ROI Properties & Fractional Ownership Assets

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ROI Properties

What is RoI? How is it calculated?

RoI is an abbreviation for Return on Investment. It simply means what is the annual return (as a percentage) that I can get as a cash flow from my investment. Gross RoI is calculated as (monthly return x 12) divided by net total investment. Further, net RoI is calculated as below:

  • Monthly rent x 12 
  • Less repairs & Maintenance
  • Less taxes, insurance and other annual/ monthly outgoings related to the asset
  • Less depreciation on asset value & write off on furnishing and fixtures
  • The net total of the above divided by the total acquisition cost of the asset (including transfer fees and brokerage charges)

Is not a single digit yield as RoI too low for real estate with liquidity crunch? How can I get more from a RoI property? The answer is that is capital appreciation

RoI properties apart from regular income also offer capital appreciation. They grow a certain percentage annually depending on the rental increment and market price. This translates your single digit return to a double digit in Real Estate which means over 10% most definitely

What is IRR when I speak about Real Estate?

Internal rate of return is the sum total of Cash flows and appreciation accruing to an investor over the period of investment in the real estate asset.

For example, if you have enjoyed a return of 7% on rental annually and the property was sold 5 years later at a 50% appreciation – your return is 7% x 5 years plus annual increments which is closer to 38% as cash flows and 50% at the time of exit. The total is could be equated to over 100% growth over 5 years if the monthly rentals were deployed for further growth every month.

Why should I invest?

Who wouldn’t like Passive income coming in. A  regular cash flow helps in liquidity crunches, unexpected expenses and growth, assists in payments of EMIs, helps in building a new asset for the family apart from giving peace of mind in times of jib losses, poor business and works as a great financial back up plan. The bulk value received at the time of sale provides ability to start a new business, meet new capital or large expenses and investments.

How do I fund this? Should I borrow to invest?

This depends on the rate of borrowal vs the IRR that an asset can yield. It is advisable to borrow smaller amounts for commercial assets that yield rental income with a with that the rental and offset the EMI and the loan can be cleared in a few years. LRD – Lease rental discounting loans are available against long  term leases/ rental agreements with lock in with interest rates lower than personal loans. 

What are normal yield rates in the market?

The normal market yields depend on the asset that you purchase. The table below will show you the average yields in the top 5 metros of India:

Type of asset

Typical average annual rental yield (RoI)

Minimum Investment Required (lakhs)

Residential house – apartment, flat, villa etc (600 sft)

2-3%

15

Co-living individual unit (Residential/ Commercial)

5%

25

Commercial – Retail space (350 sft)

4-5%

50

Commercial – office space (200 sft)

6-8%

15

Warehouse/ Factory shed (1000 sft)

7-9%

30

   

The above assets are not A grade assets and are not easily tradeable or easy to liquidate or rent. They do not offer A grade specifications & do not always attract A grade tenants as A grade tenants are looking for larger spaces! However these are good for small investors who prefers independent assets. 

What should be the investment that I require to buy A grade assets with A grade tenants?

Firstly, who is a – A grade tenant. Generally a large company which is continuously growing & can withstand the vagaries of business and is established over the years with a great recognized brand is considered an A grade tenant. What is it that they require?

  1. A good property with A grade specifications
  2. A property with all approvals and NoCs, fully compliant
  3. A flexible owner who is willing to accommodate their requirements
  4. Most commonly a large property to suit their large scale operations

Large, fully compliant, built as best in class and good assets require huge investment. When we speak about an A grade tenant occupying 25000 square feet plus office space or 1,00,000 square feet plus of warehousing and industrial sheds we are talking of investments of 25 crores and upwards which is out of the reach of a common man. 

How do I own an A grade asset with an A grade tenant with my limited resources?

As discussed in the previous video, to own an A grade asset you will need to invest a huge amount of money. Therefore, the market today has 2 options Fractional Ownership Assets and REITs (Real Estate Investment Trusts)  

What are Fractional ownership assets?

As the name implies, you can own a portion of the asset. The portion is most likely an undivided share of the larger asset. You could own it in 2 ways – first as a demarcated portion in your sale deed and secondly as a shareholder in a SPV (LLP or Private limited) that owns that one asset. While many investors pool in their funds, they also share the rental income in proportion to their investments

What is REIT?

A Real estate investment trust is just like a mutual fund wherein several share holders get their share of monthly rentals and the REIT is listed on a stock exchange with a daily price. It can be traded as financial security. 

What are the advantages of owning a fractional ownership asset or a share in a REIT?

  • Lower risks due to having smaller investments & a diversified portfolio
  • Liquidity as the investment sizes are small
  • No property management issues as these are professionally managed
  • Can invest globally and also benefit from currency devaluations and fluctuations

What are the disadvantages of owning a fractional ownership asset or a share in a REIT?

  • Joint ownership
  • No say in the management of decision making

Explain the differences between a Fractional ownership asset and a REIT?

 

Fractional Ownership

REIT

Concept

Pool in money to invest and jointly own the asset

Like a mutual fund – own tradeable securities

Number of assets & 

Choice of assets

Mostly 1 – Commercial real estate Asset – You can choose your asset

Many assets in 1 basket and of various types – Therefore no choice to select your asset

Risk vs Reward

1 asset means higher risk and ability to generate higher returns

Risk is spread across all assets in the basket – yielding average returns

Tradability 

Need to find a buyer through your platform

Listed on the stock market and easier to find buyers

Size of investments

Starts at 5 lakhs per asset

Starts at 1 lakh

Monitoring of your investment

Monthly on your dashboard – more transparency

Only when reports are released by the REIT

Charges/ Hidden charges

Lower asset management fees

Lack of total transparency

Concept and acceptance

Newer and faster

Traditional and Global