Recently, one of the property investor called me to check where he should invest his money in real estate. His objective is to make money during the recession. Last year, he winded off his positions from real estate. The biggest problem for traditional investors is that they cannot invest outside their core sector i.e. Real Estate. The same holds true for stock market investors. Rather i should call them as traders :). One point i would like to clarify that when real estate market is hot, then you can rotate your money in 3-6 months. During the recession, the time horizon for property investor increases to 2-3 years. Traditional property investor is willing to take that much risk. On the other end, the end user who invests in property keeps checking the valuation every other day. The majority of my posts on real estate keeps the end user in mind. This post is useful for both types of property investor i.e. end user and traditional. To end user, i always suggest against property investment through Home Loan. An investment should always be from savings or own fund source.
In my opinion, there are two types of investors i.e. An Investor and A Smart Investor. I know you must be smiling. The only difference is that smart investor never loses money. In layman terms, they are also referred as shrewd investors :). A basic investment philosophy says that you should buy when other are selling. The imp point is you don’t know, till what point others will keep selling :). I do agree it is not possible to find the bottom, but a property investor can always judge optimum level. Let’s check few tips to make money in real estate during recession using this philosophy.
Property Investor – 5 Tips to Make Money During Recession
1. Supply and Demand: As a smart investor you should always access and judge the supply and demand. The near optimal point to invest is the intersection of supply and demand. Normally this information is available in the public domain, or you may get from big real estate agents. I will take the example of one of my regular client. He is a property investor from Delhi. He was quite bullish on Dwarka Expressway two years back. After studying the supply-demand of that area, i suggested him to wait for some time. At the time, the average per square feet rate was Rs 5,500 psf. After 4-5 months, the rate decreased to Rs 5,000 psf. He was quite happy. He saved a lot as he was planning to buy five units. A saving of Rs 500 psf was good enough.
He called me and thanked me. He said that price will never go below Rs 5,000 psf. It is rock bottom price. I suggested him to wait for some more time :). He was not in a concurrence with me. As i keep highlighting that investors are always in fear of being left out. On the other hand, smart investors wait for right opportunity :). I told my client that as he is planning to buy five units at Rs 5,000 psf, therefore, he can buy 1 unit at Rs 5,000 & then wait. I assured him that his average price of 5 units will never exceed Rs 5,000 psf.
The price in his preferred area was on the consistent downfall, and i suggested him to buy resale under construction property for a better deal. Subsequently, he purchased three units for Rs 4600, Rs 4100 and Rs 3800 respectively. Now the prices have stabilized at Rs 3500, and it is optimal point therefore recently he bought the 5th unit at Rs 3500. His average price is Rs 4200 psf that is not bad but fear of being left out outplayed heavily in this scenario :). Therefore, as a smart investor, you should keep a close eye on supply and demand. Don’t go by builder’s rate card or rates on the online portal.
2. Land Cost: As i shared in point 1 that there is an optimal point where demand and supply intersect. Now you must be wondering how to find this optimal point. To be honest, you cannot find perfect optimal point but can find the point below which the rate will never fall. It will help you to find out the premium on the property thus estimate the optimal point. It is too theoretical for a property investor but not impossible. I will explain in a very simplistic way.
For example, there is a plot of land of 20,000 sq ft. The psf cost of land is Rs 5,000. Therefore, the cost of land is 10 Cr. Considering the FSI of 2.5. The total constructed area is 50,000 sqft. Assuming a quality construction whose cost is Rs 1500 psf. In this case, the total cost of construction is 7.5 Cr. Roughly the cost of 50,000 sqft constructed area is 17.5 Cr. Therefore, psf cost is Rs 3,500. Add other misc costs of Rs 500 psf, the total cost at no profit and no loss is Rs 4,000 psf. A price for this property will never go below this point until unless there is a crash in the market or builder goes bankrupt. In this case, the optimal point should be near Rs 4,250 psf.
It was just a rough example for a property investor to understand. The reason being the cost of land is directly proportional to the demand in the area. Therefore, Supply & Demand and Land Cost will give a fair idea of right price to buy the property for the smart property investor. If you enter near optimal point, always be assured of good returns in 2-3 years time.
3. Master/Development Plan: As a thumb rule, you can always expect max appreciation in the periphery of the city. The reason being, property prices are near saturation level within the city. The biggest problem for a property investor is how to identify such areas. As a smart property investor, you should always align your investment with govt’s development plan. Most of the metros have their master plan for future development. If i know that future focus of the govt will be Area A and Area B, then i will invest in properties in these areas. In Mumbai, one such area is Taloja and in Bangalore, it will be Varthur. If you track then, you get enough signals to identify such areas.
4. Distressed Properties: The shortcut for a property investor is to identify distressed properties. These properties are best suited for investment purpose. As an investor, you should be beware of discounted property. If i find the right one, then min 20% appreciation is immediately on the table. The seller is in a hurry to sell, and the investor can negotiate a good deal. Most of my clients who don’t want to invest much time in research take this easy route. For distressed properties, you should have good relation with the brokers or agents. They are the best source to pass the info on such properties.
The concept of a reverse auction is real estate sector is not popular in India. It will be more beneficial for the property investor. You can put a listing that you are willing to buy a property in a particular area/project for X amount. The sellers who are willing to sell at this rate will approach you. Technically, it is beneficial to both the parties. This kind of concept is successful in free markets and not for a closed market like India.
5. Commercial Property: A property investor can also evaluate commercial property during the recession. Few years back more than 90% commercial properties were available only on lease. Due to slump in the market, commercial property is now available for upfront sale. The yield of commercial property is much higher than residential property. Secondly, with the pick-up of the economy the commercial property will be the first one to recover compared to residential property. A property investor can look out for a good deal in this space.
Words of Wisdom: As i mentioned in my posts on personal finance that it is getting difficult to make money with each passing day. The no of options are reducing, and there is a great rush to identify the right opportunity. It’s a million dollar question that how many investors will be able to identify the right opportunity. All the investment decisions should be taken after thorough research and study else it will be a gamble. You should not gamble with your money. As one wrong decision can wipe out returns of last ten profitable decisions. Moreover, times are bad, but we cannot discount real estate sector like this. This sector was discounted multiple times in past but always came out with flying colors. I hope and wish the same this time also :).
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