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Investing in real estate: Pitfalls to avoid

Real estate is among the better assets classes to create wealth. But it too, be it a residential or a commercial property, has its share of risks. One important reason for this is that real estate, as an asset class, is highly heterogeneous in character and the sector is highly segmented.

RESIDENTIAL PROPERTY

There is actually a huge shortage of quality housing projects. This essentially means that if you do not take an informed decision while investing in a residential property, chances of you going wrong with your investment are higher. Though investing in residential property has its own share of risks, they can to a great extent be negated if you do the necessary homework before investing.

Timely Delivery. These days, most retail investors enter the residential property market through the primary market and this is where the risk actually lies. While there is a definite advantage of entering the residential property market through the primary market route, at a lower price, compared to entering the market through a ready-to-move-in property, the risk lies in timely delivery of the project. Examples of timely delivery of the project are very few, and a delay of around six months is an accepted norm in the industry. But things do really turn for the worse when the project gets delayed beyond a year.

A ready-to-move-in property will essentially be the best option for you to look at while investing in a residential property for self use. But chances of getting such a property is less and even if you get one it typically comes at a huge premium compared to one that is under construction. So, ideally, look at projects where the delivery is at least within 6-12 months.

Marketing spiel. Irrespective of which way the fortunes of the residential property market are swinging, the common thing that you will have to deal with when you go out in search of your dream home is the marketing spiel of the real estate agent. The trick to not fall prey to the marketing spiel is to be very clear of what you want for yourself. So before you start your home search, be very clear of things like location, your budget, the size of the house you want and, most importantly, the track record of the developer.

Remember that whatever marketing scheme the developer or the real estate agent is offering you should actually be the sweetener to the deal, and under no circumstances should it become the critical factor influencing your buying decision.

Always remember to do a check on the developer while deciding on the property. At no cost get swayed by the glossy product brochures. Instead, check if the developer has the necessary approvals for the project. So, at the time of your visit, always check that the necessary approvals are in place. You should check on the previous track record of the developer, as well as his capability to execute the project.

COMMERCIAL PROPERTY

The high entry cost in commercial property is a major deterrent for retail investors to take a plunge in this vertical of real estate. However, if you have the necessary funds and do plan to invest in commercial property, then prepare yourself for the risks involved—the major risk being vacancy risk. The reason is that unlike residential property where you primarily invest for capital appreciation, investment in commercial property is primarily for getting returns. So, if the property remains vacant for long, then your returns will be affected. Also, the probability of finding buyers for your commercial property is greatly enhanced if the property is occupied and earning rentals.

Things could be bad if an under construction project is delayed beyond a year. A ready-to- move-in property may be too expensive. So opt for one with a delivery period of less than a year.