Study real estate market cycle to make profitable entry & exit

Property | admin | January 23, 2012 at 12:24 pm

Real estate is not a 'get-rich-quick' investment route. It pays off only when one invests in a property for at least 3-4 years. Even with a long-term investment horizon, one needs to have a clear exit strategy in mind before buying real estate as an investment.

During the peak of India's real estate markets in early 2008, a number of investors would 'flip' their properties (buy a property, hang on for few months for the prices to go up and then sell it for an instant profit).

Thankfully, the 'flipping frenzy' has cooled down since then. The only safe and consistently profitable route is long-term investment. This is why it is extremely important to know what will happen a few years down the line – to the property market in general, the location and property in particular and to one's own finances. A savvy real estate investor must also know that unrealised gains are meaningless, and should be able to figure out when to take money off the table. Here are some guidelines to profit from real estate investment:

The property investor must decide on the investment horizon (period between purchase and resale)

A detailed analysis has to be done on the tax impact of exiting a property investment

Expenses, such as those towards legal fees and brokerage, need to be factored in

Prepayment penalties for early loan closure and stamp duty impact for the buyer must be considered

The investor must determine whether the eventual resale price will be higher if the property is refurbished or enhanced before resale

Potential rental income until the investment horizon is reached and the property is sold must be calculated

Irrespective of the timing, a property investor must always focus on having the highest-quality asset base. This means the quality and specifications of the building, the specific location, the depth of the infrastructure and

Accessibility

Selling the property as fast as possible in challenging market conditions is a wrong investment strategy. The important factor to determine is where the market stands in the current real estate cycle. This is the most crucial aspect of timing a successful and profitable real estate exit.

All industries are cyclical in nature – and as long as there are business and demographic cycles, there will be real estate cycles as well. In the cyclical world of real estate, the biggest profits are made when one buys discounted real estate when nobody wants it, and then sells it with a higher price tag when everybody wants it.

There are often periods of continued growth during a prolonged upturn in the real estate cycle. A real estate investor should guard against becoming overly optimistic at such times. It is important not to lose one's risk perception. By the same coin, investors must not become overly pessimistic during a downturn in the real estate cycle, perceiving real estate as more risky than it actually is.

Apart from this, investors should ensure that they do not overestimate the potential demand, or project current trends indefinitely into the future. They should view market booms with caution and search for opportunities during down-turns.

Successful investor strategies that achieve above-market returns over the long run come only from a sound understanding of the macro and micro market cycles and the resulting market timing. A degree of contrarianism is also essential, since popular opinion on property market trends must always be weighed against one's own experience, educated instincts and judgement.

Such instincts cannot be obtained by research alone, because definitive information on the Indian real estate market is rather thin on the ground. Unlike in the more developed markets such as US, where research on real estate cycles began as early as the 1930s, comparable research of Indian real estate cycles is scarce.

The lack of granular data on geographical and micro-location-based property market trends has much to do with this state of affairs. Also, property cycle phases in India are not consistent in length, making it difficult to predict when a new phase will begin. All this means that guidance and constant mentoring by more experienced

Exit timing

Finally, from the timing perspective, a professional property investor will exit the property if a good deal comes along. In some cases, selling also becomes necessary due to an urgent financial need. When the investor decides to exit, the price should be guided by open market valuation. It is neither professional nor advisable to wait until a dream figure based on opinions is achieved.