When you invest in residential real estate, you are getting more than a home or a piece of land upon which to build a home.
Thirty years ago, investing in a real estate was never a necessity but a luxury, a medium to boast the social status. But now putting money into property market is not just imperative but a tried-and-tested way to grow your investment incessantly.
WHY should you INVEST in Real Estate ?
Real estate is rather a money making cycle from where you can reap benefits till time attains infinity. For those, who still don’t believe in this statement, here are few reasons that will convince you:
‘There is no safer place than home’- Home is indeed the safest thing to invest in. Reason is that the returns and risks that are associated with it are far less than stocks and shares might give better returns over a period of three to four years but the risk associated with it is way too high. Shares and stock prices see huge variation even in a week but housing remains stable and hence safe over a longer period of time.
Ample finance options
There are ample options available for real estate financing. From banks to Non-Banking Financial Companies as well as private lenders, there is no dearth of money for a real estate investor.
Loans are cheapest
When compared to other assets, loans offered for homes are cheapest in India. A home loan is available for 9.25-11 per cent while auto loan is offered for 14 per cent while personal loans are offered for 15 per cent on an average. This makes home loans comparably cheaper.
Suits every need
Real estate suits every need and budget. If you are looking for long term capital growth, building a retirement home is a good option. For continuous income, buy a home where the rental flow is attractive and if you are looking for an addition to your portfolio, you can always buy an old home, available at a lower price and remodel it as per your choice. This would also raise its value.
It is a controlled asset
You might need to hire a broker if you are investing in shares and stocks but real estate investment is easy and simple. Property portals like Makaan.com are one stop destination to look for options and research about localities, get answers to all property related queries that an investor tends to have. Even if you are buying through a broker, it is a one-time payment while share brokers charge commission on an yearly basis.
Keeps you ‘Financially Disciplined’
Real Estate actually keeps an investor financially disciplined. A fixed date for EMI payments keeps you motivated to arrange for the funds on time as late payment might involve a huge penalty. Moreover, one needs to keep up the holding costs as well keeping in mind the tax and rental income factors as well. All of this makes you more aware and urges you to have monetary dexterity.
It keeps on growing
Real Estate asset never stops growing. Once you buy it, the yield and returns tend to increase varying as per location. Even if you put it for rent, the capital price will continue to rise. For those who want to build their retirement nest have the winning edge as they can leverage rental income till the age of 58 and can sell it for lump sum amount to buy another property.
Benefits from other’s investment
Property prices increase whenever there is any infrastructure development or upgrade in amenities like new hospital or school or shopping complexes or business centre etc. Improvement in employment opportunities can boost housing demand in nearby areas. If the investment you made is in a suburb, improvement in accessibility can raise the property values as well as housing demand.
Pass it on to your next generation
Real Estate is one of those assets which you can pass on to your kids and generations to come. Whenever you think about long-term investment, it is not necessarily for your lifetime. You can pass this to your children and if well-positioned, property will continue to grow over the long term. There is no single company on National Stock Exchange which has topped the market for 10 years in a row.
Owning a property offers you a tax rebate. You can enjoy deduction of up to Rs 1,50,000 from taxable income in a financial year as payment towards housing loan. However, an enhanced deduction of up to Rs 2 lakh per annum for a self-occupied property can be availed of if acquisition or construction of the property is completed within three years from the end of the year in which the loan is taken.
Time would change but the benefits of investing in real estate are only going to increase. Not just that it is the safest haven but because it is an asset which is tangible and makes it more real. The ‘look-and-feel’ is comforting and its value is far more than any share or stock that has gone under
Real estate investment has become a popular way for people to make money, and it is not uncommon to buy a house or land without any intention of living there. Some people simply buy and hold property, waiting for it to appreciate in value before re-selling it.
Having cash for a down payment is the quick and easy way to enter the real estate market, but it’s not your only option. Many people have found ways to start investing in real estate with little or no money of their own. Options include borrowing money as well as a number of more unusual and creative paths to ownership.
How To Invest In Real Estate With Little Money or Experience ?
1. Investing Without a Down Payment
SELLER FINANCING AND LEASING
Look into seller financing. If the seller is motivated enough, s/he may be willing to make it easy for you to purchase by giving you a loan. You could offer to make higher monthly payments instead of a down payment.
You could also negotiate a deal where the seller pays your down payment to a traditional lender in order to sell the property faster. The seller might expect you to pay him/her back or s/he may throw the down payment in for free, essentially lowering the selling price.
For each of these scenarios, make sure you have a real estate attorney write up the agreement so that both parties are protected.
Lease the property with the option to buy. You can invest in real estate slowly by making payments on a lease agreement until you have the money to buy. Your payments would (at least in part) be credited toward the purchase price.
Ensure the agreement specifically states a final price for the property. Define the exact portion of the rental payments that will be put toward the final purchase price.
in real estate, a lease-option is just what it sounds like: a lease with the option to buy.
In real estate, the lease-option is a legal instrument between the investor/seller and a tenant/buyer. It involves a lease with a monthly rental amount due, but it also includes an option to buy — for a pre-determined price — at any time during the agreement.
Typically, lease-options include a rental credit that goes toward the purchase of the home. If the tenant-buyer pays the rental amount due each month, a portion of that rental payment is credited back should the tenant-buyer exercise his or her option to purchase the property.
This arrangement has plenty of advantages for the owner of the property under the lease-option agreement. Those advantages, in a nutshell, include:
Higher monthly rents: Because a portion of the rent paid is to be credited to the buyer at the time of purchase, the owner of the property can typically demand monthly rent higher than the market norm.
Greater tenant responsibility: If a rental is structured as a lease-option, the tenant (buyer) is operating under the assumption that he or she will eventually own the property, which means he or she might be more willing to take good care of it.
On-time rental payments: If structured properly, a lease-option arrangement can include the provision that the amount of rent credited toward purchase is only applicable if the rent is paid by a certain date each month. The tenant has a big incentive to pay on time.
Pre-arranged sales price: The owner of the property can build in expected appreciation and be guaranteed a bottom-line sales price years in advance.
A typical lease-option period is one to three years. The tenant signs a lease, including the higher-than-market-average rental amount and agrees to a purchase price set in advance. An investor might write the lease-option on a home worth $100,000 to be sold to the tenant-buyer in three years for, say, $115,000, thereby guaranteeing the sale of the property for more than its original purchase price.
In the meantime, during the three years, the tenant will be paying above-market rent each month. Even if the monthly credit is achieved every month, reducing the sales price or contributing to the buyer’s down payment, the investor is likely to get more out of the property than it cost. That’s a version of the “buy-and-sell strategy” that many real estate investors aim for.
Work out a trade. You can pay for real estate by bartering another piece of property or a specialized skill you have. For example, a contractor could offer a real estate developer labor in exchange for a down payment.
Other possessions you could offer to swap include motor homes, campers, boats, cars, large appliances, valuable artwork and furniture.
For any bartering deal, draw up a legal agreement with an lawyer specifically stating the value of each item in the trade. An outside appraisal may be needed.
Simply put, swapping properties is like selling your home to a person and buying another home from that same person, ideally on the same day.
The swappers sign separate purchase and sale agreements for each of the houses being traded. The contracts spell out the price of each property. If one home is more valuable than the other, the buyer of the more expensive house pays the seller for the difference at closing. In other words, if you swap your $200,000 house for a house worth $300,000, you would pay the seller $100,000 at closing.
If either of the properties being traded has an outstanding mortgage, the existing lender is paid at closing, just as in a traditional sale.
And as with any traditional purchase, the buyer in a house swap can get a mortgage to pay for the new house. Anyone needing a mortgage in a home swap should include a copy of the sales contract with the application documents to show the new lender there will be only one mortgage once the deal closes.
Take over mortgage payments. If you are interested in investing in a piece of real estate but you can’t afford the down payment, offer to take over the mortgage payments in exchange for the deed. However, you will need to investigate the existing loan before you make such an offer. Some mortgage loans have specific language preventing this type of transaction.
You could also offer to take over a seller’s other debts such as credit card payments instead of a down payment. This is something you could pay off over time. Put the agreement in writing, as if you don’t pay the credit cards on time the seller’s credit rating will be negatively affected.
3.Co-Investing for a Down Payment
Bring in a partner. If you are big on ideas but short on cash, bringing in a partner who will provide the funding and allow you to do the managing might be an attractive option. You will need to write up a contract that establishes who is responsible for what, and how the profits will be divided.
If your partner is in place strictly for financial support, make sure you retain all control over the day-to-day management of your investment.
Invest with a building contractor. If you lack carpentry, plumbing and electrical skills to fix up and resell a property, partner with someone who does have these skills and could help with the down payment. Once you make a profit on the sale, you will have the down payment for your next real estate investment.
4. Borrowing Money for a Down Payment
A.Family and Friends
Borrow money from family or friends. If you have little or no money on hand and you want to make a real estate investment, borrowing money from family and friends is another option. Be sure to write up an official promissory note with payment due dates, a specific interest rate, and what ownership, if any, the lender will have in the property. If you pay back the loan on time and with interest, these lenders might be willing to lend to you again for future projects.
Consider whether the relationship you have with your lender could be harmed if you were unable to repay the loan. Ask yourself if securing real estate is worth endangering your relationship with someone close to you.
HOME EQUITY LOAN
Take out a home equity loan. Find a bank who will allow you to take out a loan for a down payment on top of the mortgage loan you have on your own house. This could be a line of credit or a second mortgage using your home as collateral. Look for a low interest rate that will allow you to purchase the property economically enough that you can still make a profit later on your investment.
A home equity loan, often referred to as a second mortgage, allows you to borrow money for large expenses or to consolidate debt by leveraging the available equity in your home. Your home equity is based on the difference between the appraised value of your home and your current balance on your mortgage. For example, if the value of your home is appraised at $200,000 and you still owe $150,000 on your mortgage, your available equity is $50,000.
Benefits and advantages of a home equity loan
A home equity loan can be a good option if you need to cover large expenses associated with home renovations, college tuition, consolidating debt, or other types of major expenses. Because you can borrow against the value of your home, a home equity loan may also be easier to qualify for than other loans because the loan is secured by your house.
Home equity loans typically carry fixed interest rates that are often lower than credit cards or other unsecured consumer loans. In a changing rate environment, a fixed rate loan can provide simplicity in budgeting, because your monthly payment amount remains the same over the life of the loan and will never increase.
The amount you borrow with a home equity loan is provided to you in one lump sum. This offers you flexibility to cover large expenses. You pay back the loan amount with regular monthly payments that go toward accrued interest and principal for the agreed-upon number of years. Just remember, a home equity loan must be paid in full if your house is sold.
A tax deduction may be available for the interest you pay on a home equity loan if the loan was used specifically for renovations.
Make sure you can pay back this loan or you risk losing your own home. You will also have to have a credit score in the high 600’s to take out this type of loan.
- Other Alternatives
Seek out motivated sellers. These people are desperate to sell for reasons such as bankruptcy, divorce, death of a relative, an out-of-town new job, poor condition of the property, behind on payments, etc. They will be more open to providing funding to close the deal quickly. Your local real estate broker can help provide information on who might be in this situation.
Search online for properties that offer incentives. These can include little or no down payment or seller financing.