affordable alternative: Real estate mutual funds offer a more affordable way to invest in the real estate sector compared to purchasing properties directly. Investors can choose the amount they want to invest, making it accessible to those with limited capital.
• High liquidity: Real estate funds are highly liquid, allowing investors to easily buy or sell units. In contrast, selling a property can take time and has lower liquidity.
• Protection against fluctuations: By investing in multiple properties across different areas, real estate funds balance out local downturns or fluctuations in the market.
• Protection against inflation: During inflation, property prices and rents tend to increase, leading to a rise in the value of units in a real estate fund. Thus, these funds offer protection against inflation.

Risks

It is important to note that investing in real estate mutual funds carries certain risks. The performance of these funds is closely tied to the overall market conditions. If the real estate market is sluggish, the fund's performance will likely suffer. Additionally, the interest rate regime can impact borrowing rates, which in turn affects the real estate sector.

Fractional Ownership

For example, an investor can now commit a smaller amount, such as Rs 25 lakh, to own a slice of a 'Grade-A' commercial property, such as IT parks, prime office spaces or warehouses. This is made possible by online investment platforms, which offer partial ownership in physical assets.

The process involves creating a Special Purpose Vehicle (SPV) for each property, with funds collected from investors routed through a trusteeship company or a limited liability partnership (LLP). The SPV purchases the property, and each fractional owner becomes a shareholder in the SPV, proportionate to their contribution. The SPV's sole purpose is to hold the property on behalf of the customers.

There are a few things to keep in mind when investing in fractional ownership. Firstly, market research is crucial as fractional ownership is still relatively new in India. It is important to find a company with experienced founders and a strong network of investors. Secondly, it is essential to fetch the best deal and correctly evaluate the property's price to avoid overpaying. Lastly, look for customer-oriented solutions and clear planning of exit points.

Compared to REITs, fractional ownership offers higher yields and the potential for capital appreciation. However, REITs are regulated by SEBI and are considered safer.

Frequently asked questions