What are the various kinds of risks involved in real estate investment? And what should you as an investor do to minimize those risks?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Any kind of investment whether in Gold, property, stocks, bonds, etc. is subjected to certain risks. While Government securities are considered risk free, there is still some amount of risk involved in those. What if the government defaults as has happened in some of the EU nations? Consciously or unconsciously people do their risk analysis before making any investment. In this post, we will analyze the risks that are involved in real estate investment. Whether one is investing a small amount or substantial amount, going through this risk analysis will help you in foreseeing the potential risks that can creep in your real estate investments.

• Business risk:

Property investors suffer due to fluctuations in economic activities that affect the variability of rental income generated by the property. Changes in economic conditions prevailing in the country often affect some properties more than others depending on the type of property, its location, and any existing leases. For commercial properties, particularly office space buildings, a property with a well diversified tenant mix is likely to be less subject to business investment risk. Lease deeds that provide the owner with protection against unexpected changes in expenses (e.g., with expense stops in the lease, or leases indexed to WPI, etc.) would have less business risk. Changes in the economic conditions also affect the residential property investors who are primarily looking for capital appreciation gains on the property. With economy slowing down, the capital yields goes drastically down as can be seen in the latest housing price index across many cities in India.

• Financial risk:

The use of debt (financial leverage) magnifies the investment risk. Financial risk is directly proportional to the amount of debt taken to finance the purchase of property. Based on the prevailing interest rates, the financing costs may go up and eat into the income generated by the property. Financial risks affect both commercial and residential property investor due to the financial leverage. The cost of financing goes up or down depending on the economic situation and prevailing interest rates.

• Liquidity risk:

This risk occurs when a continuous market with many buyers and sellers and frequent transactions is not available. The more difficult it becomes to sell a property, the greater the likelihood that owner will have to under-sell the property in order to dispose of the investment quickly. Sometimes, it can take from six months to a year or more to sell real estate income properties especially during period of weak demand. We have seen many cases in recent past when investors were forced to undersell because of slow property transactions across the country.

• Inflation risk:

Unexpected inflation can reduce an investor’s rate of return if the income from the investment does not increase sufficiently to offset the impact of inflation. To overcome this risk, use of leases that allow the Net Operating Income to adjust with unexpected changes in inflation is applied. Higher inflation also eats into the capital gains that are sought by many housing investors.

• Management risk:

The risk is based on the capability of the management and its ability to negotiate leases, respond to economic conditions, and operate/maintain the property efficiently. Even in case of residential properties, with outdated tenant laws across India, we have seen how difficult it gets for the manager or owner to get hold of their property. Therefore, as is the case in commercial properties, property owners must go for registered leases for residential properties as well.

• Interest rate risk:

Real estate tends to be highly leveraged and thus the rate of return earned by equity investors can be affected by changes in interest rates. Most mortgages are of floating interest rates in India and therefore any monetary policy changes by RBI is keenly watched by the real estate investors. Even if an existing investor has a fixed interest rate loan or no loan at all, the change in the monetary policy by RBI by increasing the level of interest rates may also lower the capital value of a property that a new buyer is willing to pay.

• Legislative risk:

Regulations such as tenant laws, taxes, registration procedures, stamp duty, restricted use of property, zoning, and other restrictions imposed by the state bodies or municipalities are categorized as legislative risk and must be factored in by the investors.

• Environmental risk:

Environmental risks such as constructing or buying property in areas where the land use policy is under jurisdiction and therefore have the possibilities of adversely affecting the returns on investment.


Having gone through the above risks, a property investor should do his/her due-diligence before investing in a property:

• Review of title/deed documents
• Property survey
• Government compliance
• Areas of review/locality
• Physical inspection
• Tax matters
• Insurance policies
• Pending dues
• Market studies including the demand for the similar property
• Review of rent agreements or lease deeds in case the property is already rented.

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Things to Avoid while Investing in Real Estate

If you were to believe the latest national news, consumer confidence is on the decline and cash deficit on builders on an incline. In Mumbai, Delhi-NCR, and other popular cities, the demand has come down to around 50% for new property launches.

But not everything in real estate is gloomy, the Reserve Bank of India has recently made a cut in policy interest rates. While this news may cause haste in investing in the sector, say in buying luxury villas in Bangalore or any other metro cities, there are some things you need to consider before making an investment. These are mentioned below for your consideration:

• Trading in real estate properties frequently

When you trade in real estate properties more frequently – that is, buy or sell your property in shorter duration – you may incur a loss in tax benefits.

To be precise, if you sell your property within 3 years of making your real estate acquisition, such acquisition would then be called short term capital gain, which entitles you to zero tax concession or exemption.

But, if you sell your real estate property after 3 years, it entitles you to long term capital gains and the taxation for this would be at a comparatively lower rate.

Be wary that if you trade-in too many times even in long term capital gains as it could alarm your Income Tax officer, who may consider this dealing as your business income and withdraw the low rate on long term gains.

• Investing in properties that are due completion

It’s easy for your agent or builder to make excuses for not completing their project on time and completing it at a much later date than promised. They may not have any hidden agenda behind this, except prolonging time. It means a little more number of EMIs for you than which were originally expected.

The second of the two-pronged effect of the delay is this: The tax benefits that you receive on your property investment are restrained on possession, which is a direct effect of long delays.

Being alert on investing in incomplete or overdue properties is therefore very important, at least for your pockets.

• Planning your budget before investing

We know that if a budget is unplanned or unsupervised before investing in real estate, it may deplete most of your saved resources, back-up money, or hamper your short-term investments. It may also affect your daily expenditure and can create dearth in your cherished small purchases every now and then.

Purchasing properties not just involves a down payment but also what seems like an endless array of EMIs – directly affecting your monthly salary.

Seek the professional advice of your financial consultant before buying a real estate property. A good recommendation would be saving at least 40% of your total income after you have made your investment.

• Considering all the factors before making your investment

As again like planning your budget, it is equally important in knowing and fully understanding all factors involved with making your investment, because knowing the loan criteria, real estate details, and repaying capacity are not adequate. Consult a financial adviser for a complete financial plan on your investment.

• Plenty of investment in properties may not result in profits always

The best idea would be to divide your finances into different types of investments, and not just stick to investing in real estate. First, because transaction costs in real estate are much higher than say investing in gold, bank deposits, bond funds, equities, etc.

The prime reason that people choose to invest in a lump sum in properties is that their prices increase at a faster rate compared to other most forms of investments. While this may not be true always, it’s wise to be aware of the current changes or trends in the market for accurate predictions.

If you are planning to make any investment such as buying villas in Bangalore or Chennai, etc., these above-mentioned points should hopefully help you in making the right investment.


This is a guest post by Dinesh Dhawde

Get the best revenue with real estate investment

We all wish to invest in avenues which give us better profit margins. But it is difficult to gauge them and finally invest. Investment is a matter of the right time you enter and the exact time to exit out as well. You need expertise for this kind of investment which comes only with experience. The best investment option available in the market today is the real estate. It is a booming industry and almost all the investors are pooling their money in this lobby. The developers keep on giving handsome returns to all the investors who help them in providing the investment to complete the projects.

• How does the real estate work?

Real estate is a business of constructing properties for the end users. Since real estate is at a boom and is in the demand by every individual, it is a huge money-making business. But not all investors buy it for self-consumption. They invest when the project has just started or in the initial phase and get out of it when it nears completion or is completed. This way the holding period of the construction gives them humongous profits which is the fruit of investing while you can hold it for a while. The profits are just unimaginable. But do you need a huge investment for such a profit. Well it completely depends on the kind of investment you would like to do and the budget you have.

• What you need to be careful of?

If you wish to invest for a goal then you need to be calculative. But if you need to do it just for investment purposes then a small amount of profit would also excite you. But you need to be very careful while dealing with real estate developers. There are many loop holes that need to be known by the investor. The basic thing to be done by you is to be sure on the paper work. Check on the property and the land it is built upon. The titles should be clear and the paperwork should be accurate. Also, if you are investing in a property then ensure you get all the rent agreement formats seriously and keep them updated as and when needed. Many times, your property needs to be sold to someone who wishes to use it for self-consumption.

All such things help you to be safe from any legal formalities or complications. It is a way to protect your property and investment amount. You would find many fraudsters who dupe you of the money and sell your property to multiple people to make more profits but in an illegal manner. This can be evaded if you are smart enough and know all the loop holes of the game. It is not easy to get into the act completely as it is just a side income you wish to generate for your better future. But if you wish to make it big in this game then I suggest you know all that is required.

You can get in touch with many real estate brokers who has immense knowledge about the property and the business to help you to take the right decision. These brokers should be registered with the real estate lobby and should have a good background. If they are not the right people then you would face challenges and losses as well if not paid much attention. Real estate is a huge pool of investors and you would need to be smart on all your actions to make a good profit out of your investment. So, ensure you have all that would make your investment profitable.


This is a guest post by Mukul Malik

Why Is Real Estate Industry Said To Be a King of Investment??

Stocks, bonds, mutual funds, investments, and real estate - though the list seems to be endless and making a choice is still considered to be a Herculean task. Especially for a family with two children in school, with a career that has just started and it can be extremely crucial decision for them. Given below are some of the reasons as to why real estate industry is believed to be the king of investment.

• Inflation Hedging: 

The relationship between real estate and GDP has grown on the basis of the ability of real estate asset class to foster with inflation hedging. In simple terms when the economies grow and expand, the demand for the real estate industry consequently increases along with the increase in rentals and that translates into higher capital land prices.

• Retirement Income: 

The pressure on the current income that has to be spent on varied channels is high. Between the school fees, fuels, and marriage funds, almost each and every one’s saving account will continue to get thinner and thinner with time. Therefore, investment in real estate can be extremely useful for people in their retirement days.

• The Positive Cash Flow: 

It is the real estate industry that generally gives you huge investment options wherein you could receive a guaranteed and tangible income throughout the year. This is what exactly a positive cash flow is.

• Scope of appreciation: 

The real estate industry is generally considered to be one of the safest options in long term no matter what. Industry Experts in the realm of real estate industry agree that in a period of ten years the real estate industry has seen the highest scale of appreciation in comparison with any other class of investment.

• The Tax Benefits: 

Real estate sector is one of the major contributors to the country’s GDP. And since the government wants to promote affordable housing and housing for all, the investments in the real estate is bound to give you tangible tax benefits of as much as INR 1, 00,000 in the upcoming year.

• Leverage: 

Leverage here in simple terms or in terms of the real estate industry would mean the ability to use the borrowed capital in order to ensure a potential return on investment. Real estate industry is the only possibility among various investment classes that allow for leverage. For example by paying a minimum of 20% of the cost of property, you as the owner could control the income from the property. The remaining 80% can be availed from the bank in form of home loan.

• Diversification in the investment portfolios: 

Having a diverse investment portfolio would only help you in diminishing the risks and increase the returns on investment. Assets which are not co – related to each other in the same portfolio would decrease risks.


This is a guest post by Ava Jacob who is working for a real estate project named bren imperia bangalore. The developer has more than 7 years of experience in large-scale real estate development involving construction of luxury apartments.