Question: Housing is an important step in Personal Financial Planning, and for those who can block the money for at least 10 years, real estate is a good investment. So taking into consideration of needs and returns of investors, can we expect some excellent insights about real estate investment from you?
When it comes to the factor of risks of ownership in real estate, we can shift it to an insurance company by purchasing ‘Title Insurance’. So kindly advice me on the importance and utility of ‘title insurance’?
The Personal Financial Planning (PFP) says that, ‘additional real estate investments may be undertaken only if the individual has specialized knowledge and a talent for real estate investments’. But what about the common person/ investor who can afford to block a reasonable amount for more than 10 years?
Mr. Sandeep Vaswani: We have already heard the advice on Real Estate Investment from Mr. Gerard Colaco and read books by investment gurus that for real estate investment generally the time horizon is 10 years plus. We also know that real estate and stocks are the two asset classes which give returns that beat inflation, taxation and create wealth in the long run.
However what one needs to understand is that investing in real estate is unlike common stocks at least in India. In India today we have a huge population which still does not own a single house forget other real estate. Ideally for such people the first house should not be treated as an investment at all. It is only for people who own a house and then have sufficient surplus income over and above all their other expenses and more importantly have an aptitude and risk profile for real estate should venture here.
Till such time as Real Estate Investment Trusts (REITs) designed for retail investors, start in the true sense in India, retail investors would not be able to access this avenue of investment, unless they are investors having deep pockets and understanding of this market. And the best advice would be to venture directly.
As far as taking ‘Title Insurance’ does not make any sense to me if my understanding of what it means is correct. In real estate transactions when you zero in on a property, you ought to verify each and every single document of title since the time the building was made and the seller ought to give you the documents since such time. If these documents are missing it is best advised to keep away from such a property. What sought of insurance is an insurance company going to indemnify in case someone purchases a property without clear title? He has to be indemnify in case of someone purchases a property without a clear title? He has to be ready to face the music later. Buying the insurance to me then is something like what AIG did in the US for the subprime mortgage credit default swaps – firing shots in the dark, thinking that nothing will go wrong!
Further, housing is not the only avenue for investment as far as real estate is concerned. In fact, as mentioned earlier, the first house can not be considered as an investment at all. Investors in real estate can look at commercial office, retail space much more than they look at housing.
A common man with investible surplus can therefore venture into real estate investment only through the private REITs operating in India with minimum ticket size of Rs. 25 lakhs plus. But frankly and rather unfortunately not one that I have seen is really up to the mark. Also not to mention their charges levied to manage these monies.
So the answer to your question would be:
- Catch hold of a good investment advisor who understands real estate to decide if the investor can enter the real estate sector for investments.
- Be in touch with a good real estate agent.
- Verify each and every document of the property.
If all these are met, there is no stopping why not to invest in real estate, given the 10 year time horizon!