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REAL ESTATE INVESTMENT 101 – A beginners’ guide to the basic stuff

I’ve been working in real estate for several years now and while most things around me are in a constant state of flux, there are a few things that are exactly the same today as they were when I started out.

Chief among these things is the question, ‘Where and for how long should I invest my money?’ This is a question my colleagues and I at Zameen, Pakistan’s top property portal, get asked almost every day. Let me walk you through this one step at a time.

One of the most important aspects of any real estate investment, and ironically something that many beginners forget to keep in mind when starting out, is determining the appropriate time to hold a property. While there are many factors that together decide for how long one can or should hold on to a piece of land or any other property they own, many people keep their property as an asset for a rainy day. In such cases, no calculation is done with regard to depreciating monetary value and the taxes applicable on property that is usually generating no income. Please read on if you own such a piece of property.

HOLDING POWER

In real estate, holding power is the buyer’s capacity to retain the property until selling it offers sound returns. The reason why some property buyers fail to reap impressive gains from their real estate investments is lack of holding power. Selling property out of need instead of at the right time often fetches less-than-ideal returns. The holding power also determines the investment term, which varies from project to project.

INVESTMENT TERM

Simply put, the investment term is the period of time by the end of which your property will have gained a solid value, enough to give you an appropriate return on investment. For serious real estate investors, no long-term project is a good project unless the returns are truly worth the wait. Real estate investments are generally classified into three terms: short-term, medium-term and long-term.

Short-Term Investment

Any investment done for a period as short as a couple of weeks to 2 years is normally considered to be a short-term investment. Short-term investments require keeping a closer tab on the market and making calculated moves exactly when an opportunity presents itself. Time is quite literally money in short-term investments.

The gains may be smaller in short-term investment, but their percentage as compared to the property’s original value is usually high. In Pakistan, most short-term investments are best suited for projects that have just been launched or are in the initial stages of development. The rates of property in such projects could increase with something as straightforward as a simple ground-breaking ceremony, and significant events such as balloting could leave you several hundred thousand rupees richer if you play your cards right.

Medium-Term Investment

An investment done over roughly 2 to 5 years is considered a medium-term investment. Varying from project to project, the returns on medium-term investments can be multiple times the original sum. However, some thorough market research is required for a successful medium-term investment. Look for a good developer with a sound track record who is in the middle of developing a project. This will allow you to invest your capital in something that is currently undervalued but will likely give excellent returns in 2 to 5 years when it is complete or close to completion.

Long-Term Investment

Any real estate you hang on to for over a period of 5 years with the intention to sell it for profit is a long-term investment. While returns on long-term investments can be very, very impressive, they require a great deal of patience and fortitude to bear the occasional bad news – such as a temporary suspension in development activity or slow pace of development work.

In Pakistan, one has to be vigilant about long-term investments because there can be land disputes, litigation and even land-grabbing in certain areas. However, as long as you pick a reputable developer and keep regular checks on your property, you should be fine.

WHAT ELSE TO KEEP IN MIND?

An investor is free to decide the term of their investment, but generating worthwhile profit through a real estate investment requires them to have the necessary holding power. If your holding power is fine, i.e. you don’t foresee any urgent financial needs that would require you to liquidate your real estate investments prematurely, you can then focus on the following to truly maximise your returns.

Project Status

A project in the early stages of development has a better chance of gaining value in future. As a rule, the property appreciation rate slows down in most projects that are fully developed and have reached the secondary market. The best time to cash in on your investment is to sell a little while – six to 12 months – after possession has been offered.

Pace of Development Work

Be mindful of projects that have been dragging on forever. While most housing projects that span a large area will understandably require time to be developed, you need to make sure the developers aren’t just dragging their feet because they are out of funds or embroiled in a legal battle. There also exist short- and medium-term investment opportunities in such projects because prices tend to fluctuate every once in a while, but they require close monitoring to spot the right time to sell.

Market Activity

Keep a close watch on how the real estate market is doing in general. Certain times of the year – such as the time around Eid-ul-Fitr in Pakistan – are marked by heightened activity, sizeable demand and good prices. Other times, such as the onset of Ramadan and the annual budget, herald a slowdown. Make your buying and selling decisions accordingly.

Infrastructure Development

Always stay up to date on new infrastructure development projects being undertaken by the authorities. Some of them, such as major highways or thoroughfares, can add tangible value to properties in their immediate vicinity. So it is always a good idea to keep tabs on such projects and see if they are likely to add value to a segment of the real estate market. Buying ahead can eventually give you good returns when the infrastructure development project is complete.

IN CONCLUSION

Determining the right investment term, doing the proper market research and keeping the necessary tabs on your investment and surrounding developments are all crucial if you want to make successful moves in the real estate market.

Not all projects are created equal, so choose wisely and pay close attention to detail. Don’t hesitate to start small, because nowadays even as little as PKR 20,000 is enough for a real estate investment in registration or membership forms, which can turn around to give you 10 times the returns if you are smart about it.

Play smart, play safe, and the world is your oyster!

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