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Don’t Be A Victim Of Real Estate Investing, What You Need To Know?

Don’t Be A Victim Of Real Estate Investing, What You Need To Know?

Over the past few decades, real estate has delivered higher compounded returns than other investments. So why isn’t everyone taking all their money and putting it into a Bangalore apartment, a Pune commercial property, or a real estate fund? Because the returns might look attractive, but the process of finding the right investments is complex. There are many moving parts, and regular investors are not equipped with enough time or information to understand the details and identify the best opportunities.

This explains why for every person who seems to have made a retirement-worthy fortune from a real estate investment, there seems to be another person with burnt fingers, left unhappy and disillusioned with this asset class. At best, these bad experiences range from the hassle of paperwork and red-tape to sub-par returns and project delays, at worst they can be victim to project failures, market crashes, or even scams.

The fact remains that real estate is one of the most lucrative asset classes in the current market environment, and seems to be getting stronger and stronger. So here’s a primer on the basic risks every investor needs to be aware of before investing in real estate, and some tips on how to minimize those risks and not become a victim of a poor investment.

Market Risk: The real estate market is more stable than the stock market, and in the long term tends to pay off handsomely, but it is not immune to periodic shocks. More importantly, there is a huge level of variation within the market and a wide range of outcomes between the winners and losers. Real estate is all about location, specifications, pricing, and execution, and investors rarely have much insight beyond their immediate location.

What you can do: It is not easy to access enough information such that an informed choice can be made. But finding the players who have such information and a proven track record of high returns is not very difficult. So find an investment management firm that has strong market experience, highly selective curation, and a track record of several years of consistently good returns.

Financial Risk: Real estate is one of the most capital-intensive industries, and a lot of the risk associated with these highly-profitable projects has to do with the availability of the right amount of capital at the right time. This is seldom easy. The market itself can face a liquidity crunch and there are structural risks in how the capital is deployed by the developer.

What you can do: Any firm through which you choose to invest in real estate must have the financial expertise of a large PE fund and be capable of structuring their capital optimally and eking out every last bit of returns to ensure your money is working for you in the most lucrative and secure way possible.

Legal Risk: Real estate projects are complex in the sheer number of permissions, statutory approvals, and licenses required from a variety of government agencies. Given the elaborate checklist of clearances involved, projects often run into roadblocks, delays, and in the worst case, cancellations, after they are well underway, because of regulatory and legal issues.

What you can do: Make sure you invest only in projects driven by firms with legal expertise and a strong history of successful and rigorous due-diligence. Today, there are even firms that handle the entire paper-work process on your behalf and give you a completely turn-key and hassle-free experience that allows you to rake in the returns from the comfort of your living room.

Project Risk: These are immense undertakings, requiring a high degree of expertise right from the planning, design and pre-construction phases, through the actual construction and then to sales. Spanning many years, these investments return rich dividends, but require liquidity, stability, and risk management. Failing strong execution competence, projects can run over-budget, or not meet design specifications or timelines, either due to internal or external factors. All of these reduce the value of the project.

What you can do: The importance of choosing an experienced developer cannot be overstated. The easiest way to do this is to invest through an investment manager who does this curation for you.

The bottom line

Real estate investing isn’t easy. Fortunately, it’s getting easier and easier due to new types of investment funds that create highly curated portfolios of real estate opportunities. Whether it is Blackstone and its REIT with Embassy that offers steady cash flows, albeit with modest returns, or funds such as through SmartOwner, where you get a high-return opportunity by investing in new developments, the degree of transparency and ease of investment is at an all-time high today. In transactions, more access to information, more consolidated and professional management, and a slate of new technology-driven firms that offer a paradigm shift in the way we invest in real estate, are combining together to make it easy for you to profit from the world’s largest asset class.

Jul 15,2019 | realtyfact.com
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