Wealth management class presentation on real estate investment

1. WELCOME TO THE WEALTH
MANAGEMENT COURSE -
SESSION 8
S G Raja Sekharan

2. REAL ESTATE

3. WHY REAL ESTATE INVESTMENT
 Unlike stocks, mutual funds, gold and commodities, the
chances of downfall in value of real estate investments
is extremely low in India
 Investing in property with rentals is the safest way to
secure your retirement – properties give you
uninterrupted, passive, inflation proof stream of
income
 Reasonable good research will lead you to real estate
investments with CAGR of 15% plus per annum in
Indian conditions – only equity gives better returns –
but even equity has ups and downs.
 In India, real estate investment is akin to a FD that
commits 15% returns year over year with almost zero

4. LEVERAGING YOUR GAINS FROM
PROPERTY INVESTMENTS
 You invest in a flat costing Rs 50 lacs – you put Rs 10 lacs
upfront. The remaining 40 lacs is paid over two years in 8
quarterly installments – which you finance from a bank loan @
10%.
 Over the next two years, you pay pre emi to your bank.
 Overall outflow from your end over the two years –
1. Rs 10 lacs
2. Total of the pre emi’s over 24 months – Rs 4 lacs appx.
 At the end of two years the property appreciates by 20% - i.e Rs
60 lacs and you sell it.
 What is your ROI?
 On an investment of 14 lacs, you get a profit of 10 lacs in two
years. ROI is appx 40% over two years - 20% per year.
 Typically since 2000, in Bangalore, the ROI has been around
30% - 40% per year for such investments.

5. SUPPOSE YOU DO NOT SELL THE
FLAT
 On delivery, you spend another Rs.10 lacs - interiors(4
lacs), registration taxes(5 lacs) and other costs(1 lac on
water, electricity, owners association etc)
 Your decide to pay an emi of Rs 45000 ( 14 years loan) and
the rent is Rs 12000 per month and it is going up by 10%
per year.
 After 5 years, the house value goes up by 100% i.e Rs 110
lacs - the overall returns is:
 Outflow – Rs 60 lacs
 Pre emi –Rs 4 lacs
 Emi – Rs 21.6 lacs
 Rental received – Rs 1.44 +1.58+1.74+1.91+2.10 = 7.77 lacs
 At the end of 5th
year – your cash returns per annum is 3%
(and it is growing by 10% per annum) and capital
appreciation is 10% per year on the current value(appx 10
lacs per annum).

6. AFTER 14 YEARS IN 2025
 You have cleared the loan paying Rs 33.1 lacs as
interest and 40 lacs as principal over the 14
years.
 Your rental income would be around 5.5 lacs per
annum in that year ( rental received over 14
years would be 43 lacs)
 The value of the house is estimated to be 230 lacs
(assuming a conservative 10% appreciation)
 So over 14 years, by investing 54 lacs, you create
an asset of 230 lacs and also have a perpetual,
inflation proof cash inflow of Rs 5.5 lacs per
annum.

7. AFTER 14 YEARS –THE REAL LIFE
SITUATION
 Chances are that your home loan would have been
prepaid by the 5th
year.
 Your value of the house would have appreciated at
more than 10% CAGR - the actual appreciation varies
but at a good locations – it doubles in value every 5
years (CAGR of 15%)
 Chances are that you would have three such homes in
14 years with two loans prepaid and with an annual
income of Rs 15 lacs and asset value of 500 lacs
 Chances are that you would be financially
independent by then and you would have
other assets beyond these three properties

8. IT IS NOT NECESSARY TO DO
EXTRAORDINARY THINGS TO
GET EXTRAORDINARY
RESULTS.

9. YOU MUST LEARN FROM
EXPERIENCE, BUT YOU MUST
LEARN FROM OTHER
PEOPLE’S EXPERIENCE WHEN
YOU CAN.

10. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 Land – commercial/ industrial/ residential
 Land – agricultural.
 Real Estate Investment Trust (REIT)
 Real estate funds
 Real estate equity

11. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties – flats
 In good locations (most places in Bangalore), flats
give 3% rental returns (after 5 years) and a
capital appreciation of around 15% per annum
(doubling in value in 5 years) – a total return of
18% p.a.
 Minimum investment required is Rs 40 lacs -
80% of this can be through loans

12. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Houses with land need to be bought with care as the
upfront investment can be very high
 Trick is to buy in areas where the land values are low
now but will appreciate due to developments around
 Typical rentals are 2-3% ( 5 years after purchase) and
capital appreciation is 20% plus
 Typical investment required is Rs 50 lacs plus - 80% of
this can be through loans

13. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 This is a smart investment option that people
miss.
 Typical investment starts at Rs 15 lacs - 80% of
this can be through loans.
 Rentals are around 7-10% of the invested amount
from year 2 (as compared to 3% on residential
properties)
 Capital appreciation is also about 15% per
annum


14. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 Land – commercial/ industrial/ residential
 Investment in land must be done after reaching financial
independence.
 Land investments give no cash flow, are fairly difficult to
exit – but give superior returns - more than 20% per
annum.
 Typical investment starts at 15 lacs and value doubles
every 3 - 5 years.
 Lower value land investment start at 5 lacs –but the initial
appreciation takes about 5-8 years

15. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 Land – commercial/ industrial/ residential
 Land – agricultural.
 In many states – only farmers can buy agricultural land –
farmers are defined as someone who has agricultural land
already and who has a non-agricultural income of less that 2
lacs per annum
 If you are qualified to buy these lands –it makes sense to buy
agricultural land next to any town, build a farm house and wait
for the town to grow to your property in 15 years.

16. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 Land – commercial/ industrial/ residential
 Land – agricultural.
 Agricultural lands near areas of development give a
reasonable capital appreciation – however it
completely depends on the location.

17. DO’S AND DONT’S WHILE
INVESTING IN REAL ESTATE
 Future development potential of the location would define your
ROI.
 You must use a good local lawyer to look at all the legal
ownership documentation - Khata, tax paid receipts, no
encumbrance certificates.
 If it is a built property – the documents will also have the local
municipal clearances, plan clearances, water, power approvals
etc
 Ensure that your lawyer is involved in the sale agreement,
registration of the agreement and getting the documents
converted to your name.
 Do not buy the property if the documents are not clean as it
will be difficult to sell it later.

18. INVESTMENT OPTIONS IN REAL
ESTATE
 Residential properties - flats
 Landed residential properties – houses with land
 Commercial properties –shops /offices
 Land – commercial/ industrial/ residential
 Land – agricultural.
 Real Estate Investment Trust (REIT)
 Real estate funds
 Real estate equity

19. REAL ESTATE INVESTMENT TRUST
 Invest Rs 25 lacs over three years in REIT
 The fund manager invests this capital in large real estate
projects with a specific mandate( geography, segment –
residential or commercial or mixed use)
 Investment is done in projects at design stage post the land
being bought by the developer – relationship with
developer is mostly long term and not project to project
 Payments to developer are disbursed based on milestones
 Returns normally start from 5th
year and go on till 8th
year.
 IRR for these are normally 20% p.a

20. REAL ESTATE INVESTMENT TRUST
-ADVANTAGES
 The investor gets the upside of real estate without the
large funds required.
 There is also an assured exit plan
 The investment risk is spread over a few properties/
locations

21. Last Price Market Cap.
(Rs. cr.)
Sales
Turnover
Net Profit Total Assets
DLF 363.60 61,718.62 2,419.21 765.06 25,467.85
HDIL 266.20 10,914.31 1,491.99 596.65 11,169.45
DB Realty 413.50 10,058.75 - - 3,416.11
Oberoi Realty 290.00 9,518.76 - - -
Indiabulls Real 212.70 8,546.09 33.99 22.45 5,296.28
Prestige Estate 203.70 6,682.86 - - -
Godrej Proper 750.05 5,239.10 - - 1,270.33
Sunteck Realty 694.00 4,369.85 16.38 7.24 394.10
Anant Raj Ind 135.15 3,988.23 286.81 237.17 3,592.33
Sobha
Developer
367.85 3,607.28 1,114.00 136.70 3,162.51
REAL ESTATE EQUITY AND REAL
ESTATE FOCUSED MUTUAL FUNDS

22. PLACE OF REAL ESTATE
INVESTMENT IN YOUR LONG TERM
WEALTH CREATION
 As you grow your wealth, you must aim to create real
estate cash flows as early as possible.
 Smartest people start investing in real estate before
marriage when there is adequate cash flows.
 I have known one person who had three flats before he
got married – today he is 35 years old and is
financially independent
 And off course he is married.

23. PLACE OF REAL ESTATE
INVESTMENT IN YOUR LONG TERM
WEALTH CREATION PLAN
 Investment in commercial spaces that gives higher
returns and also can come with smaller investments is
recommended
 Do not invest in real estate with a view to use it. Look
at it as an asset that can be used and sold as and when
required just like a share or mutual fund.
 Invest in real estate assets for meeting your cash flow
requirements - by the 10th
year, you must have two
assets (loan free) which must contribute about 70% of
your annual financial requirements.

24. A FEW TRICKS IN REAL ESTATE
INVESTMENT
 Befriend a real estate broker – they know the
market for properties that are going cheap.
 Spend time looking at TOI Sunday edition and
visiting locations where there is real estate boom.
 If the market is expected to go up and up – book
two flats and start paying the installments –
with a view to keep one and sell one mid way and
move the profits of this sale to your flat.
 Most builders have a pre launch booking offer for
investors – as they also need money flowing to
build – Invest in good properties as a prelaunch
investor and these builders would help you sell
the property later.

25. A FEW TRICKS IN REAL ESTATE
INVESTMENT
 Buy the most premium stuff possible –
 4 bedroom vs three bedroom;
 inside city vs outskirts;
 branded builder vs a low brand one;
 property with extensive amenities vs one without
amenities
 Combine the investments of a few friends and invest
in a real estate asset – this helps in larger overall
investments and higher returns per person.

26. THANK YOU