A Complete Guide to Real Estate Financing: What, How & Why?
Using real estate as an investment strategy can help you make big money in life. After all, Andrew Carnegie— the billionaire pioneer of the American steel industry once rightly said, 90% of millionaires got their wealth by investing in real estate. So, if you are purchasing property only to make a profit out of it, or planning to rent it out or resell it for a higher cost, you need to have a catalyst mind to stay ahead in the game.?Furthermore, you should be adept at the highs and lows of real estate financing and develop an analytical understanding of the industry to maximize your profits in the future.?
Real estate financing offers investors a variety of financial benefits— home appreciation, cash flow, and other tax benefits. Real estate is considered a robust investment option and the field continues to dominate investors’ preferences even today. However, given the present state of the Indian economy, you need to have a strategic approach while dealing with?real estate investment, in order to make the most in the residential as well as commercial real estate business sector. Let’s explore some of the best possibilities for real estate financing and loan for real estate investment
Understanding real estate financing
Real estate financing describes several financial methods used by potential investors for securing their independent capital investment. Therefore, it encompasses long-term financial methods used to secure capital while buying and renovating property from outside sources. This process of borrowing and lending money is a liability for both parties — for those who lend the loan, as well as for those who get the loan as a means of financial support.?
Investment options for real estate
Buying a property is not an easy task, and is definitely a costly affair. While buying real estate— bank loans, or investing through REITs is the best possible choice, India offers several investment options for real estate.?Following are some of the possibilities:
Primary sources such as Mutual Savings Banks, Commercial Banks, Savings and Loan Associations, and Life Insurance Banks. You may also consider investment options through Financial Middlemen such as?Mortgage Bankers, Mortgage Brokers; or through other sources such as Finance Companies, Pension Funds, Credit Unions, Real Estate Investment Trusts, Foreign Funds, Individual Investors, and Farmer's Home Administration. There is also the lucrative investment possibility of the Secondary Mortgage Market.?
Bank Loans
These are one of the most favored options for potential investors.?Taking a bank loan and paying back in EMIs is common. One of the biggest advantages of buying a property on loan is that the value of EMI keeps on decreasing while the value of the asset keeps increasing — thus creating a big advantage for the buyer. Furthermore, you can buy real estate with just a 20 percent down payment, and you repay the loan over a generous period of 20 years. Some of the other common benefits of home loans are low-interest rates and low processing fees, interest on daily reducing balance, interest concession for women borrowers, no penalty on prepayment, and availability of home loans as an overdraft.?
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Borrowers however have to be well-versed in the several forms of investment in real estate financing. Choosing the wrong kind of loan may affect the success of the investment. Make sure to understand the requirements of each kind of loan and study thoroughly how the various alternatives work before approaching a lender. Three popular types of loans for investment property are — conventional bank loans, hard money loans, and home equity loans.
Real Estate Investment Trusts (REITs)
These are structured on similar lines to mutual funds and were officially introduced in India in 2014. These are securities linked to real estate that are traded on the stock exchange after their listing. REIT is considered a lucrative investment option and is a great potential investment with ongoing returns. One of the greatest advantages of REITs is that it allows investment in Grade A commercial realty, offering an addition to the investment portfolio. Furthermore, REITs provide liquidity to investors as an Alternate Funding Mechanism (AIF) and are thus considered a stable investment option. With regular returns, REIT is a transparent investment option with the Securities and Exchange Board of India (SEBI).?
Fractional Real Estate Investment
This option is slowly picking up pace in India, after being successful in Europe and the US. It is a new method of investment in commercial real estate and signifies combined ownership of a single asset by several investors together. Owing to high ticket sizes, a potential investor can sign up on the platform and invest in any of the current opportunities listed. This model opens up newer avenues of investment in fractions of premium commercial properties, thus increasing the possibilities of earning monthly rental yield. Furthermore, Fractional Real Estate Investment offers great potential for retail investors who have limited access to CRE, considering the high ticket prices. It also provides investment opportunities across multiple properties and locations. The diversification thus also reduces portfolio risks.
By?Pratik Balasaria