Rakesh Reddy, Director, Aparna Constructions
Investment in real estate is today a well established and preferred option for wealth creation due to its inherent stability, predictability, and outstanding returns on investment. Real estate offers a unique combination of advantages compared to other investment vehicles, such as asset appreciation, cash flow and tax benefits. In times of overwhelming inflation, real estate also serves as a valuable safeguard against the diminishing purchasing power of currency. Given its inherent inflation-resistant qualities, real estate is an ideal investment option for those seeking to maintain the value of their assets in the long-term.
The most common way to create wealth in real estate is through appreciation, which is an increase in the property’s value that is realized upon selling. The primary methods by which real estate, both residential and commercial, may appreciate are through location, development, and overall improvement of the property.
The chief determinant of appreciation in residential properties is the location. As the community surrounding a residence undergoes transformation by introducing essential amenities such as transportation networks, educational facilities, and recreational spaces, the value of the property tends to rise. Conversely, the value may also plummet in the event of neighbourhood decay.
Undertaking home improvement projects can serve as a catalyst for property appreciation. A homeowner seeking to bolster the value of his residence may consider a range of enhancements, such as creating an additional bathroom or renovating a kitchen with cutting-edge smart appliances.
In the context of appreciation, it is imperative to consider the economic repercussions of inflation, which is known to have a significant impact on property values over an extended period. Strategic use of inflation can serve as a powerful tool for wealth creation in real estate. The core of this approach lies in the fact that major expenses associated with property ownership, such as mortgage payments and property taxes, tend to remain fixed over extended periods of time. This stable cost structure, when combined with the upward trends in rent and home values that typically accompany inflation, can generate substantial returns for investors.
Real estate has proven to be a significant source of wealth generation through offering consistent income streams. The cash flow from real estate investments can manifest in a variety of forms including rent and dividends.
The predominant source of revenue from both residential and commercial properties is typically derived from basic rental income. Regular payments, subject to adjustments for inflation and market demand, are made by tenants, with the landlord recovering expenses and retaining the residual amount as rental income. It is essential to select a desirable location to facilitate securing tenants with ease.
Companies may offer royalties to landowners for discoveries of valuable commodities or regular payments for structures they add, such as access roads and cell towers. Additionally, raw land can be rented for production, typically for agricultural purposes or harvesting of timber.
Real Estate Investment Trusts (REITs) offer a compelling investment opportunity within the real estate landscape, commonly regarded as a means of generating regular income derived from real estate assets. REIT is a professionally managed entity that finances, owns and operates real estate assets to generate income for the investors in these vehicles . REITs are purposefully structured to generate value for all stakeholders, ranging from investors, sponsors, to developers. Functioning like a mutual fund, REITs collect funds from both retail and institutional investors to be invested in real estate assets. These assets are typically commercial in nature, such as offices and shopping centres, with a proven track record of generating steady rental income.
REIT assets are commonly safeguarded by long-term leases, which effectively mitigates potential risk for investors. Such long-term leases provide a reliable and stable source of income flow to the REIT, thus enhancing predictability in terms of investment returns. REITs significantly widen the market for property investment and attract new investors and also offer property diversification for investors in a simple and convenient manner.
In addition to property appreciation and income, there are numerous tax saving avenues for real estate investments which further bolster wealth creation. The most significant benefit that was offered in recent Union Budgets is the rationalisation of property-related taxes. Section 80C covers the amount paid as repayment of the principal amount of a home loan and a loan for purchasing property can be a significant tax saving measure. The tax benefit is allowed only after the construction has been completed and the completion certification has been received by the taxpayer. Section 24B covers tax benefits on interest paid by an individual on their home loan and Stamp Duty & Registration Charges can also be deducted under this section. Section 80EE covers an additional income tax rebate on home loan interest for first-time homebuyers. The long-term capital gains tax structure for real estate enables the benefit of rollover of capital gains under section 54 when selling a property to purchase another property. Furthermore, depreciation allows property owners to write off part of the value of the asset every year, which significantly reduces the tax burden.