Convincing Investors

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Convincing Investors 1

Transcript of Convincing Investors

Page 1: Convincing Investors

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Convincing Investors

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Investor buys a house, end user a home.

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Customer types:

• End Users• Investors • Corporates

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What is the competition?

• Their own business • Spending on depreciable assets • Financial instruments like : Stock / Mutual

Funds / Bank deposits / Life Insurance• Precious Metals: Gold / Silver / Copper

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How does it fare?

• Real estate investment is the only investment which gives all of the following:– Recurring income in case of constructed property– Capital appreciation – Full security (gold can be stolen, companies can go

bankrupt, banks may close)– Ability to consume cash component

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Comparison TableGold Shares/

Mutual funds Bank Deposit Bonds Real Estate

Capital appreciation

Yes Yes No No Yes

Recurring Income

No Not Much Yes Yes Yes

Scarcity Yes No No No Yes

Safety of Investment

No (can be stolen)

No Yes Yes Yes

Can be consumed

Yes No No No Yes

Cash Component

Yes No No No Yes

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Other Benefits:

• Capital appreciation linked with inflation, so investment is automatically hedged against inflation

• On a rental property the loan repayments are partly done by rent, so you get full returns on part of capital invested. For example: You invest Rs. 50 lakhs in a flat of Rs. 1 crore, (remaining amount is a loan) then from day one you earn return on Rs. 1 crore.

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Other Benefits:

• You can invest as little at 10% and get benefits of full 100% (schemes like subvention)

• Unlike Stock markets you don’t have to daily monitor the prices

• Provide a second home for leisure – farm house

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Other Benefits:

• Leverage: Real estate investment can be mortgaged, unlike stocks and mutual funds.

• Home loan has income tax benefits. Also rental income attracts lesser tax than Interest income on Bank FD

• Recent budget has given further tax benefits on home loans for first home buyers

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Type of Investors

• Speculators • Flippers • Income stream investors• Eventual Users • Developers

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Type of investments and returns:

• Apartment : Capital appreciations and rental• Bungalows: Majorly capital appreciation• Office / shops: capital appreciation and rental• Preleased properties: lesser risk• Plotted Land: capital appreciation • Agriculture land: capital appreciation and

retention of status as a farmer

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So how to convince:

• New property:– Pay 25% right now to start earning 10% return on

100% – So book a flat for Rs. 25 lakhs an 1 year later you

get a appreciation of Rs. 10 lakhs (as the flat value is Rs. 1 crore)

– When you sell it once its completed, usually the property appreciates approximately 25%

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So how to convince:

• New property:– With a subvention scheme, 10% is paid right now

and remaining 90% at the time of possession– This is even easier to convince as the bank

releases the payment to investors only when the construction get over in stages

– Saving on interest costs as bank usually charges interest from builder, while cost of property is fixed, so saved from inflation

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So how to convince:

• Old property:– There is no risk no delay in delivery or non delivery

of real estate due to construction delays– The property can be touched and felt – The property can be bought on loan so in case

liquidity is a problem, it can be solved– Usually comes with some finishing, more carpet

area and neighbours.

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So how to convince:

• Recurring income or Yield based property:– The yields of pre leased properties have fallen

drastically in last 5 years. From as much as 12% net return in 1 year to 5% subject to service tax.

– The important factor is : return should be calculated only on the white portion of the property

– A McDonald will give a lesser yield than a mom and pop store: Stability of income is more imp

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Risk Factors

• All investment options have risk factor. Remember there is no return without risks.

• Liquidation is the biggest risk in real estate. • Another risk is maintenance, as most

properties require some expense even if empty.

• Clear title, paperwork and time to do transaction are few problems.

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Risk Factors

• Educate investor looking for recurring income that they need to furnish the property also

• If the tenant leaves the income may stop(but capital appreciation doesn’t)

• Delayed project completion may affect the returns of the investment. But usually the capital is safe.

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Always remember:

• Advise the investor to invest in a property only if you are sure that you can match the customers expectation from the property like:– Resell at 25% higher amount after 2 years– Get a tenant

• So do not over commit or you will loose your customer for life.

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