How Do I Begin My Property Investment?
The most important step for buying a property that’s right for you involves several steps of research and due diligence. It's advisable to go through multiple platforms, channels to assured.
Property’s pros and cons, These channels could be:
3. Online Realty Portals.
4. Online/Offline classifieds.
5. Print Ads in Newspaper.
6. Property Fairs/Exhibitions.
Which is good for investment – residential or commercial?
If you are a long-term investor, a commercial is the best option for higher returns. Now a days many builders are offering preleased property which can give a secured monthly return. In general, commercial property can give you more return in comparison to residential property. If you want to go for safe investments to manage a part of EMIs, residential are better.
Points to be considered while investing in commercial properties?
If you looking for long term investing, you can earn much higher returns than most debt instruments, bonds etc. You must consider following points in mind while going for commercial property:
- For Commercial property, prime key Location is everything. Commercial properties provide returns through two avenues— rent and capital appreciation. Both are heavily dependent on the location. Look for locations where vacancy is less than 5%. This will mean that supply is in check and tenants are less likely to vacate, leading to higher rents and capital appreciation. A high vacancy location gives tenants options to move and renegotiate rents.
- For growth prospects from a buyer’s perspective, one should also consider the growth prospects in rental income. While bigger units are better for long-term investments, investing in a pre-leased asset may also be a good option as it can start generating revenue instantly.
- Market rent vs in-place rent.
This is slightly advanced concept that institutional investors use to see how risky the property is. Let’s assume that there are three properties available at more or less the same price but each with a tenant paying different rents.
* Building A has tenant paying Rs 10 and is selling for Rs 100
* Building B has tenant paying Rs 11 and is selling for Rs 105
* Building C has tenant paying Rs 9 and is selling for Rs 95
Which one would you choose? Many would say Building B as it has the highest rental return (10.5%). However, an intelligent investor will first ask, “What is the rent in the market?” Means, what is the current market rent for new buildings.
If the market rent is Rs 9, Building C is the safest investment as the tenant is least likely to vacate the property. Tenant A and B will most likely renegotiate their rents or not pay the escalations when they due. Another way to look at it is that you are buying an overrented asset at an above market price.
Normally the tenants are corporates, banks, business houses or retail chains if the location is good. It is good to deal with corporates as you need not run for rent and other operational hassles are minimum. Moreover, a quality tenant attracts more such tenants in the vicinity. It has a ripple effect and helps in better future rental yields.
- Quality of tenant
A good tenant can significantly increase the value of a commercial property. Look for bluechip multinational tenants and avoid smaller and unknown companies. Good tenants pay rents on time, pay higher deposits, stay longer and increase the value of the property.
- Interior fitouts
As an investor, you should always ask who has done the interior fitouts in the property. When a commercial unit is delivered in India, it is provided bare shell (like a garage). The tenant needs to do the flooring, ceiling, air conditioning, wiring, interior cabins, conference rooms etc. Some tenants like to do fitouts by themselves while others ask the developer to do it for them for which they pay an additional fitout rent. Fitouts generally cost between Rs 2000-3000 per sq ft and developers charge Rs 25-30 per sq ft per month (Rs 300-360 per sq ft per year). A tenant who has done his own fitouts is likely to stay longer in order to sufficiently recover the costs.
- Lease structure
Commercial lease structures are very different from residential ones. They are structured as 3+3+3 or 5+5+5 meaning 9-year (or 15-year) lease with escalations every 3 years (or 5 years). They are also one-sided. The tenant can vacate at any time whereas the landlord cannot ask them to leave for the lease period. There can also be a lock-in period (generally 3 years) during which the tenant cannot vacate the property. While analysing an investment, the investor has to understand how the lease is structured and the inherent risks involved. In general, longer the lock-in, better for the investor.
- Security deposit
Security deposits in commercial properties vary between 10 and 12 months’ rent. Be careful when a tenant offers 6 months or less as it means that they could be looking at a short-term option or have cash flow issues. Start-ups typically tend to ask for smaller deposits and shorter lock-ins.
- Infrastructure growth planned: Needs to visualize the infrastructural growth happening and planned in the region. Also the current analysis shows that investing in Tier 2 cities are far profitable than tier 1 cities and metros. Hence the location like Ghaziabad, Greater Noida, Faridabad are the gold mines considering the proximity with Delhi.
- Builder Reputation: Builder’s reputation and the past record is a key security of your investment. Considering the current market scenario it is always advisable to look for the builders working on limited projects at same time.
Is it good to invest near airports?
Airport in any regions changes the entire demography of the region exponentially within a shortest span of time, As soon as a airport get operational, it induces the related business in to the system, thereby giving a positive thrust to all the investment. The biggest example is Dwarka. Thus an operational airport at Hindon is the future guarantee of high return on all investments.
The Loan Process
Step 1: Apply for a property loan and get the initial evaluation done.
- Bank evaluation based on credit history and documents.
- Submit application documents with a processing fee.
Step 2: Bank Verification
- If eligible for a loan, bring your documents to meet a bank official
- If not eligible, you will lose your processing fee
- Bank will verify all submitted documents.
- A representative will visit your workplace and residence to cross-check details.
- The purchased property will be evaluated.
- The bank will evaluate your repayment abilities.
- If approved, bank will prepare an offer letter with conditions you should review.
Step 3: Bank Approvals
- Re-read the document, and get a legal opinion too, if you are unsure. There may be points that you can change or negotiate.
- Once you are sure, sign the loan agreement.
Step 4: After Signing
- Submit post-dated cheques
- The bank will disburse the loan as a lump sum payment (usually for a ready-to- move property) or in instalments (for an under-construction flat)
Loan Document Checklist
- After submitting the original documents - Take Acknowledgement letter from BankCIBIL (credit) score will be checked by the bank
Bank statements or passbooks (of the last six months)
- Photocopies of challans showing payment of Advance Income Tax if Self-Employed
- 3 years CA Certified Balance Sheet and Profit & Loss Account if Self-Employed
- 3 years Income Tax Returns with computation of Income if Self-Employed
- Proof of business existence if Self-Employed
- Proof of Salaried Income – copy of income tax returns (last three years) and original salary slips
- Address proof – driver’s licence, passport, recent telephone or electricity bills or Aadhar card
- Identity proof – PAN card, driver’s licence, Aadhar card or passport
- Photographs – make sure you have at least three
- Processing Fee (non-refundable between 0.25% and 0.50% of the loan amount)
- Loan application – obtained from bank or financial institution
- There is a lot of paperwork for loans.
Site Visit Checklist
- Timing: See how light, noise etc. may vary throughout the daySafety: Does the building have a guard or cameras?
- Flood risk: Assess possibility of damage due to moisture. How badly is transit affected?
- Plumbing: Flush the toilets and run the taps to see pressure and plumbing quality
- Phone signal: Check whether your signal is clear in all zones
- Wiring: Turn on each switch to see whether everything works
- Water Supply: Is the water supply 24/7?
- Power: Ensure there’s emergency power backup for outage
- Lifts: Get a sense of how long you will wait for a lift during busy times
- Official Inspection: Try to get the results of the last building inspection
- Interior Quality: Check quality of fittings such as flooring, cabinets
- Take photos. Try to visit a site during the worst time for a location, like monsoons so you know what the worst to expect is
- Use this checklist so you don't miss anything out on a site visit.