Do-Rent to create wealth in Real Estate

Mr. Saluja, aged 62, wanted to gift his daughter a regular disposable income, rather than an asset. He booked a 1000 sft demarcated office space in a corporate tower in Gurgaon, in year 2002. That year, he bought it @ INR 3200 per sft. In 2004, when took possession of the same, he started getting offers to sell it @ about 5500 per sft. Instead of selling it, he leased it to an MNC liaison company @ INR 50,000 per month for a period of 9 years with his granddaughter being the beneficiary. In July 2006, he managed to sell it at a good price of INR 9600 per sft. He has reinvested into a commercial office space of 2500 sq.ft in an upcoming IT park @ 4100 per sq.ft, with an assured rental return of approx. Rs.40/- per sft.

Mr.Subramaniam, aged 35, a software engineer by profession, invested in a 6 bedroom Villa with all amenities and facilities, more as an investment, in early 2005, by borrowing from his bankers @ INR 83 lakhs. The intent was to acquire an asset, then lease it to some MNC corporate executive, at a healthy sum. Mid 2006, an Israeli IT company offered him a deal to develop an application and manage it for their company. Entrepreneur turned Subramaniam used the ground floor of his Villa to seat the 8 developers he recruited, and has converted the first floor into a guest house for his visiting consultants / Partners; thus, saving more than a lakh per month, on expenses.

Both above have been clients & friends to me, for long. I thought it pertinent to quote the examples of two divergent characters, to bring to fore a dimension of realty investment, ignored mostly by the investors: RENTAL RETURNS.

Let’s hit the basics first. Why do we invest in real estate?

The intent of every investment is to earn SAFE revenue returns against the financial investments made, commensurate or higher to the other channels available. In the case of real estate investments, as against any other channel, there are four pluses.

i) You have physical possession on a tangible asset.

ii) Your asset gains capital appreciation.

iii) Your asset can deliver fixed monthly returns, over & above.

iv) Higher liquidity with minimal depreciation against market value.

I gave two illustrations above, to suggest how two of my clients planned for a higher return, on their realty investment, as compared to the benchmarks.

Saluja, a businessman, heeded the indicators of an increased projected demand for office space & invested in a commercial property. Till he decided to sell he assured himself of a monthly return. Let us also not forget that a pre-rented property is easier to sell, than a vacant premise.

Subramaniam, by virtue of having invested in a rentable residential property is reaping a higher return by saving more than a lakh of rupees, per month, in expenses, which he would have incurred if he had invested in a project, elsewhere. If you look at, his wise Do Rent strategy has facilitated the success of his entrepreneurial venture.

Just for information, let us look at the benefits of investing in projects, which have a higher possibility of leasing, than a property which would only appreciate in the capital

 

a) Residential – Good product virtues ensure that the habitation happens faster, thereby, the possibility of tenancy would be higher. Till you decide to move in, your acquisition delivers a higher return, compared to another. A habited project, or a project delivering higher rental returns can be sold at a premium, in the secondary markets.

b) Commercial Office – In a normally burgeoning market, the correct DoRent indicator is that the commercial office space requirement would be about 5:1 of the residential requirement. Or rather, 5 sft. of residential space would be created for every sft. of office space. Therefore, if going by that wisdom, it is suggestible to invest in commercial office space, where the renting possibilities are higher.

c) Commercial Retail space – Not the easiest to rent, but the most hyped & sought after. The initial investments are higher, but the rental projections (per sq.ft.) are the highest compared to the other channels.


 

Let us look at an illustration to understand the rental returns, as a percentage of the investment, across all the channels. To compare apples-to-apples, we are assuming that the investment is fixed @ 1.00 crore, in all the channels.

Segment

WHAT YOU BUY

Approx. built up area you can buy (sft)

Cost per sft. (approx.)

Rental returns per sft./ month

Annualized % returns

Residential

Apartment

2800

3500

14

4.7

Villa

2300

4350

20

5.5

Plot

180 – (Yards)

50000

 

 

Floor

2500

4000

10

3.0

Comm – OFFICE

A

1450

7000

55

9.6

B

1750

5750

40

8.4

C

2100

4800

30

7.6

COMM – RETAIL

Ground

600

16000

125

9.0

First

850

12000

100

10.2

Other(s)

1100

9000

75

9.


We would note that the returns vary between all the segments, commensurate to the entry timing and the risks factored in. Isn’t it time to review your investment strategy with Do Rent in mind?

Today, an investor must look to  Rent properties, more so because of the increased tendency of the developers to wean away for the channels of uncounted money channels funding projects. It not only affords enhanced ROI (Capital appreciation + Assured returns), but also helps you create assets.

By the way, with the rentals earned by Saluja’s daughter, she has just invested in two residential properties, one for self and another for capital appreciation. How’s that for a beginning towards emulating the Warren Buffets & Trumps of the world?

 

 


One comment

Leave a Reply