Should you invest in aging real estate that is ready for redevelopment?

 Should you invest in aging real estate that is ready for redevelopment?

A property with the potential for redevelopment is a risky investment. You need to determine if you have the patience to hold out in addition to disagreements between current tenants on a range of topics, including the builder they choose and the size of the apartments that are assigned to them after the reconstruction.

Imagine finding a chance to purchase an ancient structure at a great deal with the possibility of redevelopment. Such incentives may be highly alluring. For instance, in Mumbai, the price difference between a 2BHK in a recently constructed society and one that is over 30 years old is at least 20% and, depending on the location, can reach up to 35% to 40%. As families expand, many locals feel the need to upgrade to a larger home in a new structure or demand better amenities instead of waiting for the uncertain reconstruction. In densely crowded metro areas, many similar houses are listed for sale, often even at a discount. Numerous structures in Mumbai that were constructed in the late 1980s and early 1990s and are now at least 30 to 40 years old are waiting to be demolished.

waiting is a game

So, if you find an excellent price, should you invest in such aged real estate? Even though the time frame is uncertain, the biggest wager when making an investment decision on such old properties is that they will undergo reconstruction. The waiting period, during which a significant portion of your money will be stuck in an old home, is therefore essentially the inherent danger in this situation. The likelihood of returns decreases with length of waiting period. Time has a monetary value. If your money doubles in 5 years versus 10 years, there is a difference. You will eventually regain your capital over a long period of time if you monetize it by forgoing rent in the interim. In major cities like Mumbai, the rental yields are only about 2.5 to 3 percent annually, which is pitiful. The overall profits would even decrease more if you had taken out a loan and were making monthly payments on the previous property.

Getting around the delays

I'm not saying that an investment in real estate in an older home is not worthwhile. The issue is that if you want to see capital growth on such assets, the fundamental assumption is that they will be redeveloped. Just like any investor who makes trading (not investing) calls on shares, gold, currencies, or other commodities, you could get lucky or unlucky.

Additionally, the renovation of historic housing societies is a difficult task. Numerous obstacles exist, including societal divisions and a lack of cooperation, problems with conveyance, potential legal issues, etc. Redevelopment projects run the risk of being held up or even stopped if the builder selected by the managing committee is unreliable. Therefore, a key consideration in this case is how long it takes to start and complete the full job.

The likelihood of achieving large double-digit returns increases if the property is redeveloped in 10 years or fewer. If the waiting period is 10 years or longer, you will only be able to slowly recoup your investment through pitifully low rental yields. So, ultimately, the timing of the property's rehabilitation will determine your returns.

A guide to buying real estate with the potential for redevelopment

The following inquiries should be made before making an investment decision about historic properties:

Do you have any short-term objectives that would require a significant outlay of funds, such as paying for your child's school over the next five years? If so, you will not be able to afford to invest in real estate.

How would you characterize your current asset allocation? It is recommended to put your money in debt or equity first if you have insufficient exposure to any of these asset classes. These assets can better support your goals and are much more liquid.

· Ensure you have sufficient funds in your savings or investments to cover the down payment. Will this put a strain on your current asset allocation?

Do you need to take out a loan to buy this property? Are you able to pay the EMI back? Make sure you can afford it. Have you thoroughly researched the property's location, the managing committee for the society, etc.?

· Regardless of the redevelopment situation, do you have a set time frame in which you want to exit your investment, or do you have the financial wherewithal to lock in the money for a considerable amount of time?

Real estate investing is enticing because it fosters a sense of ownership. There is also the cliche that real estate investment is always profitable. However, one must evaluate their own circumstances and reflect on the aforementioned questions. Unplanned real estate investments may end up costing a lot of money. After all, a good deal isn't always guaranteed when you buy cheap. In the end, what matters more is how the investment fits into your larger plan.