Or they buy houses or shops and give it on rent so that they can get regular income. Friends, there are four options to invest in real estate: Land, Residential Real Estate, Commercial Real Estate, and Industrial Real Estate.
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Land means unconstructed land or agricultural land.
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Residential Real Estate means houses, flats or buildings where people live.
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Commercial Real Estate means such buildings where businesses run their business — like shops, showrooms, shopping malls, office spaces, hotels, marriage gardens, parking lots, etc.
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Industrial Real Estate means such places that industrial businesses use — like manufacturing plants, warehouses, factories, logistics hubs, etc.
Friends, we can invest in any of these four options. We can only make a profit in two ways. The first is by selling the purchased real estate at an increased price — which we call Capital Appreciation. And the second is with the rent that we get from our real estate — which we call Rental Income.
Friends, it is entirely up to us which of these four options we invest in real estate. But no matter which option we choose, the most important thing in real estate is Location. It is said that there are three most important things in real estate:
Location, Location, and Location.
So before investing in any type of real estate, study its location well. Usually, we should buy real estate at a location where the demand for location is likely to increase in the future.
For example, if we are buying a residential real estate property, then we should think about whether people want to live at the location of the property, whether there are good schools, hospitals, malls nearby, and whether the property is well connected to the roads, and whether it is easy or difficult to go to the railway station, airports, etc.
Friends, before investing in any type of real estate property, we should look at one thing about that property — and that is the Cap Rate.
Cap Rate or Capitalization Rate tells us how much return we can get from a real estate property. The formula for calculating the cap rate is:
Cap Rate = Net Operating Income / Current Market Price of the Property
Here,
Net Operating Income means the annual rental income from the property minus the yearly cost to manage the property.
Net Operating Income = Annual Rental Income – Cost to Manage the Property
Let’s understand this with an example:
Let’s assume that we want to buy a 2BHK flat for investment. The current market price of the flat is ₹25 lakhs. And we can get ₹12,000 rent from the flat every month. That is, we will get
₹12,000 × 12 = ₹1,44,000 rent in a year.
Let’s also assume that it will cost us ₹14,000 to manage the property in a year.
In this way, the Net Operating Income of this property will be:
₹1,44,000 – ₹14,000 = ₹1,30,000
Now we can calculate the Cap Rate for this property:
Cap Rate = ₹1,30,000 ÷ ₹25,00,000 = 5.20%
In this way, the cap rate of this property will be 5.20%.
Friends, we use the cap rate to compare two properties. If two properties seem the same to us, then we can compare their cap rates to see which one is getting more returns.
