Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.

About the Class
We bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.

Chapter 7 Lesson C - Investing in Real Estates and Precious Metals.
In this lesson we will see the various factors that have to be considered while going in for a real estate investment.

Investment in real estate is considered to be a very sound investment. The various advantages of this investment are

• The value of property generally appreciates with the passing of each year and hence it is considered to be a safe and secure investment.

• The interest paid by way of mortgage on the property is tax deductible for residential as well as commercial properties.

• Investing in real estates helps to hedge against inflation as both the values of the property as well as returns like rent increase.

• The value of building depreciates in book value each year and this can be claimed as depreciation by way of deduction from the gross income from business.

• By taking loans to purchase property you can enhance your returns with the help of borrowed funds. This will fetch you higher returns on the cash invested.

• Investment in real estate could also be investment in land as well as farmhouses where it acts as not only as an investment but also as a source of leisure.

Types of Real Estate investments.

• Undeveloped Land.
• Residential house property.
• Commercial properties like office complexes, industrial estates and shopping complexes.

Factors to be considered while going in for a real estate purchase.

• Go in for a property whose price is affordable.
• The property should be such that it can be maintained easily.
• Choose a location, which is accessible and has the potential to develop within a reasonable time.
• If you are going in for a second purchase see that it is in good condition.
• If you intend buying a property, which has to be altered, determine whether the cost will not exceed the increase in value.
• Buy a property, which has the capacity to generate revenue. Take into consideration the rent it will fetch.
• Plan and determine your financing options and choose one that suits you best.
• Work out the before-tax and after-tax cash flows.
• In case of investments in lands check whether they will need any maintenance and whether they can be managed easily.

An important point to remember is that a real estate investment is not liquid. It is therefore necessary to have at least one- third of your gross income in liquid funds to fall back on.

Determining the cash flow from real estate.
Before investing in any real estate property work out the cash flow on the property. This will help you to find out the return on investment.

• Find out how much rent the property will fetch based on the rents charged on similar properties in that locality. Calculate the annual rent receivable based on this.

• From the annual rent deduct expenses likely to be incurred. These expenses include repairs and maintenance, property tax, water tax, and any insurance. This will give you the net operating income.

• From this amount deduct your principal and interest repayments. This will be your before- tax cash flow.

• From the before-tax cash flow deduct tax at the rate of 30 % to arrive at your after-tax cash flow.

• The above is calculated without taking into consideration any appreciation in the value of the property.

Valuation of a property that produces income.
There are different methods to find out the estimated value of a property that produces income.

• Gross income multiplier.
  This is calculated as a percentage of the purchase price and the gross rental value, which is without deduction of expenses.
• Net income multiplier.
  This is calculated as a percentage of the purchase price and the net operating income, which will be after deduction of operating expenses.
• Capitalisation rate.
  This rate is the reciprocal of the net income multiplier. The higher the rate the lower will be the risk to the investor.
• Discounted cash flow.
  Here the present value method is used, where the real estate investment will be the present worth of the future after-tax cash flows from the investments, discounted at the rate of return required by the investor.

Investing in precious metals and precious stones.
Gold and silver are the precious metals suitable for investments. Platinum is recently picking up. These are held not only for their money value, but also for their aesthetic value. In India investing in gold has been an age long tradition which still holds good.

Investing in gold takes the form of investing in gold coins or as jewellery. The pure gold is called 24-carat gold and the highest quality silver jewellery is hundred percent fine silver where there is no mixing of other metals. The prices of gold and silver keep changing depending on the demand and supply of these metals in the worldwide markets.

Investing in precious stones.
Diamonds, rubies, emeralds and sapphires are precious stones. Among these, diamonds have been regarded as investments for a longer time and are worth more per carat than any other precious stones. In comparison with investments in precious stones, investment in precious metals are more liquid.

Investing in art objects and collectibles.
In recent years the demand for genuine antiques has increased with the increase in the number of individuals as well as corporate purchasers. These are considered good investments because of the increasing demand and limited supply. Investment in art objects is not liquid though and the investor should be ready to hold the art object for at least ten years. But before venturing into investing in art objects be sure to study the product and the market or take the help of experts.

Similarly, collectibles like coins, stamps etc. have also started enjoying enhanced interest. Investment in each of these real assets is unique and requires a detailed study before investment.

Questions on Chapter 7 Lesson B
1. What are financial assets and real assets?
2. What are the effects of the changes in the economy on investments?