A Complete Guide to Real Estate Financing: What, How & Why
By Pratik Balasaria
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Using real estate as an investment strategy can help you make big money in life. After all, Andrew Carnegie— the billionaire pioneer of the American steel industry once rightly said, 90% of millionaires got their wealth by investing in real estate. So, if you are purchasing property only to make a profit out of it, or planning to rent it out or resell it for a higher cost, you need to have a catalyst mind to stay ahead in the game. Furthermore, you should be adept at the highs and lows of real estate financing and develop an analytical understanding of the industry to maximize your profits in the future. 

101 of Real Estate Investing

Real Estate financing: 101 of Real Estate Investing

Real estate financing offers investors a variety of financial benefits— home appreciation, cash flow, and other tax benefits. Real estate is considered a robust investment option and the field continues to dominate investors’ preference even today. However, given the present state of the Indian economy, you need to have a strategic approach while dealing with real estate investment, in order to make the most in the residential as well as commercial real estate business sector. Let’s explore some of the best possibilities of real estate financing and loan for real estate investment

Understanding Real Estate Financing

Real Estate Financing: Understanding

Real estate financing describes several financial methods used by potential investors for securing their independent capital investment. Therefore, it encompasses long-term financial methods used to secure capital while buying and renovating property from outside sources. This process of borrowing and lending money is a liability for both parties — for those who lend the loan, as well as for those who get the loan as a means of financial support. 

Investment options for Real Estate

Real Estate Financing: investment options for real estate

Buying a property is not an easy task, and is definitely a costly affair. While buying real estate— bank loans, or investing through REITs is the best possible choice, India offers several investment options for real estate.  Following are some of the possibilities:

Primary sources such as Mutual Savings Banks, Commercial Banks, Savings and Loan Associations, Life Insurance Banks. You may also consider investment options through Financial Middlemen such as  Mortgage Bankers, Mortgage Brokers; or through other sources such as Finance Companies, Pension Funds, Credit Unions, Real Estate Investment Trusts, Foreign Funds, Individual Investors, and Farmers Home Administration. There is also the lucrative investment possibility of the Secondary Mortgage Market. 

Let’s consider a few of these options closely:

Bank Loans

These are one of the most favored options for potential investors. Taking a bank loan and paying back in EMIs is common. One of the biggest advantages of buying a property on loan is that the value of EMI keeps on decreasing while the value of the asset keeps increasing — thus creating a big advantage for the buyer. Furthermore, you can buy real estate with just a 20 percent down payment, and you repay the loan over a generous period of 20 years. Some of the other common benefits of home loans are low-interest rates and low processing fees, interest on daily reducing balance, interest concession for women borrowers, no penalty on prepayment, and availability of home loans as an overdraft. 

Borrowers however have to be well-versed with the several forms of investment in real estate financing. Choosing the wrong kind of loan may affect the success of the investment. Make sure to understand the requirements of each kind of loan and study thoroughly how the various alternatives work before approaching a lender. Three popular types of loans for investment property are — conventional bank loans, hard money loans, and home equity loans.

Real Estate Investment Trusts (REITs)

These are structured on similar lines to mutual funds and were officially introduced in India in 2014. These are securities linked to real estate that are traded on the stock exchange after their listing. REIT is considered a lucrative investment option and is a great potential investment with ongoing returns. One of the greatest advantages of REITs is that it allows investment in Grade A commercial realty, offering an addition to the investment portfolio. Furthermore, REITs provide liquidity to investors as an Alternate Funding Mechanism (AIF) and are thus considered as a stable investment option. With regular returns, REIT is a transparent investment option with the Securities and Exchange Board of India (SEBI). 

Fractional Real Estate Investment

This option is slowly picking up pace in India, after being successful in Europe and the US. It is a new method of investment in commercial real estate and signifies combined ownership of a single asset by several investors together. Owing to high ticket sizes, a potential investor can sign up on the platform and invest in any of the current opportunities listed. This model opens up newer avenues of investment in fractions of premium commercial properties, thus increasing the possibilities of earning monthly rental yield. Furthermore, Fractional Real Estate Investment offers great potential for retail investors who have limited access to CRE, considering the high ticket prices. It also provides investment opportunities across multiple properties and locations. The diversification thus also reduces portfolio risks.

Importance of real estate financing and why you should consider it

•Real estate financing is growing at a minimum of 30% CAGR.  At this rate, the business is doubling and the profit is increasing every 2.5 years. 

•RERA and Aadhaar have bound to main-stream the business of real estate in India. This will further bring more organized real estate players into the market, thus allowing higher and safer businesses for home finance companies.

•Greater the development of a country, the lesser the interest rates (most developed economies have a sub-1 % or even negative interest rates). The present time is therefore the best time to invest in real estate with loan offers of great profitability. 

•The net NPA levels are lesser in home finance companies as compared to the banking sector.

•Due to the need and push for affordable housing — the housing finance domain anticipates the highest growth potential — followed by services, technology, and trading. It also guarantees fixed income, as investors are bound to get three times more of the sum than their 20-years loan from home finance. 

•Commercial realty has also emerged as a resilient segment and substantial traction is witnessed towards the Grade A office space. Positive investment growth is also anticipated in the leasing of coworking spaces.

Key Takeaways

You don’t need a lot of money to start with

It is a common misconception that real estate investment requires a lot of money to start with. The key to smart investment is to understand the various real estate financing options to fund investment. How you fund a specific deal greatly affects the outcome of the investment, understanding the financial aspect is therefore crucial. Remember, every investment option of real estate financing has its own set of pros and cons, and the financing approach greatly depends upon the type of the property and the situation. Furthermore, it is also important to understand, that what works best for you, may not be the smartest choice for another. The option of real estate financing, therefore, has to well complement the business strategy. Take time to research the most accessible investment options.

Smaller markets involve less risk and generate good revenue

Beginner investors need to remember — the smaller the market, the lesser the risk is in real estate. Established investors usually don’t jump into smaller markets, given the smaller geographical area. This trend widens the scope for smart, beginner investors. Furthermore, in small markets, there is a lot of difference in the ratio of the price of purchase and the rent compared to metropolitans. This increases opportunities in the domains of investment and renting.

Tech in time saves nine

Being a tech-savvy investor can take you to places, and in the case of real estate — we mean it literally.  In the rapidly evolving market of real estate, it is important to understand the latest technological advancements, in the field of rent collection, which has made communications between the landlord and the tenants easy to follow. For instance, landlord software helps to manage the property more effectively. Furthermore, technology saves time and costs, allowing you to focus on various other aspects of the property. 

Yes, 2020-21 anticipates lucrative investment opportunities in India’s real estate

Real estate experts give big thumbs up to investment in the real estate sector for the next two years. 2020-21 anticipates great investment potential for both residential and commercial real estate business. The past few years have witnessed an impressive demand for co-ed office space, especially in cities with IT/ITeS players, such as Bengaluru, Kolkata, NCR and Pune. Real estate builders and real estate developers in Kolkata are expected to have higher demand in the housing and urban infrastructure sector. Furthermore, the strict Government regulations and structural economic policy reforms introduced in the Indian real estate system are bound to bring more financial discipline, accountability and transparency.

In closing

Migration for a job search in Kolkata and other bigger cities is likely to increase the demand for real estate in the coming years. People buying small flats has become common — both for residential and investment purposes. The scope for demand in real estate financing is expected to grow rapidly by 2025. Furthermore, the ratio of defaulters is high, it is, therefore, a smart move for genuine real estate players to attract customers through timely delivered projects, as well as to create better scope in the real estate market. 

Finally, if you are a beginner investor, remember — financial hurdles are imperative in the process of real estate investment, and all investors require to overcome them at some point in their career. So, if you are planning to add real estate financing to your investment portfolio, start visualizing, planning and create a better future!

You can also refer to ready to move flats in Joka, 4 bhk flat in South Kolkata, and flat for sale in New Alipore.

Is it possible to buy a house with no money?

You may consider the following options if you wish to buy a house with no money: 
Borrow money. 
Rent the property from the owner with an option to buy.
Exchange for another property, if you already own property.
Combine mortgages and provide the seller with cash at closing without using your own money.

How much in savings should I have?

Buying your dream house at a young age is possible. You may start small by investing Rs. 15,000 a month in SIP, and with a modest return of 12%, you can invest in a substantial fund of Rs. 12.40 lakhs, in a matter of just 5 years.

What is the most expensive apartment in the world?

Located right in the heart of London, One Hyde Park is one of the world’s most expensive residential buildings. Penthouse D is one of the priciest apartments with $237 million dollars USD. The penthouse is unfurnished, but the building includes amenities such as an ozone swimming pool, among others. 

Which is the most expensive house in India?

Antilia, located on Altamount Road in South Mumbai is the most expensive house/ private residence in the world. Home to the chairman of Reliance Industries – Mukesh Ambani, Antilia is a visual masterpiece that boasts of 27 floors, houses a private movie theatre, a helipad, an ice-cream parlour, salons, multiple swimming pools and gyms between its walls.  Designed by Chicago-based architects Perkins and Will and constructed by Australian-based construction company Leighton Holdings, Antilia is valued at 10,000 crores according to Business Insider.

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