Tips to make a fortune from property

If you want double-digit returns, it won't come right away. Opt for an affordable house on a metro's periphery, invest and wait it out.

This is a common story in many families. Parents had purchased a house in a location then considered to be the city's periphery.

The area was under-developed, too far from the city centre, had bad roads and poor train connectivity. So, few preferred to stay there. Over the next 10-15 years, things changed.

The area developed, connectivity improved, the locality is now part of the city suburbs, and the property is at least 20-25 times the initial value.

Every metro city has seen this. The best example is Gurgaon. The city as it is today barely existed three decades earlier.

It now buzzes with malls, metros, designer showrooms and houses some of the world's biggest companies.

Real estate experts believe the same story can be repeated today but the investment would require much more due-diligence.

Pravin Shelar, employed with an airline company, has experienced this first hand. In 2009, he got a flat in Mira Road, close to Mumbai, for Rs 13.55 lakh.

There were very few housing projects close to his society. As new projects got constructed and infrastructure improved around his locality, the price rose. He's now being offered Rs 35 lakh for the same house.

"For better returns on real estate investment, the affordable housing segment is the best bet," says A S Sivaramakrishnan, head, residential services, CBRE South Asia.

There are, he explains, four categories of projects - luxury, premium, mid-segment and affordable housing. The highest demand is in the latter two.

But, projects within the city that cater to the middle class (mid-segment) have become expensive.

Developers will be very cautious on raising prices in this category for at least the next three-four years, as any increase would affect the demand.

This also means returns on investing in these would be less than a bank fixed deposit. But, demand in affordable housing is growing and will see better returns.

Though the definition of affordable housing varies, experts say it is best to go by what the Reserve Bank of India classifies as priority sector lending.

Home loans up to Rs 28 lakh in metros and Rs 20 lakh in other centres are now part of the directed lending, as long as the cost of the property is not more than Rs 35 lakh and Rs 25 lakh, respectively. But, many such projects are also available starting at Rs 12-15 lakh.

Playing the segment

Many of these houses are marketed on the basis of a new infrastructure project. In Panvel and Pen (close to Mumbai), for example, properties are sold citing the upcoming international airport and Mumbai Trans Harbour Link.

Similarly, projects in Faridabad are sold citing the proposed metro rail link.

Mudassir Zaidi, national director, residential agency, Knight Frank India, says an investor needs to evaluate if the proposed projects are likely to take off or are only plans on paper.

Also, take a call on the project completion. In such themes, an investor needs to wait for many years before the project is completed and the property prices start escalating.

For instance, the Navi Mumbai international airport will come up in phases, the deadline for the first phase being 2020. The government says the final phase will be complete by 2030.

One also needs to be prepared that rentals in such housing in the initial stage will be low. Probably, barely enough for the upkeep.

To watch

The usual rules of property buying apply here, too. The investor needs to look at the record of the developer, opt for a property that is funded by banks, check the titles and other papers, and so on.

Experts say it takes around 40 days for a person to buy a house after shortlisting one. In this period, the investor should visit the project four-five times and check the progress. In a month and a half, the progress should be clear.

Also, property from reputed developers such as Godrej Properties or Tata Value Homes will always fetch more, due to brand and construction quality.

As the person needs to remain invested for the long term, he or she should first find the ratio of end users, long term buyers and investors looking to exit in the short term.

"Ideally, the project should have 65-70 per cent long-term investors and end-users, and only 30-35 per cent looking to cash out on completion," says Sivaramakrishnan.

This is difficult to judge. A person can realise it after talking to the developer. If a builder talks about guaranteed returns and offers to buy out after a few years, it means the proportion of short-term investors is high.

One should avoid such deals. In some areas, there are intrinsic buyers - those belonging to the same area but wanting to relocate to projects with better amenities. Such investments would fare better. The value of a property is unlocked only when end-users start to buy. 

Divakar Vijayasarathy, co-founder, MeetUrPro.com, says that rather than buying an apartment in a project, investors can look for land parcels or plotted developments.

Some investors who bought land near the new Bengaluru airport have made better returns on their investments than those who purchased a house.

Zaidi says the process is akin to picking up mid-cap and small-cap stocks. If the business turns out as expected, it will be a multibagger.

"This is an investment where 50 per cent is judgment and the rest is luck," he says.

That's why he suggests a person invest in multiple properties for diversification, and avoid the same area and similar projects.

Don't invest in one because it's priced cheaper. When you would exit, you will be selling it to an end-user.