Imagine you come across an opportunity to invest in an old building at a bargain price and with the potential of re-development. Such offers can be very tempting. For example, in Mumbai, the price differential between a 2BHK in a newly built society compared to one which is 30 years old is at least 20 percent and could go as high as 35-40 percent, depending upon the location. As families grow, many residents feel the need to upgrade to a bigger house in a new building or desire better amenities and do not want to wait until redevelopment, which is uncertain. There are many such properties put on sale (even distress sale) in densely populated metros. In Mumbai there are thousands of buildings which were built in the late 1980s and 90s and are now at least 30-40 years old, awaiting their fate.
The waiting game
So, should you invest in such old real estate if you get a good deal? The biggest bet in taking an investment call on such old properties is that it would go for redevelopment, although the period is ambiguous. So, basically the inherent risk here is the waiting period, the duration for which a huge chunk of your money will be blocked in an old property. The longer the waiting period, the lower the possibility of returns. Money has a time value. There is a difference if your money doubles in 5 years and 10 years. Until then, if you monetise it by giving up on rent, you will end up recovering your capital over many years. The rental yields in metros like Mumbai are around 2.5-3 percent per annum which is peanuts. If you have taken a loan and paying EMI on the old property, then the overall returns would even drag down further.
Navigating the delays
I am not suggesting that any real estate investment in an old house is not a good deal. The point is if you are seeking capital appreciation on such properties, the basic premise is the speculation that it would go for redevelopment. You may get lucky or unlucky just like any investor takes trading (not investing) calls on shares, gold, forex or other commodities.
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Further, the redevelopment of old housing societies is a complex process. There are a host of challenges like lack of co-operation and differences among society members, conveyance issues, legal disputes if any, etc. Redevelopment projects also face the risk of delays or may even get stuck if the builder chosen by the managing committee lacks credibility. So, the duration in which the entire project is undertaken and executed is a major factor here.
If the property goes into redevelopment within 10 years or less, then the possibility of earning high double-digit returns increases. If the waiting period is 10 years or more, then you can end up recovering your capital over a long time only through pathetically low rental yields. So, eventually, your returns depend on when the property goes into redevelopment.
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A checklist to buy redevelopment-potential real estate
Before making an investment decision about old properties, you should ask the following questions:
· Do you have any short-term goals which would entail a big outflow of money like your child’s education in the next 5 years? If yes, then you cannot afford to invest and block the money in real estate.
· What does your present asset allocation look like? If you are inadequately invested in equity or debt, it is best to deploy your money in these asset classes, first. These assets are far more liquid and can be better aligned to your goals.
· Make sure you have enough money in your bank account or investments to make the down payment. And will this stretch your present asset allocation?
· Do you need to borrow to invest in this property? Can you afford to service the EMI? Check your affordability.
· Have you done proper background work about the property location, the society members managing committee, etc?
· Do you have a definite timeline within which you want to exit your investment, irrespective of the redevelopment situation or can you afford to lock in the money for a long time?
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Buying real estate is alluring as it gives a sense of ownership. There is also this typical notion attached that property investment is always lucrative. One though needs to take stock of the personal situation and introspect on the questions above. Real estate investments when unplanned can prove to be expensive later on. After all, buying cheap does not always mean a good deal. Where the investment fits in your overall scheme of things eventually matters more.
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