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Housing: Buying Vs Investing

With the Indian economy showing signs of revival with a pro-active government at the centre, the economy is poised for growth again. Expectations are riding high, stock market is in good health and realty market too is expected to gain momentum soon. Keeping this in mind, is it a good time to buy residential property?

Buying a property these days is a lot different from what it used to be. Before the economic slowdown, one could be confident that a purchased property would quickly appreciate in value. Real estate was looked at as a lucrative investment opportunity. Today, home buyers are in doubt – they do not want to take a plunge because they feel that property prices may decrease. They would prefer to buy when prices are at their lowest. This is a perfectly sound strategy for an investor, but often not a good one for home buyers. 

Investor Or End User?

The difference between an investor and a home buyer – or ‘end user’ is that the first is looking at returns on investment and is backed by a certain amount of risk appetite. An investor looking at rental returns or capital appreciation is willing to gamble on his or her assessment of current and future market conditions and is usually invested in other instruments such as stocks and bonds.

A home buyer, on the other hand, is looking for a good place to take up residence in. Price is definitely a major consideration, but so are other factors. A
home buyer cannot and should not view properties with the dispassionate eye of an investor who looks at them purely as stock in trade.

Timing The Market

An investor can and must time the market so as to identify the right entry and exit points. For a home buyer, the entry point may matter in terms of price, but there is no exit point motivation. If a home meets a buyer’s criteria in terms of location, facilities offered and neighbourhood profile, it is usually inhabited for several years and even decades. Over such a long term, property always appreciates and the ‘investment’ is in any case safeguarded from market fluctuations. 

At no stage will property prices in an entire city appreciate, correct or stagnate uniformly. Real estate is all about ‘location, location and location.’ 

Housing: Buying Vs InvestingHaving addressed the important the difference between property investment and home purchase, let us examine how the property market tends to behave. It makes sense for both investors and home buyers to know these fundamentals, but again – both should not necessarily let their choices be guided by them.

Market Corrections

The residential real estate market behaves differently in different cities. Sound investment strategy will therefore also vary for different cities, and more importantly for different locations within cities. In some micro-markets, prices are not likely to sink further because there is still sufficient demand and no new supply is coming in for now.

At no stage will property prices in an entire city appreciate, correct or stagnate uniformly. Real estate is all about ‘location, location and location.’ 

In such a scenario, investors must evaluate the local market, determine the preferred ticket size, identify the corridors which promise the best capital appreciation and rental income, and make an ‘entry’. Home buyers, on the other hand, are guided by different goals. They look for a home for their family to live in, and the most appropriate guidelines for home buyers have nothing to do with investment potential.

Strategy For Home Buyers​

The correct strategy for home buyers is to determine their budget, get pre-approved for a home loan based on that budget, short-list at least three locations that their family are comfortable, and identify at least five property options within each location that fit within their budget. Each of these options should be examined on the ground and evaluated on the basis of amenities and facilities offered.

The final short-list should consist of homes that everyone in the family is satisfied with. Next, one needs to understand how far the sellers of these properties will be ready to negotiate on their stated prices. For this, some informed advice from people who are familiar with the local market is called for.

Schemes, and incentives and other ‘offers’ by developers should only be considered if they add real value to the property or translate into significant financial savings on the stated price. The fine-print clauses of financial schemes should also be examined closely by a specialist for legal catches or traps. If they exist, these options should be struck off the short-list.

If the decision is to wait, then the waitand-watch game begins. If the decision is to buy, then the home hunt ends. Given that the process of buying a home is already complicated enough, it should never become more complicated than that.

Posted by The Finapolis

Friday, April 17, 2015 3:23:00 PM

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