The rich have always known that the way to make money without doing much at all is investing in real estate. Unfortunately, those who are not strapped down with bags of money have never considered that they too may use the avenue of real estate investment to deepen their pockets.

In fact, the real estate investors club seems a pretty secretive society. How deep are your pockets? They ask you before they consider letting you in. If you don't have tens of lacs or crores we don't have much for you, they say. And they keep all their learnings to themselves.

Over the last decade real estate investments in India have given great returns. And everyone should be able to access this opportunity equipped with the right understanding and confidence.

Investing in real estate in India requires work, focus and an understanding of all aspects of the real estate opportunities available. This series will empower you with the knowledge and confidence you need to make good real estate investments.

In the US, and other developed nations, real estate investment is lucrative in a whole different way. You invest in a property and with an 8-10% yield in rental prices you can not only cover any mortgage payments, but if you're smart you can end up with a decent extra income per month (I'll send out Mark's essay on this strategy for those of you who are in the global north).

In India, however, things are very different. The return on investments from rental yields on residential properties, is one of the lowest anywhere in the world. It ranges from 2-3% across the country, although higher for commercial properties. Investing for earning from rent itself is therefore not a profitable idea.

But it's not specifically rent we buy real estate for, it's primarily the capital appreciation. If you count capital appreciation the returns can surge to 20% compounded annually - one of the highest rates of return in the world.

And in a country developing as fast as ours, our real estate prices keep going up, up, up.

Making investments in real estate in India, albeit tricky sometimes, is hugely lucrative when done right. So in our research we pursued and grilled several top real estate investors and developers until we got the real story. And that is this:

With a few lac rupees and a great deal of detective work you can invest in some incredibly profitable properties. You just have to know where to look.

And there are the 3 basic tenets you must remember before jumping into the deep end of the real estate pool:

1st Essential Rule Real Estate is a long term investment - longer than stocks, longer than investing in business. If you're patient, if you're not stretched, only then this is for you. Remember, when you are buying real estate, that it might take several years for your investment to bear fruit, and make your decision accordingly.

2nd Essential Rule Real estate for the purpose of investment should not be bought with a loan. Debt is okay if it's your first house to live-in, but a house purely for investment should not put you into debt. Simply because, this is not a regular income opportunity, it's not predictable, and it won't help you make regular payments on your loan.

3rd Essential Rule Know what you are buying. Do your research and always buy the best quality. Don't get swayed by opportunities that friends and family, or your bank is telling you about. Your own research is invaluable. Discounts in real estate usually mean something is wrong, and should be taken as a warning to be careful.

And that's what we are here to tell you how to do - to find the right property, at the right price, buy it at the right time and sell it when it's time.

We have been gathering research and advice, connecting with really smart real estate gurus from around the world, all of which you will get over this series.

We also got some great input from Ashwin Ramesh, a respected real estate advisor, who has agreed to share with us some great advice, from his 20+ years of focus on real estate investment.

Better yet, we reached out to Equitymaster, who had Ashwin speak at their very successful annual conference - The Equitymaster Investor Conference 2014.

This conference is a limited attendance event that costs Rs 10,000 to attend. But I reached out to Rahul Goel, our friend at Equitymaster and requested him to make an exception for us. We have obtained exclusive access and their blessing to share Ashwin's presentation with Wealth Builders Club members only.

Today, you will hear Ashwin's thoughts on direct real estate investment in the following three asset classes:

Investing in land parcels Commercial real estate investing Buying units pre-construction

Ashwin Ramesh on direct investment opportunities

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Source: Equitymaster Agora Research Private Limited

Ashwin is very clear here, as far as direct real estate investment is concerned - these are the three areas that are profitable.

Land is the most complicated - but also the most profitable with a very long term horizon.

Pre-fabrication flats can be profitable in the short to medium term.

And commercial real estate is an option for investing for rent income.

You will be hearing more from our real estate gurus Ashwin, Mark, and other experts later in the series. You will learn more about these and other asset classes, as well as receive a wealth of simple to understand and follow advice on real estate investment from across the board. So stay tuned.

To your wealth-building journey,

Anisa Virji Managing Editor, Wealth Builders Club

Ashwin Ramesh Video Transcript:

So I am going to start off with pure land.

The way history has shown us is the last 20, 30, 40 years I guess globally as well, that land has actually given the highest returns over time and the reason is very simple, it is not being made any more.

If you see over time construction cost does increase with a slight escalation of maybe 5,7,10% every year, that is because of material input cost, but land by itself because just the sheer number of people that come in from smaller towns to bigger towns, etcetera there is pressure on land.

So, I think land as an investment opportunity is very much real, it does give good returns, it could be used as a weekend home in the meanwhile, it can be used for future expansion of families as days go by, but we have to worry about certain things.

Sorry, before I come to the challenges I will just talk about – you can either buy land in acreage form outside towns like Panvel, Alibagh, Mysore, outside of Bangalore or you could buy it in what we call plotted schemes which developers launch and the difference is actually very simple.

In one case you are exposed to titles, zoning, usages, security which are the issues of raw land whereas in a developer’s land layout he organizes all of that. You have the security, he probably gives you a certain title certificate and you are kind of just worried about at some point the escalation or the appreciation.

The difference between the two in terms of costing is very simple. You can do the rough math yourself. If you want to go to an area and find out what the rough land price per acre would be, say a 100 for an acre for example just so that you know that when you start dividing that into smaller plots you lose about 35-40% in terms of roads, RGs, wastages, so the net area which you can actually sell or buy is about 60-65% of the gross area. So raw land therefore gets indexed to that much higher and it costs about 50, 60, 70 lakhs per acre for development depending on what kind of quality the developer is giving you. So that gives you a sense of what his cost would be as against raw land and what he is then charging over and above that is finance cost, gestation and some margin.

So I gave you an idea of how far or how much the gap is between a raw land and a developer’s land. I will also talk to you about security and title, because those are issues which we really have issues within India. Encroachments do happen, neighboring boundary disputes do take place, so you have to be careful about that.

Our title system is not so great, you have people who off record do sell land multiple times, you have family disputes, some people in the family have not got their share, some have, so they come back and hassle you later, but regardless if you did your due diligence and spent time in those markets you can overcome these challenges and over time land has done very well.

The next asset class in a way would be the commercial real estate.

If you remember going back, we had the rent control laws and so people were scared to give their property out on rent, because it never came back, but over the years that has been diluted and in a way the balance of equation has shifted from the tenant to the owner, you can get your property back provided you give it to a corporate who has got a bit of capital, public sector undertaking, etc.

So in that sense the worry about getting it back is less and fortunately the model of the business has changed. In the years earlier corporates bought their own properties, nowadays they tend to rent it, so you have a good multinational tenant or a good local company who has a long -erm tenure, 10, 20, 30 year contracts maybe in some cases and you can just ride over time the appreciation and the escalation in rentals.

So typically when you start renting out or buying a pre-leased asset as we call it, in markets like Bombay you get a return of about 10-11%. So you pay a Rs. 100 per square foot and you get about Rs. 10-11 over a year in rental incomes. When I say 100 I am talking about the acquisition cost, the stamp duties, the incidental costs along with it minus the deposits that you get from the tenant.

You roughly get about six months, nine months advance rent as deposit, so net cash outflow is at 100 and when you get your rental income you are getting the cross rent from which you have to pay outgoings, municipal taxes, etcetera, etcetera, so you come to a net rent and the two give you the actual yield.

So Bombay gives you about 10-11% , NCR which is Gurgaon and Noida gives you a much lower return of about 8%, Bangalore is also about 9.5-10.5. That itself is not so high, when you add the escalation typically contracts have about a 15% escalation every three years. So you had that five-year annual escalation on rentals and over time usually appreciation of the property itself about another 3-5%, you get to somewhere around 18-20% if all goes well.

If you need money in a hurry you can even do a lease rental discounting. So you go to an HDFC or a bank and you say I have got this rental contract and every month I am getting a check, they will effectively discount it downwards to today’s net present value and give you a check upfront.

That is what a lot of people also do, I do not recommend it because sometimes you can have vacancy periods, that is a risk. Sometimes you have a client who you think is there long term but his business plan might change, costings for him might change, he may get better opportunities at lower rates, you will have a situation where you have vacancies. Roughly in the country today on an annual or on a gross level there is about 400 million square feet of commercial space and about 20-22% is vacant, so that is a risk.

The other issue that you have to worry about especially in Bombay is the municipal taxes. It is unfortunately very, very opaque, there is a system but it is really not being used, so there are two properties in the same building, one could pay Rs. 2.50 municipal taxes, somebody would pay Rs. 8 municipal taxes.

So that is a challenge, but again with some time and effort put in you can sort that out.

The next again asset class or vertical within real estate I would talk about is buying units under construction from a developer or pre-permits or pre-construction.

So a developer typically would offload about 5, 10, 15% of his overall stock very early in the game to investors to generate cash flow. At that time you really do not have plans, you do not have sizes, you do not have a lot of real data which a user would need.

So you have to go there and understand very broad concepts and in a way negotiate things like payment, terms of payment, carpet ratio to saleable ratio, transfer fees, but net-net those sort of investments are really very simple in a way.

You are buying stock in what you call a kacha form before it is ready for a user, you are paying under construction installments per slab or every few slabs and by the time the building is more or less ready post slabs and during painting maybe, pre-OC or even after OC, you can then offload that in the market to the real user who is going to come in with a housing loan maybe or maybe not.

So the exits are pretty visible, it is just that there could be delays in construction because of either developer funding himself or permits being delayed or just environment.

The huge challenge here is the developer himself. You have to be very sure because at that point there is no re-cost, you have to trust the man, see his track record, see his investor friendly, try and figure out does he have the balance sheet to complete the project, is he compliant with local rules, does he have permission for ten, is he building 20, things like that, but let us say again in each case you would just spend more time on it, network a little bit, figure out what other people have done, but the returns in this kind of investment are upwards of 20%.

You could have a few rotten eggs, but you have to then do a sort of diversification. These are the few broad ways of doing direct investments.

To be a successful investor in real estate “you need to have money, knowledge, and time,” says Mark Ford. In our first essay in the Real Estate series, we talked about what we called the essential rules of investing in real estate in India.

One of these essential rules stated:

Know what you are buying. Do your research and always buy the best quality. Don't get swayed by opportunities that friends and family, or your bank is telling you about. Your own research is invaluable.

People often think buying right in real estate means buying property when it seems cheap. But that is certainly not as important as buying the best quality you can get within your budget, by identifying the right property in the right locality and the right market

The 'right' property has many different definitions.

Whether it is urban or rural, downtown or suburbs, in densely populated or uninhabited space, in a residential or commercial area, pre-launch or been lived-in for years - for your own peculiar context you have to seek out the right property for you.

Let's walk through some of the characteristics that make a property right for you.

The right property for investment is one that's near you.

It is one you can keep your eyes on, and stay connected with. Or at least one where you have friends or close family to keep an eye out for you.

Amit once bought a property just outside his city, Mumbai, early in his life. He then moved away to live in the US for a while, and never really got a chance to visit, let alone develop his land.

He got a call from his friend and associate, the real estate developer Ashwin Ramesh, one day saying, 'I'm glad to see you're building a wall around your land finally.'

“A wall?” asked Amit. “I'm not doing anything to that land.”

“Well, somebody is.”

So on his next visit to Mumbai Amit went to see his land. It was, as he had been warned, walled in by a wall he hadn't built. He found that somebody else just took over the land, built a wall, paid someone money probably, and said the land is his and till today it is his because Amit's documents were overwritten by his.

'You may have papers, the man said, but in India possession is 9/10ths of the law. There was nothing Amit could do about it, except learn his first lesson: Buy property where you can access it.

This may be an extreme example, but this idea is sound. Every real estate investor I spoke to reiterated this point to us. Buy real estate in a place that is close to you (or familiar to you).

Don't get carried away by people talking about buying property all over the place, vacation homes in exotic places, etc. A property that is far from you can become a noose around your neck.

A friend of ours in Mumbai, trying to unload a property in Goa, had to go back and forth so much, meeting buyers, meeting the society people, meeting lawyers, etc. that not only was he tired of Goa and never wanted to go back, but he also swore off investing in any kind of 'vacation' or 'weekend' home.

You don't know what's going on when you're not there - with the development, with the neighbourhood, encroachment, zoning, etc. You need to have your ears to the ground. And if you decide to liquidate it becomes incredibly hard trying to meet buyers, figure out the right price and get a good deal.

We simply don't have a property management system that's reliable enough to buy a place and leave it up to someone else to manage. Yet. This is changing as we speak, but until that happens it is not viable to invest far from home.

However, investing away from you can work for commercial property, because offices are managed by reliable property management companies.

So the right property for investment is one that is accessible to you, that you can reach easily if need be, that you can visit from time-to-time, protect from encroachment, and offload when you need to without too much effort.

Factors for Identifying the Right Property.

Few people are lucky enough to be able to afford property in the poshest areas of town. For everyone else, there are some things you need to figure out about an area before you invest in a property there. There are some factors of the right property that can help you do this.

The right property is well-connected - roads and railways make a property lucrative.

Until a few years ago, the Eastern suburbs of Mumbai such as Chembur and Wadala were not on property buyers radars. Now, in the last few years the property prices have shot up. The primary reason for this growth was connectivity - a monorail, a metro station, a link road and an expressway resulted in property prices shooting up by almost 30% in two years.

A building near a highway, expressway, freeway, a railway station, a metro station or any station (except too close to the airport because of the noise of planes flying overhead all night long) increases the value of a place, makes it convenient to live in, and makes it more in demand.

If you know that a metro is coming up in a neighbourhood, as it is in several areas of several cities across India, the property prices will be lifted and make for a valuable investment. Although the construction of a metro could make for short-term annoyances, the long-term advantage would be great.

The right property is in an upcoming locality, where there is potential for growth.

As with Chembur, other areas of towns are growing, which will lead to greater demand, and subsequently appreciating prices. A growing, or 'gentrifying' area is one where people are moving to, not away from.

[Gentrification is a term in urban planning which refers to shifts in an urban community lifestyle and an increasing share of wealthier residents and/or businesses and increasing property values.]

This means that although the places are now affordable, and the locality may not be considered good, it is changing slowly so that people with increasing incomes are moving into it, and in a few years the demand to live in that area will increase, and prices will go up increasing the value of your investment.

One indicator of an improving locality is more stores, supermarkets, malls and other businesses opening in the area. A new gym, banks,restaurants, even a new hospital can indicate upward movement in the neighbourhood. And of course high-rise buildings indicate people want to move there to live.

So if a new building complex is under construction in a previously unnoticed area by a well-respected developer, chances are other developers will follow and the area will soon become a coveted place for young professionals and families to live in.

The right property is in a fully-occupied and safe area.

If you're looking at a neighbourhood and it seems deserted, or the houses are half-empty then it wouldn't be much of an investment no matter how cheap you can get it. If nobody wants to live there nobody will buy the place when you want to sell it.

So pick an area that is bustling with activity during the day. But, and this is an important point many people miss out on, also go by to check out the area at night. Make sure the streets are well-lit, if it seems safe to walk around in, perhaps there is a day and night chemist in the area.

You want to make sure the place you choose is a safe one. Would you be willing to live there with your family? If yes, you will also be able to sell that place to another family when you are ready to sell.

The right property is surrounded by the right amenities for the right neighbours.

It's important to get a sense of what kind of people live in the locality you are looking to buy in. Above we have said look at the neighbourhood, and now we are saying look at the neighbours to understand what their needs are.

If it is the kind of neighbourhood where single professionals are living, access to commercial areas such as office neighbourhoods, as well as entertainment such as bars and restaurants are important to them. For young families access to good schools and parks take on precedence. For retirees and older residents, access to hospitals, community centers and places of worship become important.

Understanding these distinctions helps you estimate the correct value of the property you plan to invest in.

You can search online portals for area ratings and reviews by residents. For example, in Mumbai, Brokers Please Excuse does a locality review. CommonFloor.com lists the facilities accessible around each property such as hospitals, schools, banks and malls that can be helpful. Magic Bricks has a comprehensive locality ratings and comparison tool that can be helpful in evaluating neighbourhoods. But remember, online searches can help you figure out what others are saying, but nothing replaces your own gut feeling when it comes to assessing an area, so if possible take a walk in the area you are looking at.

Understand demand and supply.

Demand for real estate in a particular area is inversely proportional to its supply. As the availability of real estate decreases, the valuation of property increases. In a growing (gentrifying) neighbourhood the population is changing and you can see it slowly changing into a popular neighbourhood where people want to move, increasing demand, which increases its prices.

So do your research. Knowledge is power - what you know decides how your investment will turn out. Keep tuned into what's happening on the ground. If you're considering a particular housing development project think about what you know about it? What do you know about the builder by reputation and history? What do you know about the municipal plans for the neighbourhood?

Whereas understanding the micro context of the place you are looking to buy is important to identifying the right property, it is as important to identify the right market for investment. Here again, we have Ashwin Ramesh, our real estate guru, talking about the kind of market we are in.

Understanding the context and the market are very important.

It's important to understand what the character of the market is in the place you plan to invest at any given time.

In a user-driven market, or buyers market, people are buying residential properties to live in. This means that although prices won't go up too much it is easy to sell property when you want to exit, because people actually need to buy homes to live in.

In an investor-driven market, the market can get very speculative, and therefore more complicated to invest in. In such a market, investor behavior drives the market. In a highly speculative market where there are many investors prices go up, but then there are no buyers and the investors end up stuck with property they can't offload.

So the market changes, and it's important to stay abreast of the dynamic in the market when you are thinking of investing.

Watch Ashwin explain the intricacies of real estate markets in this short video.

Ashwin Ramesh on understanding real estate markets

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Source: Equitymaster Agora Research Private Limited

Identifying the right property must therefore take into account various factors, such as the location, infrastructure, amenities, connectivity, demand and supply, and the current state of the market.

Before deciding on a property to purchase, you, the investor should assess these factors to get a fair valuation of your investment. Remember, taking the time and care to arm yourself with knowledge can lead to better returns, easy liquidity and more lucrative investments.

To your wealth-building journey,

Anisa Virji Managing Editor, Wealth Builders Club

PS: There are many more ideas for real estate investment to come. To help us understand what you need do send us your questions for our real estate guru Ashwin Ramesh as well.

Ashwin Ramesh Video Transcript:

I will talk to you about generally the kind of markets which we are right now in.

Residential overall across the country has slowed tremendously, more so in NCR area. The reason is very simple, prices have tripled and quadrupled and quintupled in the last two years, it is just not affordable and this sentiment is very poor.

As against that a Bangalore or a Pune are more steady but even there in some cases there is oversupply and an absorption issue.

In these markets again some are speculative in nature. NCR I will talk about a little bit, is highly, highly speculative. Bombay has some speculation element, New Bombay has a lot more and Southern India has a lot less. So as you go down from North to South there is more end-user driven demand as against speculative demand.

Now in good what you call tezi markets, speculation rises, price is much higher and you get a huge return, but in bad markets it is a serious issue.

What is happening now in the NCR area is that the last four, five years the system was that a developer would sell 100 apartments, 500 apartments, 1000 apartments in a day, a million square feet, that is ten lacs and a guy would go and give him 50 checks and he will be called the underwriter. He would give him 50 checks of 20,000 each, Rs. 50,000 each and the developer would then be very happy I have sold a million square feet. The underwriter would the next day sell 48 of those flats to different people and keep two for himself.

Now that is great while the going is good, but now what is going on is he is not able to find those 48 people and if he has found those 48 people they any case had the resources only to buy two or three apartments where they have gone and bought 20 apartments.

So today the developers are facing a serious cash flow issue, because the guys who they sold to do not have the resources to pay them for construction, so there are huge delays in construction and obviously there is a huge exit. So all these guys are coming back to market to resell and there is no buyer.

As against that a Bangalore-like market is more user-driven, who is more a home loan buyer, so there is less appreciation, it is much more steady but at least it is a solid market in the sense you can exit and you can see buildings coming up and being occupied.

Bombay has had a lot of the user market but the last few years had become investor driven, which is why again today in Bombay you are finding the user actually out-priced, most buyers are not users, they cannot afford it and the investors are stuck because they cannot find buyers to resell to.

In this essay, I am going to walk you through everything I know about how to determine the right price for any given property.

Don't worry: Estimating property price is not difficult. The challenge is to be thorough. If you don't do a bit of work, your estimates will be less reliable and you will end up paying too much. It's as simple as that.

To organize the data you will be collecting, you'll use a “price survey.” The price survey is a table that displays the key factors in determining property values in a given area.

To determine accurate prices, here are the three steps you need to take.

Step 1: Create a table like the one below. As you can see, this table identifies certain key characteristics that determine residential property values. These include location (always very important), the type of structure, the number of bedrooms and bathrooms, and the square footage.

As I've said in previous essays, I prefer single-family homes with three bedrooms and two baths. These are obviously more expensive than homes with just two bedrooms, but the extra bedroom makes them more desirable and therefore easier to rent or sell.

You're going to use this form to fill in the information you'll find. Here is an example of such a table:

Price Survey Address Type Sq. Feet BR/Bath Price per Sq Foot

Etc., for a dozen properties in all Average price per square foot: Rs

If you have the knowledge, you can create this table as a template on your computer in less than 10 minutes. If you don't know how to do it, get a friend or professional geek to set one up for you. It's a template you'll be able to use over and over again.

Step 2: Start driving, calling, and browsing.

This next step is collecting data. Begin by driving around the area you're considering. Get a feeling for the locality: the size of the homes, the income level of the residents, the proximity to schools and hospitals, the amount of traffic on the roads, etc.

You can't get a feeling for an area in a single drive-by. You will have to spend a half hour or so in the neighbourhoods at least a half-dozen times. Be sure to visit the area in the morning, at midday, and at night. And spend some time walking and speaking to the neighbours.

You can let them know you are thinking of buying a house in the area. Ask them frank questions about their experiences as residents. Take mental notes. After six such tours, you should have a very good idea if this is the kind of locality you and - better yet - a tenant or buyer would want.

Also, while you are driving around, take down any phone numbers of advertised properties you come across.

When you call the agent, broker or owner, ask for the key data on each property. You're looking for the size (in square feet) of the house, the number of bedrooms and bathrooms, the availability and kind of heating and air-conditioning, the availability of amenities such as pools, club house, etc.

You can also ask them about prices in that area. Not every agent will know these numbers. And some brokers, if they suspect you are a real estate investor, will exaggerate the prices, but you should ask nonetheless, because most of the time, brokers have a fair idea and will tell you the truth.

After you've gotten a feeling for the neighbourhood by the half-dozen visits and the necessary data from local brokers, you should double-check what you've learned by some online research.

There are a several websites that can be very helpful in finding rental and property values in your market. Here are a few:

housing.com magicbricks.com commonfloor.com

You should also locate and interview at least one real estate agent who specializes in selling and renting properties in your target area. He is an expert in estimating accurate prices. He will have a good feeling for how much you can expect to pay for every sort of property in that area.

In interviewing him, you can admit that you are an investor, or you can say you want to live there or rent. The former approach allows for a fuller, more detailed conversation. But there is always a chance that he won't be interested in speaking to you since he won't see you as a source of future business.

A good broker will be able to give you the actual asking prices in that area. Of course, what property owners are asking for and what they are getting might be two different numbers. This is another reason I personally prefer to be honest with the agent: I can ask about actual prices, not asking prices.

Another very important question you should ask is how long it normally takes to get a renter, or sell a property. As you can imagine, this is a very important factor in figuring out your exit strategy in case that becomes necessary.

Ask how long properties typically remain on the market once put there for that area. In some neighbourhoods, the term might be two or even three years. In other neighbourhoods, it might be only six months. This is important, because if you ever need money you need to know that you can sell your property easily.

You might think that contacting such an expert is the only thing you need to do. But I don't feel comfortable trusting any single source of information, especially when it is critical to my success.

I prefer to contact brokers after I've done the other work I've listed above. By that time, I already know a good deal about the area and I can ask better questions and better determine whether he is giving me reliable advice.

You can also get on the email lists of online real estate websites. Here prospective buyers, sellers, and renters can sign up for daily email alerts free of charge.

You can customize the daily email alert by price range, bedrooms, bathrooms, and area. These daily emails are pure gold. You'll get information on properties that come to market each day for your rent survey table.

As you take these steps, enter all of the relevant data into a journal. That data should include “hard” information that will go into your rent survey table and “soft” data (such as proximity to schools and hospitals, the sort of employment residents have, the amount of traffic in the area, etc.) that will be useful later when it comes to finding good tenants.

And keep all of this data in a safe place.

Step 3: Once you've collected at least a dozen rental quotes from making calls and browsing websites, you can fill out the table you created in Step 1. This will make it easy to analyze and compare the data on an apples-to-apples basis.

Making Sense of the Prices

As I said in the beginning, the purpose of the table is to be able to accurately estimate the price you can get for the kind of property you intend to buy.

Traffic, proximity to schools and hospitals, the class of resident, the condition of the house, and the availability of amenities are all examples of soft data I've already mentioned.

Another factor is curbside appeal, and building complexes. Houses that look good at a glance and are in nice areas and building societies are usually easier to rent and sell. (in our last essay you learned about urban gentrification)

These soft data do matter. But as I said, they are only 10-20% of the equation. The hard data (location, number of bedrooms and number of baths, etc.) will always be the most important factors.

There is a reason that soft data doesn't matter as much. It is because the typical renter or buyer of this sort of property is cash-strapped. He won't be able to pay extra for these extra benefits.

So that's one important “inside” tip for you. If you can buy properties in great condition with extras at or below “average” prices, then do so. But don't pay much extra for these. You won't get the return from them.

Another factor you should consider is the physical condition of the property. Both inside and out. As a general rule, older houses tend to require more maintenance. But many newer houses may be in poor condition and in need of repair. Keep these factors in mind.

You will notice that my table takes note of the size of the property in terms of square footage. The size of the house is as important as the number of bedrooms and baths, etc. Later on, if and when you decide to sell the house, it can become important. So it's a good idea to include that in your comparison table.

Paying Attention to the Loading Factor

In some parts of India, especially when you buy from developers, an important thing to be careful about, according to Ashwin Ramesh, our real estate guru here at WBC India, is the loading factor.

Loading is the phenomenon where you buy an apartment of, say, three bedrooms, which they say is a 1,650 square feet. The actual use and what we call carpet area, the floor to floor carpet area, is only a 1,000 square feet. So a loading of 65-70% has become standard in parts of India such as Mumbai in the newer buildings and developers have a way to play with words.

Nowadays they use a term called usable carpet, where the carpet area is actually even less than the usable carpet. So if you go to a new building to see a sample show flat what you need to see is outside the bathroom they have got this little duct where the pipes should be running, or they would have a little service area outside the utilities area - those are what they include in your usable carpet area which technically are outside of FSI, so they have not paid for them.

So, therefore, what really happens is when you are buying 165 square feet, even if they say the carpet area is 100, if you exclude those ducts and dry areas, then the real relevant carpet area actually becomes even less - about 90, because that is the FSI carpet. So now on that 165 you are getting the loading is now greater than 65, maybe 75 or some such number. When you buy, you must be aware of the real price you are paying per square foot.

Also remember to add all costs in the price per square foot including the acquisition cost, the stamp duties, the incidental costs, taxes, etc.

What Residential Renters & Buyers Look For

Let's look at everything we've just discussed from a different point of view. What does a buyer look for? The location is usually the residential buyer's first consideration. He knows that the quality of the neighborhood is going to have the greatest impact on the quality of his family's experience there.

The next most important factor is the number of bedrooms he needs. Obviously, a couple with three children will much prefer to rent a house with three bedrooms than two.

Fill in details for at least a dozen properties on your table. Then calculate the per square foot selling price for each one as we showed you above. You'll quickly develop a sense for what any given property type could rent for.

Go Figure

Now you have collected the data on several properties. You've determined the property economics of the neighborhood you're looking in. Now you can calculate, with some precision, just how much you should pay for any piece of property in that neighborhood.

When I say “pay,” I mean to include both the purchase price of the property and any money you need to spend on getting it renovated, etc.

Now It's Your Turn

Identify a small area in your locality you'd like to buy properties in. Go through the three steps I've listed above to gather price details for these properties.

Next, use some of the same websites and agencies above to find out what properties are available for sale in this same area.

Here's what you will pay for a property = Purchase price + closing costs + renovations needed

If all of that seems sound to you, you've likely found a decent candidate for a property.

In my next lesson, I'm going to show you how to negotiate for your property so that you can pay the best price possible.

Best, Mark

Let's briefly review where we are. We've talked about the three essential rules for investing in real estate in India. We've also gone over the details for identifying the right opportunity for investment in the right market, and determining the price you should pay for a property .

If you've done all of this, the next step - making an offer - will be relatively easy.

Most amateur real estate investors get anxious about making offers because they don't know - really know - how much they should offer. Since you've already done your homework by figuring out a price, that won't be a problem for you.

You know the absolute most you're willing to pay. If you can't buy the property at that price, you are going to walk away from it. Right?

Well, the answer had better be right.

What you may find is that after doing all of that work you are tempted to bid the price just a little higher than your limit, because you don't want to “waste” all of the work you've put into it.

Don't do it!

Thank you for writing these lessons. I have been implementing your suggestions and have been pleased with the results. Club member LS. There's an old saying that applies here: Miss one bus, and another one will come along. And remember another saying: You make your money when you buy, not when you sell.

To buy property at the right price, you must be a good negotiator. But unless you are emotionally ready to walk away, you will not be able to negotiate well.

A good broker or a savvy seller will sense your eagerness to buy and take advantage of it. You're not going to let that happen. Why not? Because you'll have two advantages.

One, you're going to be prepared, knowing exactly what the property you want is worth and how much you want to pay. Two, you're going to be aware of some of the mistakes people make when negotiating.

Figuring out a Property's Value

Let's start by talking about how you'll know what the property you're looking at is worth and how much you want to pay.

The best way to avoid spending too much on your property is to know what similar homes have recently sold for. You learn this by looking at sales “comps.”

Comps are recently sold homes that are “comparable” to the one you're considering. They have a similar number of bedrooms, bathrooms, square feet, and so on. You use the “comp” sale price as a rough estimate for how much the property you're looking at is worth. Then you'll know what you should pay for your property.

We talked about how to find the sale prices of these comparable homes in the last essay.

Remember two important things: One, the comp homes must be in the same neighborhood as the property you're considering (or very close to it). Two, make sure the sale of the comp home took place in the last six months or so. A sale a few years ago won't reflect current market value of these homes.

Step 1 After narrowing it down using “neighborhood” and “recent sales,” search for homes that are as similar to yours as possible. Remember, similar number of bedrooms, bathrooms, square feet, style, and so on. Find as many good sales comps as possible.

Step 2 Then look at how much these homes sold for on a price-per-square-foot basis. For example, if a comparable house sold for 1,000,000 and it was 1,500 square feet, you'd divide 1,000,000 by 1,500 to get Rs 666 per square foot.

That's its price per square foot. Ideally, you'll identify about 6-7 comps and their prices per square foot.

Step 3 Now you can use an average of these “price per square foot” values to estimate your property's value. For example, let's say you find five comps. To determine the average, add up all five per-square-foot selling prices and divide by five. This way you'll get an average price per square foot.

Step 4 Take the square footage of your rental property-let's say it's 1,650 square feet. Just multiply the “average price per square foot” value by the square feet of the property. In this case, Rs 512 x 1,650. You'd get Rs 8,448,000. This is what we'll call the fair market value of the rental property you're looking at.

Okay, you've found comps and used them to identify the fair market value for the property you want. What's next?

Your Initial Offer Price

Do you offer the seller the exact fair market value? Or do you play hardball and offer something way below it?

There are two theories on this.

The first is to begin by making very low offers in the hope you will get an amazing bargain. This can work in buyers' markets (when there are more sellers than buyers), but it won't work in more competitive markets. This is because sellers will see you as a “bottom fisher”-i.e., someone who is interested only in taking advantage of weak sellers.

The problem with very low offers is nobody-especially sellers-likes a bottom fisher. I've been on the other side of the situation several times, and I always have the same response. They give me a low-ball offer, and I respond by raising the ante.

Here is how that works.

Twenty years ago, I was selling my house in a nice neighborhood in Boca Raton, Florida. I had it listed for $900,000 - a fair value. This one particular bottom fisher offered me $700,000. I was so insulted that I countered - not at $850,000 or $875,000, as some might expect. Instead, I actually raised my price to $925,000. I told the broker that if he didn't want to pay $925,000, I'd raise it to $950,000.

The guy walked away (I like to think he ran away).

But even if he came back and met my price, I wouldn't have sold it to him. Why? I was insulted. The market wasn't that bad. His offer price was flat-out unreasonable.

I sold the property six months later for $950,000, higher than my original price.

Writing that reminds me of a similar story - but from the buyer's side.

About 15 years ago, I wanted to buy a little house next door to the one I have now on Ocean Boulevard in Delray Beach. The house itself wasn't too valuable, but the lot at that time was worth about $1.75 million.

The owner had an inflated idea of how much it was worth simply because it was located across the street from a beautiful stretch of beach. He wanted $3 million for it, which irked me, so I told his broker that I was reducing my bid to $1.6 million.

The seller was not pleased.

He countered at $2.5 million. I responded by saying I would now pay no more than $1.5 million, and if he didn't accept my bid, I'd lower my offer by another $100,000.

To make a long story short, I bought it nine months later for $1.3 million. Had he accepted my initial bid, he'd have made another half-million.

What is the moral of these two stories?

Be reasonable.

Don't make an offer so low, or list a price so high, that you insult the person you are doing business with. Unless he's an idiot, it will cost you only time and money.

This leads us to my second theory of making offers. It's my own philosophy, and it's what I believe is the better way. Using the fair market value I found using comps, I then knock off 10% and use this new value as my initial offer price.

There are two immediate benefits to this.

First, a 10% discount leaves me room to adjust my price upward if the seller wants to negotiate. It gives me breathing room. If my initial offer price is the fair market value I just found, if the seller negotiates for more (which they almost certainly will), I'll already be paying more than the fair market value.

The second benefit is that it shows the seller that I'm a serious buyer. The seller is more likely to recognize me as a legitimate, interested buyer-not just a bottom fisher.

As my story above reveals, I know from experience that lowball offers will turn off a seller in an instant. No one likes to feel taken advantage of.

That's how I figure out my initial offer price. And it's how I recommend you do it.

What's next? Make the offer and start negotiating? Not yet.

As I wrote earlier, first, we need to be aware of some of the mistakes people make when negotiating.

Avoiding Common Negotiating Mistakes

There's a negotiating principal called “anchoring.” An anchor, in this context, is a sort of “stake in the ground.” It's a central value around which much of the negotiating happens.

The main anchor is, most times, the asking price of the home. Many uneducated buyers will anchor their offer prices around this asking price - rather than the fair market value you calculated earlier.

But just because an owner wants a bazillion dollars for the home doesn't mean it's worth it!

Of course, you know this. And you're not going to anchor your offer price like that since you just found the fair market value. But it's not enough to go into the negotiation with just the “10% off” fair market value as your initial offer price.

I have wanted to buy rental real estate for a long time but have been too scared to pull the trigger. A short sale opportunity recently presented itself and Mark's guidance gave me the confidence to go for it. Club member MM. Why not?

Because you'll end up anchoring your final “I'll accept this” price to your fair market value number. That's a mistake.

The fair market value is the MOST you should ever pay. It's not what you WANT to pay. But when people go into a negotiation with only this number in mind, they tend to “negotiate up” to it. It's human nature, because it's the only established focal point.

I want you to make a new focal point. One where you estimate how much this property could make you. Calculate the return on investment that you desire from this investment.

Looking at this and factoring in the various sale prices of the property, what price do you want to pay to hit your desired return? Obviously, the bigger return the better. But being realistic, what price will you be happy settling on?

This price should be your anchor. This is the number I want you to fight for. Do NOT anchor at the fair market value. Because the closer you get to that number, the less profitable your investment becomes.

At this point, I want you to know 1) the fair market value of the home you are considering 2) your initial offer price 3) the sale price you're going to anchor on and fight for.

Okay, are we finally ready to make our offer? Almost. Just one more thing to watch out for.

Don't Fall in Love With the Property!

Consult Experts to Draft an Offer Contract

In this lesson, we've just talked about the “price” component of making an offer. There are many other important topics to consider when structuring your offer on an actual contract.

For one thing, you need to insure yourself against serious problems with the property. You do this by insisting that your offer is contingent on a full inspection. This is standard operating procedure for buying real estate, so you won't get any objections to it in principal.

These contract-specific details are beyond the scope of this lesson. If you're buying a property for the first time, consult a real estate agent or lawyer to help you draft an offer contract. These experts will make sure your offer contract has all of these important fine-print details. The best way to protect yourself from overpaying is to avoid getting attached and involving your emotions. It's just a piece of property. There will be many, many others. And remember: Your goal is to buy a great “investment,” not a piece of property.

Please leave emotion out of it. The moment the deal stops being a great investment, walk away. How do you know when you reach this point? By checking back to all of that number crunching you did: fair market value, and target sale price.

One way to help keep this mental edge is to have an attractive BATNA. “BATNA” stands for “best alternative to a negotiated agreement.”

Simply put, it's what your second best option is if your negotiation fails. Having an attractive BATNA-or, hopefully, many attractive BATNAs-means having other good options.

If the seller of Property 1 won't lower his price to where you want it, that's okay. Why? Because the seller of Property 2 you've also been looking at is more desperate to sell, and he's willing to meet your offer price.

When you've got other options, you can walk away easier.

The lesson: Not falling in love with the property keeps you from making bad deals.

You're finally ready to make an offer! Just to recap, you're going to:

Use comps to figure out the fair market value of the property you want to buy Figure out your initial offer price (which I recommend is 90% of the fair market value) Figure out your target purchase price and anchor yourself on it. Remember to leave emotion at the door. No falling in love!

Got it? Good!

Best, Mark