Ref: 09-034A of 1st November, 2009I am skipping three important chapters on Bonds – Treasury, Municipal and Corporate (FixedIncome and Convertible Bonds) which are really useful to practical investors, especially wealthyones who do not have risk appetite after a few years, and would settle for more secured yet reasonable returns. I am postponing, not skipping them because there has been demand fromretail investors in popular column of this blog Confused Mind, Clear Answers.REAL ESTATE – the name conveys it all. It is “real” that is touchable, feel able (Indian English) andenjoyable on day to day basis. It is “physical”., not paper assets except its derivatives that destroyed America such as CDO (Collateralized Debt Obligations), CDS (Credit Default Swaps),REIT (Real Estate Investment Trusts), Mortgage Pool, Warrants of shares of Real EstateCompanies etc.Howsoever the high may be the price; the Investor in Real Estate has one consolation – which theinvestment will never go to zero (except in derivatives as above). It can be held for long term, forpassing heritage from one person in the family to the other descendants. He is often wrong,especially when he leverages his investment by borrowing from the banks, relatives, homefinanciers, moneylenders and friends.Gone are the days when the people used to invest into Real Estate only from own savings. Today,Opium (or Other People’s Money) or others’ lending becomes our capital. We have come to a stagewhen one can comfortably say “If I earn, it’s all mine; If I lose, it’s all yours”.The World’s riches men have made major fortune in real estate. AND the world’s leading bankrupt persons lost everything in real estate. The Real Estate therefore makes or breaks anyoneanywhere.It is therefore important that we know the every little thing behind the real estate to make us richand richer, not poor and poorer. Any investment made carefully has chance of making money in70% of the cases. An ordinary investor is never in command of external factors, that takes away30% what we call risk.Any long term investment in good assets of whatever kind always makes money, is another rule of investment. The real estate automatically become long term investment because it can not bebought and sold like a stock or in day trading exercise EXCEPT in a city like Hong Kong, my city,where the Chinese people eat, drink, lunch, dine or breath only real estate and race course.

Following are the most important long term investment, some physical or real and others abstract.1.

Own Education - Abstract 2.

Family – Parents, brothers, sisters etc – until one marries (Abstract)3.

Family – Wife or husband, Children – after one’s marriage until Children marry(Abstract)4.

Family – Wife or Husband after the marriage of the children who get separated- Abstract yet Real5.

Job or Business – Real6.

Home, Office, Land – Real7.

Car or Scooters, Motorbike – Real8.

Bank Deposits (3 years and above) - Real9.

Bonds - Real10.

Stocks of really good companies bought at market crash time. - RealIn short, after one’s own education, only Spouse (wife or husband) become real long terminvestment that comes to help at any time even when a person loses everything or at deathbed. It is important therefore to choose the career carefully (while educating) or while selecting a lifepartner.Second Best is “Real Estate” – our Home. Owning a home is a dream of everyone in every country–in America, it is known as “American Dream” that went sour of late. Even one has gone on a costlyholiday and stayed at best hotels, he feels comfortable when he returns home – Home, my Sweet Home. There is no pleasure like coming back to one’s own home from wherever he was.

How to Buy Real Estate? Where to start? Residential Home

Its a million dollar question. The answer is very simple. Start from buying Home for self use. Nevertry to buy own home for investment purpose but for real self use. When one buys his own homefor dwelling purpose, to marry and then build family, he develops tremendous attachment to that asset, and never feels like selling unless there are very compelling reasons to do so. It automatically becomes a long term investment. Following are the basic rules to follow whilebuying own home.

Type of Usagea.

Commercial Property:

As a rule, commercial property rise much faster than residential or agriculturalassets. They also tend to fall last. The reason is; the commercial property ismeant for business which has earning power. The owner can afford to pay moreif the business is good.

ii.

Residential Property is of following types with features:

Luxury Property – always on rise for several years. They are relativelystable because the owner has holding capacity in the event of downturnof overall property market. Prime properties are always best to invest. If your purpose is an investment, and fairly for large value (Over USD500,000 or more) and not necessarily own personal use, prefer primeproperty. They are liquid, rise fast in value, fall slowly and give the ownera unique status.

Upper Middle Class Property: They have more liquidity. Most of theowners are high salary earners from executive or semi executive cadre.Or they could be middle order businessmen.

Lower Middle Class Property: These are generally Mass Housing Projects.They look good for first few years but then begin to crumble due to poormaintenance. In country like India, where the concept of “cooperative

society” is popular, the property is managed by the group of owners whoare always cost conscious. The owners generally do not contribute muchto the proper maintenance. There are always differences or squabbles. Asresult, the property deteriorates fast. They fall fast in bad times but riseslowly even in good times.

iii.

Agricultural Property:

Very few are interested in this property. The farmers everywhere arepoor, so the value of the property rises at slowest pace.

However, one has to read the farm produce prices and its trend for next few years. Of late, the food prices are seeing strong upswing with theresult that the yield rises very fast. The value also rises at fastest pace.

In such property, the presence of Water and suitability of land for tillingpurpose are most important factors for selection. No water, no value forsuch property. However, little imagination could bring in stupendousprofits. More on this later.

Location

Country: Buy where you are going to live for at least 10 years.b.

City: Buy in that city where you will be livingc.

Suburb: Buy where you have place of business or job (even if it is transferable).d.

Select the location between two cities or two districts of same city, which are expandingoutwards. For instance, if the district or city is expanding north, and neighboringdistrict/city is developing south, it is preferable to buy somewhere in between,provided the location is within same municipal limits.e.

If the nearby road is less than 30’ wide, better buy the unit one block inside. It oftenhappens that when the city start developing, the roads are widened. If you have bought unit just touching the road (what they call “road touch property”), it may be subject tocompulsory acquisition by at least 10 feet to 25 feet. If you have bought the unit oneblock inside, it will automatically become “road touch” with the result that its valuationwill improve instantly whereas older one will lose.i.

Real life example: I bought one large piece of land (5.5 acres) about 500 feet inside the main road, Due to expansion of new Airport, the main road is nowtruncated and the inside road touching my land will be developed into a HighWay. I will lose about 10’ to 15’ – about 0.125 acre, but I will be compensated@Rs 500,000 when my acquisition price only a year ago was Rs 245,000.ii.

The adjacent plot was just sold for Rs 900,000/acre for some industry. In otherwords, my investments will more than treble in less than 18 months.

Locality a.

Select safe, secure and developing locality. Avoid mature locality which has no room forgrowth. Newer localities are better planned and have room for growth, so yourinvestment has chance of growth.

Ensure that there is enough power, water and other sanitary facilities.

Ensure that there are banks, post offices, telephone facilities and most importantlySchool and colleges facilities. (Real life example: In NRE Complex in Navi Mumbai, India,the prices never rose for 7 years, in fact they fell. When the prestigious school DelhiPublic School opened near its front gate, the home prices started climbing, rising nearly5 times (500%) in 7 years from all time low)

Ensure that there are some industrial estates in less than 20 kilometers (10 miles)peripheral area.