Apartment Property Investment – Tips and Due diligence
Investing in a property or real estate asset provides an investor with a physical asset that increases in value and also provides cash flows in the form of rent, when it is let out. However, maintaining a property and attending to its repairs, improvements, etc. can take a lot of cost, time and effort.
Despite these issues apartment property has advantages such as common facilities or amenities such as power back up, play area, security, etc which means you don’t have to worry about cleaning common areas, water supply, etc.
Scope of our discussion – Getting Focused
People invest in an apartment property for self-occupation or investment or both. [Read article on second income] Let us take a case of an investing in an apartment property, which should also be good for self-occupation if required. For a pure investment in any asset we need to separate our emotions from our investment rationale.
When you look at a pure investment angle the idea is to get an asset at an attractive price with the basic right features you are looking for.
For instance when you buy a stock you do a thorough study of the company and invest when it is available at an attractive or bargain price.
We also do this we go to a bazaar or shopping center where you have attractive bargains. This is quite common in India whether it is Commercial Street/Shivaji Nagar in Bangalore, T.Nagar/Purasawalkam in Chennai or Karol Bagh/Sarojini Nagar in Delhi.
For example when you invest in an apartment property – treat it like any other asset. If you are looking for a nice bath tub, Jacuzzi, large balcony, nice garden, etc probably you need to be rich enough to buy these within your own means.
The idea here is to invest for the future and not about building a dream home. This might sound disappointing for many people, however keeping a close watch on your budget will help you save on capital expenditure, which can be used as savings for paying up EMIs and for your emergency needs.
Doing your Research
When you think of investing in a property you need to see a few properties in the location or area you are interested in. This requires a lot of leg work and takes time. You need to consider factors such as proximity to shopping, office, schools/colleges, public transport, main roads, etc. It is a good idea to explore the property’s neighborhood, which gives you a glimpse of the surroundings, traffic and amenities in that location.
If you have a notepad or diary you can note down some points that you felt were good or bad for this property. You can approach different sources such as brokers, individual sellers, builders or developers, etc. Sometimes banks and financial institutions auction individual houses and flats that have been foreclosed. Exploring various sources helps you to see more properties and get more data and information to make your decisions.
One of my friends Rajesh was too new and alien to suburban areas in Chennai such as Maduravayal, Poonamalle, etc. When he got a promotion and moved to suburbs, he decided to buy a property and did a thorough research on weekends. After a period of 6 months he bagged a good apartment deal for Rs.25 lakhs in Maduravayal.
Today after a period of 2 years he is an expert in this market and has been advising people on good and bad locations beyond the city limits such as Sriperambadur, Kanchipuram, etc. At current market rates his apartment price has appreciated to Rs.35 lakhs (Rs.10 lakh over its cost).
His brother who bought a flat in the same society for Rs.30 lakhs is sitting on a property worth Rs.42 lakhs has seen rentals move up from Rs.9000 to Rs.12000 in a short span of two years. This is the kind of price appreciation and rental income you get in promising locations that have solid future growth potential.
Comparing Price & Features
The cost of an apartment property includes its basic price quoted on Rs.Xxxx per SF plus extra charges on your amenities plus your registration/stamp charges. You need to match your requirements and see which apartment satisfies your basic and additional requirements and is priced reasonably or attractively. It is important to negotiate on your price to get a good deal.
However, one also needs to take in to considerations future price appreciation potential and potential for rental cash flows in future. A property which is in a good location with proximity to important public transport and amenities would sell like hot cakes and can yield good rentals. Whereas a property that has structural issues, bad layout, or poor location would be difficult to sell and may not fetch good rents.
Since there are so many factors to look in to you can have a table or chart that compares each property against certain features or parameters such as square footage, price, quality, amenities, location, etc. This will help you make see which ones are positioned better on certain key parameters.
Recurring & Ancillary Expenses
This is one key item that many people tend to ignore. This is because most people think that as soon as they move from a rented flat to their own flat their lifestyle has improved, given that they don’t have to shell out rents and deposits anymore. This is a flawed assumption.
Remember that you still have commitments such as your housing loan payments, regular maintenance expenses, repairs, property taxes, etc.
Lets take the monthly maintenance charges, which is common across all apartments. The regular monthly society maintenance charges can start anywhere from Rs.500 for a bare basic apartment and can go up to Rs.4000 or more for a luxury apartment property. In addition to regular expenses there are medium to long term expenses such as deferred maintenance (painting, refurbishing, etc). These are absolutely necessary to maintain your property in perfect condition and to maximize its useful life.
The Investment Angle – Stick to basics but maintain quality
Although property is looked at as a permanent living space most people forget about the investment angle. If you want to really get the maximum benefit out of property investment, think of it as an investment rather than a personal possession. As discussed if you try to build each and every room according to your favorite theme and style you may find that in future there would hardly be any buyers or takers for your fancy designs and layouts.
Instead try to understand the standard layouts and best practices followed by market. For example there are certain specific types of tiles used in bathrooms known as anti skid tiles. Similarly, the front doors are made of teak or other high quality or durable wood which is the common practice. Even basic stuff such as ventilation, space management and quality of materials and interior fittings make a lot of difference. When you are renting a house, if you provide useful spaces such as wardrobes, modular kitchen, lofts, etc, your rent can go up based on the facilities provided.
Moreover, an apartment property with these facilities is preferred by some tenants who may be willing to shell out some extra rent. While you follow the best practices don’t indulge in buying premium stuff, instead try to see where you can get the best quality at reasonable prices. Your builder would also be able to provide references or may arrange to do certain interiors for you at attractive rates.
There are many smart people who buy a house for the dual purpose of living as well as investment (or renting). These smart owners provide the basic facilities and furnishing which will attract good tenants and fetch reasonable rents. Similarly, when the owner himself or herself wants to occupy the house it is well equipped with all the necessary furnishings.
Proximity to Commercial or Employment Hubs
This is oneConclusion – Apartment property investment factor which works favorably for both for end users (occupying their own house) as well as investors. When you have your own house within a commercial or employment hub you will be closer to your office, shop and other amenities.
In a case where you bought a house for renting out, you can find ready renters such as office goers, young professionals, businessmen, etc.
For instance people who invested in a property in Whitefield, located in the Eastern suburbs of Bangalore are able to find a good demand from professionals in ITPL, Hoodi and surrounding areas which have a mix of software, manufacturing, technology and research firms. Most home owners in Bangalore are keen on short term renters for one particular reason:
They know that most tenants are migrants from North or other neighboring southern states who change jobs within the city or move to other cities. In most cases people relocate within a year. This provides home owners with opportunities to hike their rents when a new tenant comes in provided the economy is in good shape.
We have seen various aspects of property purchase now. But when I discuss these aspects some people still ask “Which is the best city or location to invest in?”. There is no short cut formula or a magic wand to ascertain the best investment.
You need to do your own due diligence and research and come up with ideas and strategies that fit your budget and investment needs. Since property involves physical presence and involvement its good to buy a property in your home town/city or in a place where you have planned to settle down for a major part of the decade. If this is not feasible you can look at a neighboring town or city that is easily accessible.
Buying a home in mid or late 20’s is becoming common nowadays. But given the fact that a property can be long term investment and can require you to commit a major part of your earnings and savings, one has to plan a property purchase meticulously. Buying a property using bank finance is a good way to build an asset for retirement. You are able to leverage this asset buy financing at lower interest rate, and also benefiting from tax sops offered on loan payments.
People who occupy the house can save on rents, while those who let it out earn a rental income. To conclude, if you plan well your property can be one of the best investment vehicles that can provide you the following benefits:-
- a safe roof or shelter during your twilight years
- an asset that appreciates in value &
- a stream of monthly rentals
On the auspicious Akshaya Tritya you can definitely invest in Gold, stocks or other assets that are attractive at current levels. However if you are interested in buying an apartment property you can start your search on this auspicious occasion.
I am not recommending that this is a good time to buy, but just insisting you to make a start or to start your research, which will help you take a suitable decision a few months later. Your journey to make a million should start with a small step, so this might be the right time to take the small step.