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There are essentially two ways to invest in real estate. One is to invest through direct cash and the other one is to invest through an Installments plan.
We can further classify these two options as under:
- Possession plots on cash.
- Non Possession plots on cash.
- Non possession Plots on installments.
- Constructed properties on cash.
- Under Construction properties (Houses, apartments, shops) on installments.
Generally, builders launch installment plans as convenient for those who can’t afford to pay the whole sum upfront. However, many people use it as leverage while investing. It helps them gain big returns against their small amount of investment. So, it’s a good idea to invest smartly using an installment plan even if you’ve enough cash.
Installment Vs Cash Investments
Before we proceed further, let us see the general advantages and disadvantages of real estate investment in cash, or through installments.
Merits of real estate investments on installment
Most importantly, you can buy a property even if you don’t have the complete payment. Making it convenient for you to save and pay as you go.
Since you will be paying the price already decided in your installment plan. You will get the leverage when property prices will rise by the passage of time.
It allows you to buy more properties within the same amount and you have the flexibility to liquidate them partially on profit later.
Houses or Apartments under Construction on installments are usually available at less or equal price than similar possession properties.
You can take advantage of Dollar appreciation if it happens during that time period.
Demerits of real estate investments on installment
In general, the prices of plots on installment are but higher as compared to the cash ones. You’ve to pay around 10 to 25% more price on installment than buying the same property in cash.
Buying a cash property is more secure in a way you can get instant possession unlike purchasing property on installment which is yet to develop.
The Comparison
If you’re short of capital then the choice is quite obvious, you ultimately will have to go with installment options. However, if you’ve got the cash, it’s the right time for you to evaluate each factor about which type of investment will be lucrative for you.
Possession plots on Cash
Having cash in hand will open many opportunities for you in the real estate market. You will be able to take benefit from speculative trading and can instantly enjoy the market boom.
However, real estate investments can never be a bed of roses. There is always a risk factor and losses involved on parallel. For instance, purchasing a plot in an area that has already reached its full potential will give you no benefit and it’s like freezing your capital.
Non-possession plots on cash
One of the most frequently asked questions is should we buy property in cash which is available in installments? It’s not economically beneficial to buy property in cash if it’s available on installment. The reason behind is builders offer a very minimal discount on cash which is usually around 10%. This discount rate is quite low when compared to the installment plan. Therefore, it’s better to pay installments over a decided period. But that’s not recommended in cases where the decided installment period is as low as one year.
Plots on Installments
There are many approaches to get the benefit of purchasing plots through installment plans. You can strengthen your standing and invest in multiple options; all you need is to formulate a plan including:
- Estimated appreciation of the plots in future
- How long you are able to hold property with all precautions regarding loss.
- A good plan of sale on premium
- A backup plan in case Plan A doesn’t work.
So far everything is looking convenient, but you have to be vigilant. The risk associated with these investments is that underdeveloped societies require a decade or more than that in some cases. But if you’re efficient enough, you can take benefit of investment bubbles within this span to make a lucrative deal.
Constructed properties on cash
Purchasing a mature property is unarguably always a good option to produce solid cash flows. Most importantly, it opens the door of rental incomes which is really important in real estate investment. However, acquiring a mature property is not a piece of cake for many, obviously due to financial constraints. Therefore, speculative investment in plots remains the handiest real estate investment in Pakistan.
Please note that a handy option doesn’t mean always successful as well. If we talk about stats, the success ratio of people who invest in rental income-generating properties is far better than that of those who invested in plots.
Under construction properties on installments
While investing through installment plans, plots aren’t the only option you have. You can also consider under-construction projects such as houses, malls, apartments, etc. These investments have their own set of benefits such as:
- Usually apartments, malls or houses are constructed in already matured areas which means you’re investing in a mature property. Apartments, houses or Malls are usually made in areas which are already mature. So technically you are investing in an already mature property.
- The constructed projects usually take less time to mature as compared to societies which have their developments underway. The constructed projects can take any span ranging from 3 to 6 years to fully develop. However, this span is far less than that of projects which are yet to construct and will take almost a decade to get mature.
- The rates of property increase by the passage of time in a predictable pattern as the construction progresses. It makes it convenient for investors to plan and take exit with lucrative deal.
- You will be getting an asset as product of your investment which can be rented out and used to generate a steady flow of income.
The only significant demerit of this investment is that the resales are usually low as that of plots. The reason behind slow resale is that generally, these properties are end-user properties. The genuine buyers purchased it through the natural gain process. Therefore, they usually don’t sell it as investors do after getting a good opportunity to exit. However, this negative aspect is also improving gradually as the investors are getting more and more involved and the construction trend is rapidly increasing across the country.
How to be a Winner?
Considering the facts that we stated above, we can say the winner be the one of opting for construction projects on installment followed by the rental income-generating properties on cash. Properties during construction usually add capital gain excess by 50% and in the end, the final product will generate cash flows which is not likely in the case of plots.
As per the past trends of Pakistan’s property market, plots investments in Pakistan have the legacy of loss or zero growth. Once you’re stuck, you will have to wait for almost 5 years before you step further to liquidate your property.