How to invest like a pro in real estate

Real Estate is a great investment avenue if done well. Read these tips to find out how.

Legendary stock market investor, India’s Warren Buffet, Rakesh Jhunjhunwala, passed away recently. This is a great loss for Indian business and finance and also for the nation, as Rakeshbhai was one of the greatest believers in the strength of the India story.

?Rakeshbhai was primarily active in the securities markets, but the learnings from him are equally applicable to real estate. So, for this post, I have decided to take some cues from his success to talk about investing in the real estate market.

?Before I get into that, let me answer a fundamental question.

?Why invest in real estate?

The first question is why invest in real estate when there are several other options like stocks and bonds? There are multiple reasons. Firstly, you should always diversify your investments rather than put all your eggs in one basket. So, even if you invest in stocks, bonds and mutual funds, you should also invest in real estate. Secondly, like stocks, real estate can give two kinds of returns – capital appreciation and rental yield (similar to dividends).

?Of course, the most crucial element that is distinct in the security markets is that you can leverage to invest in real estate. Home loans – irrespective of the prevailing interest rates – are always the cheapest debt. Investors can use them to buy a residential property that can give them long-term capital appreciation (as well as yield in the form of rents).

?What should real estate investors look for?

Location

The most well-known aphorism about investing in real estate is “Location, Location and Location,” variously ascribed to an English Lord and a real estate investor in Chicago. The origin doesn’t matter, but it is as accurate today as it was a hundred years ago. I would, though, like to qualify it, given today’s context.

?To take a cue from Rakeshbhai, one of his most significant investments was in the Titan shares. He invested when the scrip was priced at Rs. 3, and Titan was an unknown company. Today, of course, the stock is quoted at close to Rs. 2,500.

?This tells us that the Big Bull did his due diligence on the company, found several attractive aspects and then made his big bet. The same holds for investing in real estate.

?To conclude, location matters, but the location's potential matters even more if you are looking at multi-bagger returns.

?Reputation

Rakeshbhai once said that balance sheets reveal what is important, but what they conceal is vital. ?He noted that it was only after he could dive deep into a company’s accounts that he could make informed decisions about investing. One of the key elements he said that led him to invest in the Titan stock was that it was a Tata Group company.

?The same rule works when investing in real estate. Almost every developer, big or small, comes up with glossy brochures or intricate web-based ‘walk-throughs’ of their new projects. They often tend to hide information that is vital to an investor. What is the track record of the developer? How leveraged is the company/group? What is the project execution record? How satisfied are their previous customers?

?Get answers to these, and you are rarely likely to make a mistake.

?Innovation

If you look at Rakeshbhai’s mega investments that made him India’s Warren Buffet, one thread seems common – innovation. All the companies he made big bets on were innovators in their field.

?The same principle holds in real estate investments. You need to look for developers at the cutting edge of design and technology when executing their projects. These developers are in tune with changing market trends and addressing their customers’ evolving aspirations. Customers will most likely pay a premium for their projects.

?Time

Finally, the most crucial element to learn from the legend Rakesh Jhunjhunwala is that you need to give your investments time to mature and give you great returns. He bought into the Titan stock in 2002. But so convinced was he of his decision that even at the time of his untimely death, he held more than 5% of the stock.

?The principle for investing in real estate is the same. If you buy into a project in an emerging destination, you need to hold it for a substantial period to realise its potential. If you exit early, you will likely lose out on potential profits.

?Whether Warren Buffet or our own late Rakesh Jhunhunwala, hardly anyone lost money following their investing principles. Why not follow them while investing in real estate?