33.35 Should you go through Builders? Case Study of whats really happening

#finance #real-estate

Builders and Developers control the majority of the Real Estate Market. This is a fact.
It’s extremely hard to value a property, given the opaqueness of the market and that is precisely how builders make money. They sell you fancy boxes in the sky at extremely high prices. Promising the sky. But these in 90% of cases will not work out.
To make you understand their motive, let's take an example of Fractional Leveraged Properties. What are they?

In simple terms, Fractional Leveraged Properties allows individuals to own a fraction of a property they couldn't afford outright, granting them the opportunity to invest in real estate without carrying the full financial burden.
If we do it smartly, i.e.: A syndicate type of investing, this could be a good idea. But through builders, that’s a whole other thing.
Below is an example of a 3 BHK villa in Goa that is being sold at almost 3 Lakhs per sq m through Fractional Investing.

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This is simply because this will increase demand massively.
People will expect to buy properties with low cash positions and then expect to sell it at better returns in a set time frame. All this expecting property prices to keep going up. As demand goes up, the price of the property will go up as well.
If a bust cycle does happen, this will lead to a bunch of distressed sales.

After buying several properties across India, here are a few key things I have learned:

Most builders give 2-3-year estimates. This can easily go up to 5 years.
Technically, if you are investing in anything risky (eg. an undeveloped property), your money should double in 5 years (that is a CAGR of 17%). Getting locked into deals that cause significant time delays is a huge financial stress.
If you are not sure with more than 80% certainty that you are going to get possession within 2 years, don't buy.

Example: XYZ location in my city has given 50% CAGR on Flats, I will buy a flat here now. This is similar to saying: HUL stock has given 20% CAGR for the last 5 years, therefore you should buy it now.
Under most cases, if a certain location has given a massive up-move in prices, most likely you will buy at highly inflated prices. And would never make good money on it.
Figure out: where growth is happening next.

I have personally seen that some builders do their initial projects really well. But, once they make their name, they start "squeezing" on everything (even the paint quality).
The builder games have reached a whole other level now. I am personally so fed up, that I now simply buy: fully constructed/ buy land, construct, etc. Beware of situations like below:

For example: a 2BHK flat in North Goa could set you back 2.5Cr if it is close to the beach.
One of the tricks used here is:
- The builder will build a calculator and show the returns you would make. The yield would look something like this:
  For example: Per day rent: 10000
  - Utilisation: (40%), therefore: you will make 14.5Lakhs.
  - So your yield comes out to be roughly 5-6%. And, this is double of what you'd make in Delhi/Mumbai
  - You will get super enticed.

Here is the problem:

So you are back to an average yield.
More problematic: you have purchased an inflated asset. So the property price appreciation would be SUPER slow.
Even more problematic: 'luxury apartments' crazy high maintenance fee (like 10K/month to society/builder)
So this becomes a cash cow for the builder; a terrible deal for you.

Just putting this out there, so that it benefits everyone. The simple learning here is that:

Don’t but at super inflated prices and don’t make dumb decisions.

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