Saturday, November 29, 2014

The Current State of Real Estate Market in India

Real Estate has always been a preferred avenue of investment for Indians and will most likely continue to be so for the foreseeable future. The Indian Real Estate Market witnessed never before growth during the major part of the last decade and it looks as though things are cooling down. Some feel the market has it its peak while some feel there is a correction on the cards. So, what is the Real State of the Indian Real Estate Market?

You will find out by the end of this article. Shall we get started??

Why this article…

Real Estate Promoters & Builders consider the Non Resident Indians (NRIs) as a lucrative segment and am sure you don’t want me to explain why. Anyways, it is common practice for Builders and Promoters to visit foreign countries with sizeable NRI population (Ex: Singapore, Malaysia, USA, etc.) and conduct road shows. I usually visit such road shows that are held in Singapore and happened to visit one last week. After visiting the most recent road show, something odd really struck me.

The list of promoters that participated in the road-show were very close the same list that visited us just 3-4 months ago. In fact, even the list of projects was the same. If projects flouted by reputable and respectable builders haven’t been sold out for months, I started researching for some data and statistics on the real state of our real estate market. So, here you go…

So, What is the Current State of the Indian Real Estate Market?

The Indian Real Estate Market is at an all-time low. The demand for houses in most of India’s top cities are extremely sluggish and in fact, on a year on year basis the growth or demand for homes has come down by over 20%. Yes, you read it right – Demand is Down by 20%

But, if you thought promoters and builders are reducing their prices to fuel the falling demand, you are definitely mistaken because, the prices of homes have come down by less than 5%. Yes, the prices have come down by an average of 2-3% only.

Did that Surprise You? No wonder, their projects are still unsold and they are advertising the same projects time and again.

Is this the state of just Existing Projects or has it affected New-Launches too?

Actually speaking, the new launches are affected even more because all major cities have witnessed a shocking reduction in about 40% or more in new project launches. In the month of March 2014, I was on the verge of booking a house in Chennai. There were about 3-4 projects that were on the verge of being formally launched and were selling units at a special “Pre-Launch” price. Do you want to make a guess on what is the state of those projects now?

They are still offering the same “Pre-Launch” price and promoting the project as “Will be launched soon!!” and we are almost close to the end of 2014.

I can actually list down those 3-4 projects but it wouldn’t be in my best interest because the promoters may feel I am disparaging their project and sue me…

Did you know that, at the current rate of demand for new homes, it would take at least 2 years or more for all of the currently "In Progress" or "Completed" Residential projects to get sold out... 

So, what is the reason for this Reduction in Demand?

There are many reasons that attribute to this reduction in demand but the 4 main reasons are as follows:

Reason 1: Affordability

The rise in annual income of individuals isn’t going up at the same rate at which property prices are going up. People who were earning 5 lakhs per annum 3 years ago are making about 6-7 lakhs per annum now but properties that were worth 50 lakhs 3 years ago are worth almost 90 lakhs or more now.

Reason 2: Lack of Strict Regulations & Corruption

The Indian Real Estate market is poorly regulated and heavily influenced by corruption. Builders in most cases have extra-deep pockets and buy-off or rather pay-off regulation makers and ensure that property prices don’t come under governmental regulations. If you try to find out the governmental guideline selling price of land/property in any area in India, you will find that it is much lower than the price at which builders are selling their projects. Am I right?

Reason 3: High Interest Rates

India is one of those economies where interest rates are pretty high. Do you know the average rate of home loans in developed nations is much much lower than the rates in India? Paying 10% or more as annual interest rate is unaffordable for most of the salaried class

Reason 4: Black Money

It is widely suspected that the phenomenal growth in the real estate market in India was fueled heavily by Black Money. If I were investing 10 crores of my black money, I wont be bothered much about having to wait for 2 or 3 years to make a 12 crore white income on the investment because that is the main purpose of the investment. If I were investing my hard earned white 10 crores I wouldn't want to wait for 3 years to make 12 crores because that's not good enough. I might as well reduce my profits by 3-5% and make 1.15 crores in one year and finish the deal. Get the picture?

So, Is Buying Property Now – A Good Idea?

There is no single – one size fits all answer to this question. If you are someone who needs a house for you and your family to live in, then the answer is YES. There are many things you must think and consider before you actually buy the house and I had written about it in 2010. I would recommend you read this article: Buying a Home

If you already own a home or you are in no hurry to buy a home right away, then you could wait for a few months to see where this goes. I would recommend you read this first: Is Buying a Second Home an Investment

Most builders would've invested huge sums of money and hence would like to have some kind of returns on their investments and this trend of “Not lowering prices” even though Demand is Low” will come to an end soon. So, if that happens, you can take advantage of that opportunity. Second hand property market always trades at a discount of at least 10% in comparison to fresh property. Think of it this way, what if you invest 50 lakhs of your hard earned money to buy a second home and there is a correction and the value of the house goes down to 40 lakhs, what would you do? 

Better Safe than Sorry…

Happy Investing!!!

Wednesday, November 12, 2014

Your Path to Financial Prosperity – One Step at a Time…

Have you ever wondered, no matter how much money you make, the yearly pay raise, the promotion etc, somehow you always end up with a deficit budget most of the time. Saving money and accumulating wealth can be a challenge no matter how much money is coming home in your paycheck.

The purpose of this article is to help you get your financial habits in order and move towards financial prosperity – One step at a time..

Lets get started, shall we?

Step 1: Know Where Your Money Is Going

It was early 2013, I had recently gotten married and had to get my finances in order because now I have a wife and soon I will have a family of my own. At the end of each month, invariably my bank account was almost empty and I was always left wondering – what the hell is going on. So, as a first step, I decided to track where my money was going.
I picked up an old diary and started noting down the expenses on a daily basis for a month. At the end of the month I had a clear idea of exactly how much I was spending each month and on what. Even the brightest of minds cannot remember every little aspect of our spending habits and it doesn’t hurt to note them down. Use a notepad and pen or use an excel in your laptop or if you have a smartphone, use one of those expense tracking apps.
At the end of the month – review your spendings and identify the areas where you feel you can cut-down.

Every year when we get a pay raise, our spending patters change. The moment our mind senses that we will have more money to burn, we will end up burning all of it and maybe more. So, Unless you identify this unwanted spending category, you will continue to be in deficit up until the point when you either start tracking your expenses or you hit the lottery

Step 2: Know How Much Yow Owe

Kudos on starting on your one step at a time program towards financial prosperity. If you started out with step 1, you will realize exactly where your money is going at the end of the month. If you are someone who goes by the mantra “Cash is King” and does not have any Loans, then you can actually skip this step as well as the next.

If you are like the majority of the population, you will invariably have some loan or the other. Car loan, bike loan, home loan, personal loan, education loan, credit card outstanding etc and etc… The more categories under which you have loans, the more difficult it is to get out of the situation and move towards a loan free or debt free life. Anyways – it is not impossible. All you need is a little discipline and a plan…

Before we work on the plan, sit down, call up your respective loan providing banks and list down the total outstanding amount against each of the loans. Total it up and you are all set for Step 3…

Step 3: Plan for a Debt-Free Future

Being Debt Free is not just a dream – it can be reality. All we got to do is plan. Go back to step 1 where you identified all the categories of spendings where you feel, you could cut-down on. Start right away. By cutting back on unwanted spending, at the end of the month you will have an amount with you that would remain.

Plan A – If you have a lot of Loans:

Put it in a bank account and forget about it. Repeat the exercise each month. Cut-down on unwanted spendings and accumulate as much money as you can, in this account. If you get a pay raise, forget the fact that you have more money to spent. Divert the additional income to this account. By the end of the year, you will definitely have a sizeable amount which you can use to repay all or part of at least one of the loans. Repeat this exercise every month/year and you will be debt free in the next 3-5 years.

Yes, I understand 3-5 years may sound like a long time but think of it this way, if you don’t plan like this, you will most likely take 8 or 10 years to repay the loans. Which one sounds better?

Plan B – If you have lot of Credit Card – Outstanding Debt:

Credit Card debt is like forest fire. Even though the bank only insists that you make the minimum repayment due amount, they will be charging you hefty interests on the whole outstanding amount from the date you swiped to your card up until the date you fully repay it. So, whatever surplus you end up with at the end of the month, use that to repay the credit card outstanding debt ASAP…

Step 4: Build an Emergency Corpus

Gone are the days when both employee and employer were loyal to one another. These days, companies aren’t as loyal to its employees as it used to be. Even at the slightest forecast of lower sales or lower profit, heads start rolling. This is very common in almost all private sector companies across the globe and industries. So, we should be safe. Isnt it?

Start the month with 10% of your salary diverted towards this emergency corpus. If you cannot start with 10% right away, start small – 3% or 5% and then implement step 1, identify unwanted expenses and increase this emergency corpus to 10% every month. Only spend what remains after this 10% contribution.

It might sound like a lot, but trust me, this emergency corpus will go a long way to help us in the unfortunate event of we losing our job. Or maybe one of our loved family members is sick and we need money for medical expenses, this emergency corpus will come in really handy…

Step 5: Invest your savings – Don’t let it stay idle

Money that is left idle in your savings account is probably the biggest financial crimes we can commit. If you followed Step 1 – you could’ve identified the amount or surplus you can save each month (by cutting down expenses + identifying how much money will remain at the end of the month). If you follow step 4 – you will keep a % of your income each month as emergency corpus. So, a smart guy/girl would invest this money – rather than let it stay idle in their account.

Plan A – For the Emergency Corpus: Start out a Recurring Deposit for the amount you wish to set aside. Select duration as 1 year and at the end of 12 months, restart a fresh RD and deposit the maturity proceeds as a Fixed Deposit.

Plan B – For the Monthly Savings: Start out a Mutual Fund SIP for the amount you can afford to save each month. If you want you can choose a full equity fund or something that is balanced between equity and debt. The fund you choose is your choice but remember to select a fund that has equity exposure. Otherwise there wouldn’t be a difference between this and the RD.

Step 6: Plan for a Second Income

Though this is something that wouldn’t be feasible for everyone – right off the start, with a little planning and effort this is quite possible.

Fixed Deposits have monthly or quarterly interest payout options. After a few years’ worth of accumulating the emergency corpus, this corpus can actually make a small but regular income for you. If you have surplus, you can buy an extra house/shop and rent it out to make an extra income. You can also try freelancing like tuition classes to supplement your income.

Don’t start out with hopes of earning thousands each month. Such plans will most likely start off small but as time goes by, there is only one way to go à UP…

A Word of Caution:

Following these 6 steps does not guarantee that you will be a millionaire soon. But, it can guarantee that your finances will get sorted out, your spending pattern will change and you will start saving more than what you are doing now… 

If you get a Bonus at the end of the year (even private co.’s have started giving out bonuses at the end of the year). If something like that happens, don’t splurge all of it. Save at least a part of it (preferably 30% or more) and use the rest to enjoy the fruits of your hard work throughout the past year..

Some Last Words:

Becoming Rich and Financially Prosperous usually requires a lot of effort (Unless you are rich by birth or hit the lottery). A Smart person always knows where his money is going, keeps his debt to the minimum and invests prudently for many years to achieve his/her goal of financial prosperity and independence. Hope you found these tips useful…

Happy Saving Money!!!

Sunday, November 2, 2014

Seven Deadly Investment Mistakes… Watch Out!!

Ok, the title sounds a little crazy or even scary but, hang on with me here. By the end of this article you will know exactly why this article is titled so… 

The main reason we invest is to make more money. As simple as that. Right? 
Did you know that on an average the rich investor makes a lot more money than the normal or common-man investor. Without talking about numbers, just taking the % returns into consideration, the rich investor easily makes about 5-10% or more returns than a regular investor (whose main aim is to one day become rich). So, how come they make much more profits than us?

If you say, the amount they invest, go back and read this previous paragraph, we are talking % returns here and not absolute returns. Now, think why!!! 

They don’t make the common Investment Mistakes that we so easily make. In fact, most of us don’t even realize that we are making this mistake. Anyways, for the rich folk, their investments are handled by professional investment managers (Privileges of Private Banking) and they make sure not to commit these mistakes. Enough of the pep-talk, lets get down to business…

Deadly Mistake No. 1: Portfolio Over-Diversification

Have you ever heard of the old saying “Don’t put all your Eggs in the same basket”? The purpose of Portfolio Diversification is to ensure that we invest across asset classes and don’t stick to a single basket. But, an over-ambitious investor usually ends up over-diversifying his/her portfolio by choosing too many investments. 

Let me give you a simple example. One of our blog readers had emailed me asking if his mutual fund portfolio is good. He was investing Rs. 2000/- as SIP Across about 15 funds. Yes, 15 funds. He was investing 30,000 rupees each month which is sizable investment but if you take a step back – 15 funds make his portfolio over-diversified and very hard to manage. Do you honestly think someone can track the performance of all those 15 funds? We can actually reword Portfolio Over-Diversification as Portfolio Over-Diworsification. 

I suggested that he select 3-4 good funds across various categories like Large Cap, Diversified Equity, Mid-Cap and Small-Cap and invest the money according to his risk appetite. 

Deadly Mistake No. 2: Over Emphasis on Past or Historic Returns 

Have you seen any mutual fund prospectus or advertisement? There is usually a * which says “Past Performance may or may not be sustained in future”. This is because, no one can guarantee the fund returns and even though a fund may have given extra-ordinary returns in the past one or two years, the same may not be possible in future. Unfortunately, most of us go by past returns and end up expecting unreasonable returns. 

Be realistic – just because a fund gave 40% or 50% returns during a bull market, it does not mean that the fund will continue when the market makes a U Turn… 

Deadly Mistake No. 3: Investing Without a Plan

When was the last time you sat down with a pen and paper to analyze a potential investment before you actually put your money in it? Most of us consider Investment as a one-time activity and don’t really put much emphasis on planning. 

You must create a disciplined plan based on mathematical expectancy because anything less is gambling and not investing. Never gamble on rumors, hot tips, stories, future predictions, or an expectation the market will go up. None of these approaches qualifies as a plan despite their widespread use and popular appeal.

Deadly Mistake No. 4: Trusting Experts Blindly 

This is by far the most common and prevailing mistake that almost 99% of investors do. Yes, an expert is someone who knows more about investment, stock markets or any other subject than you. But, does he know more about your personal situation than you? Does he care more about your financial future than you? Would he share your losses if you end up incurring some along with you? 
The answer to these Questions would be a Big No. On top of all this, this so called expert or financial advisor is getting paid to sell investment products to you. So, do you really want to blindly trust such a person? 

The bottom line is your investment advice is coming from sources whose business objectives are focused on their wealth, not yours. Don’t make the mistake of trusting the experts. You should always operate from the assumption that the investment advice you receive is tainted. We all have biases including you and me.

With that being said, I also believe there are many honest, good people doing their absolute best to work with the limited knowledge and conflicting data that make up the investment world. But, we are all human and may make a mistake as easily as anyone else. 

Its your money and your responsibility. I even posted an article titled “Financial Resolution No. 3: I will not blindly trust my Insurance or Investment Advisor” in Jan 2012 because I am a strong believer in the fact that, if you don’t care about your hard earned money, your advisor most likely wont too…

Deadly Mistake No. 5: Excessive Exposure to Risk or Excessive Conservatism

Any investment portfolio must have a combination of instruments that range from fully safe options like Fixed Deposits to risk options like Equity Stocks or Mutual Funds. Excessive exposure to risky choices may result in huge losses and similarly excessive exposure to safe investments may result in low returns. I wrote an article a few weeks back titled “Does My Portfolio Need Equity Investments?” which actually explains why you should diversify across asset classes…

Deadly Mistake No. 6: Holding on to a Loser – In the Hope of Breaking Even

Sometimes, even the best investor makes bad choices. It is all part of the game. A smart investor is one who can own-up to his/her mistake and sell an investment (even if it means incurring a loss) if it was a bad decision. Many of us hold on to such loser stocks or mutual funds in our portfolio in the hope that someday this investment will break-even and you can at least recover whatever you invested. What makes things worse is that, some of us may even end up buying more of this loser to average out our losses. 

If you take a step back and think why we do this – the answer is very simple. Not everyone can accept that they were wrong. A smart investor is one who can actually accept that fact that he/she did a mistake because it is perfectly fine to make a mistake. Holding on to the loser is actually a bigger mistake than actually owning up to our mistake and moving on…

Deadly Mistake No. 7: Mixing Emotions and Investments

Have you ever heard of the saying “Water and Oil – Do Not Mix”? Emotions and Investments are almost the same. Yes, investment is something we must make with our brains and not our hearts. Sometimes our emotions may interfere with our ability to make prudent decisions. So, if you are going through emotional duress (like loss of a loved one) or are basing an investment decision based on emotional motivation (like recommendation by a family member/relative), there is a very high probability that this investment will end up being a loser. 

Never, mix your emotions with investments. Invest only when you are calm and clear. 

Hope you found this article useful...

Happy Investing!!!
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