The tendency of most property investors in India is to focus on the cities where they live. This is because they are already familiar with the locations that have highest demand and who the reliable and reputed developers are. Most people will also have a fairly broad network of people within their city, who can advise them on potential property investments. However, the internet has opened up the real estate playing field in India for both buyers and developers. Property investors now have access to information on a large number of geographies.
Nevertheless, the question that arises is: how advisable or safe is it for a non-resident to make a real estate investment in an unfamiliar city? This question becomes even more important when one considers that lower property prices and better appreciation are in such a city’s emerging corridors, rather than its established real estate precincts. In this article, we will delve into the nitty-gritties of investing in property in a city you don’t live in to help you make a more informed decision.
See also: The tier 2 cities growth story: Rising residential prices
Factors driving demand for property in a city
The demand for property in a location depends on several factors, making it a volatile market. So before you make a decision as to whether or not invest in property in a city you are not familiar with, it is recommended to understand these key demand drivers:
- Economic growth and employment opportunities: Cities with potential for economic growth and abundant job opportunities are appealing to investors as the demand for housing increases with more and more working professionals settling here.
- Population growth: A rise in the number of city-dwellers, whether fueled by a natural increase over time or a sudden spike in migrants, leads to a rise in demand for property.
- Income levels: With an increase in average income levels in a city, more people would be in a position to buy homes, making it a lucrative property market.
- Interest rates: By making borrowing cheaper and mortgages more affordable and accessible, low interest rates encourage more people to buy property.
- Urbanisation: With rural populations moving to city for better opportunities and quality of life, the demand for urban property increases due to the need of housing such populations.
- Infrastructure development: Locations boasting of new roads, public transportation, schools and hospitals are more attractive options for buyers, thereby driving up property demand.
- Quality of life: Lower crime rates, good schools, well-equipped healthcare facilities and availability of recreational options are attractive to residents.
- Government policies and incentives: Locations with lucrative tax incentives, subsidies and policies aimed towards encouraging homeownership can significantly boost property demand.
- Foreign investment: In cities with a reputation for being safe havens for investment, activity by foreign investors can add to the legitimacy of the location when it comes to property investments.
- Availability of land and property: Limited availability of land and existing property urges people to compete for the available options, thereby driving up demand and prices.
- Speculation and investment trends: As most people buy property as an investment, potential for future appreciation and expectations of high ROI can lead to higher demand.
- Cultural and social factors: Also influencing property demand are preference trends (owning vs renting) and social factors like family size and structure.
Important considerations
If you are considering buying property in a city you do not live in, here are some points to keep in mind to make the most out of your investment:
Market research
Take into account economic indicators like GDP growth, unemployment rates and job creation as a strong economy is related to a robust property market. Also try to identify trends and predict future movements in the market by analysing historical data on property prices, sales volumes and rental rates. Lastly, evaluate the population trends in terms of growth rates, age distribution and income levels as a growing and affluent population has a positive impact on the property market.
Location
Analyse the neighbourhood by looking into the crime rates and quality of local amenities. Upcoming planned infrastructure projects like new highways or commercial developments can enhance the value of the property. Additionally, considering the property’s proximity to key areas of the city, such as business districts and entertainment hubs, is also beneficial.
Legal and regulatory environment
Familiarise yourself with the legal aspects of the property investment, including zoning laws, property taxes and ownership restrictions and understand the associated tax responsibilities, including capital gains tax. To avoid legal pitfalls, it is advisable to also look into the local tenant rights and landlord obligations.
Property management
While investing in property in an unfamiliar city, it is best to seek professional help from reliable property management firms. Prioritise good reviews, reasonable fees and track record of effective management while selecting one and establish clear lines of communication. The company must offer comprehensive services like tenant screening, maintenance, rent collection and resolving tenant issues.
Financial considerations
Carry out in-depth cost analysis by calculating all upfront costs and ongoing expenses, such as maintenance, insurance and property management charges. Explore mortgage options and interest rates to see what suits you the best. For unexpected expenses like repairs or vacancy periods, set aside a contingency fund apart from the regular budget.
Rental market
Evaluate the demand for rental properties in the area in question and the current supply. High demand with limited supply yields higher rental income. A healthy rental market is indicated by low vacancy rates and high vacancy can signal an oversupplied market. Also consider the tenant demographics and understand the housing preferences of the renters.
Risk assessment
Potential unprecedented market downturns can significantly impact property values and rental income. It is also important to evaluate the risk of natural disasters and ensure adequate insurance coverage. Also monitor the local economy to identify indicators of instability that can affect your investment.
Network and local contacts
Reputable real estate agents who know the market well can provide helpful insights about the market. Similarly, a local attorney can better navigate legal and regulatory issues. For necessary repairs and renovations, seek help from the agents to identify reliable local contractors who would get the work done efficiently.
Inspection and due diligence
Hiring professional inspectors is recommended to evaluate the properties condition in depth, including structural integrity, electrical systems, plumbing and pest infestations. Ensure that there are no legal issues on the property with a thorough title search. Do not forget to check for environmental concerns like soil contamination or proximity to hazardous sites.
Exit strategy
Analyse the liquidity situation of the local market. High liquidity would allow you to promptly sell off the property as needed. Take into account any costs associated with selling the property, such as agent fees and capital gains taxes and time the sale well by considering the market conditions and your financial goals.
Technology and tools
Make use of the available technology to make the process easier. There are softwares available that can help you track rental payments, manage maintenance requests and communicate with tenants. For viewing potential properties and showing them to prospective tenants, consider setting up a virtual tour of the property. For market analysis, property listing and connecting with local professionals, it is best to leverage online real estate platforms.
Pros and cons of buying property in a city you don’t live in
Before you make the final call, here is a list of pros and cons for you to go through to decide better:
| Pros | Cons |
| Diversification: Investing in different locations reduces the risk of localised economic downturns on your portfolio and offer unique investment opportunities such as higher rentals yields and rapid appreciation. | Management challenges: Remote maintenance of property can be challenging and often expensive; communication gaps are common while coordinating maintenance and tenant issues. |
| Higher return potential: Investing in emerging markets yields substantial returns with time and can provide steady income streams. | Higher costs: Travelling might be inevitable at times, even in the case of remote management, thereby adding to the costs; property management firms might claim a share to a percentage of the rental income, reducing the net returns. |
| Economic stability: Investing in multiple markets can prove to be a hedge against local market volatility and protect against economic instability in your home city. | Lack of local knowledge: Awareness about local market trends and navigating through tax implications and rental regulations can be complex if not physically present. |
| Variety: It can provide access to diverse property types and investment opportunities, from commercial to rental. | Risk of fraud: Misrepresented property conditions and unscrupulous management companies are some common scams you might fall prey to in your absence from the city. |
| Potential tax benefits: You can benefit from the tax advantages of the city, like mortgage interest deductions, insurance, maintenance and management fees. | Economic and political risks: Local political and economic instability are risks that you might not be familiar with. |
| Lifestyle benefits: Owning such property can also be beneficial for personal use as a vacation home or temporary abode. | Tenant issues: Assessing tenant demands, managing vacancies and maintaining a good bond with tenants might be difficult from a distance. |
FAQs
How can I research the property market of a city I don’t live in?
Use market analysis reports from online real estate platforms and local news websites, consult local real estate professionals and review economic indicators like job growth and population trends.
How do I manage property remotely?
To manage property remotely, hire a reputable local property management firm, utilise available technology to track payments and manage requests, make sure to establish clear communication and plan periodic visits to the property.
What are the legal considerations for investing in property in another city?
Make sure to have proper understanding of local property laws, zoning and rental regulations and the applicable taxes, and get all the agreements reviewed by a local attorney.
How do I finance a property investment in a different city?
Understand competitive rates and terms in the city you’re investing in, explore private lenders and investment groups and consult a financial advisor for the best option for you.
How do I ensure that the property I plan to invest in is in good condition?
Consider hiring certified inspectors for insights on the condition of the property, get a detailed view remotely using virtual technology, review inspection reports and property history thoroughly and have a trusted local contact to verify the condition of the property in person.
What should I consider while choosing a property management company?
Take into consideration the reputation and track record of the company, the kind of services offered, the fee structure and their communication practices and responsiveness to inquiries.
How can I minimise risks when investing in property remotely?
Diversification, thorough research, professional advice, insurance and a well-planned exit strategy can help minimise risks while investing in property remotely.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
