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Why Every Angel Investor Should Invest in Real Estate
Before we dive into angel investors should invest in real estate, If you’re an angel investor, you have enough capital to financially back a business in its nascent stages, or an entrepreneur with a million dollar idea.
Of course, all angel investors are on the hunt for a successful financial venture looking to maximise their returns.
Providing the initial seed capital for a startup or business is typically in exchange for ownership equity in the company, or convertible debt (where the debtors agree to convert part of the debt into equity shares).
But there’s no guarantee of any business or startup succeeding. In fact, more new startups are gaining initial funding then going bust than ever. And in an age where Shark Tank is prime time television, angel investors should seriously consider diversifying their portfolio & allocating some of their funds to real estate.
Are You An Angel Investor?
Like the name suggests, individuals known as angel investors actively inject financial support into small startups or entrepreneurial ventures in return for a portion of ownership equity. Their involvement proves indispensable during a business’ nascent stages.
These influential figures contribute more than mere capital – they offer mentorship, forge industry connections and bring invaluable expertise to the table.
Frequently comprising of experienced entrepreneurs or professionals: these angels seek not only to diversify their investment portfolios but also promote innovative initiatives primed for exponential growth.
If you have the money to fund a small burgeoning business, then you very well can be an angel investor.
Why Should Angel Investors Invest in Real Estate?
- Institutional investments in India’s real estate sector reached $4.3 billion in 2023. The real estate sector in India has a projected compound annual growth rate (CAGR) of 9.2%.
- Real Estate has always been a reliable, trustworthy investments. Through economic & political uncertainties, market volatilities, and financial scams, real estate has remained the tested pillar of strength and stability in the investment game.
- Businesses & startups can be hit and miss, investing in traditional asset classes such as stocks and bonds depends too much on market considerations, but real estate, especially commercial real estate has always been the key in diversifying your portfolio as an angel investor, and seek steady, long term returns. These returns can be through rental yields, or capital appreciation.
How Commercial Real Estate Can Be a Game Changer for Angel Investors
As per CBRE, the country’s commercial real estate sector is expected to increase from 37% in 2022-23 to more than 40% in 2023-24.
Stable and Tangible Asset
Real estate investments are a tangible, real asset. They can mostly retain their value over a period of time. Unlike stocks & other financial instruments, which are subject to market fluctuations, real estate offers stability and a hedge against inflation.
Income Generation
Commercial properties such as office spaces, retail outlets, and warehouses generate rental income, and also provide investors with stable cash flow. This passive income stream can supplement other sources of income and contribute to long-term wealth accumulation.
Portfolio Diversification
Real estate investments offer diversification benefits, and reduce overall portfolio risk. By adding commercial properties to their investment portfolio, investors can spread risk across different asset classes, which improves the resilience of their investment strategy.
Potential for Capital Appreciation
With growing demand for commercial spaces driven by urbanization, infrastructure development, and economic growth, commercial real estate properties have the potential for capital appreciation. Investors can benefit from the appreciation in property values over time, increasing their net worth and investment returns.
Hedge Against Inflation
Real estate assets often serve as a hedge against inflation, as property values and rental incomes tend to rise with inflationary pressures. This inherent inflation protection feature of real estate helps preserve the purchasing power of investment capital and maintain wealth over the long term.
Value Added Opportunities
Commercial real estate investments offer opportunities for value-add strategies such as property renovation, redevelopment, and lease optimization. By actively managing and enhancing the value of their properties, investors can unlock additional returns and maximize the profitability of their real estate investments.
Tax Benefits of Commercial Real Estate Investing for Angel Investors
Moreover, there are numerous tax advantages for angel investors for investing in commercial real estate. These include:
Depreciation Deductions (Section 32)
Angel investors investing in commercial real estate can claim depreciation on commercial assets they’ve used for business purposes. Basically, any buildings, machinery, furniture, and other tangible assets associated with commercial real estate are things eligible for depreciation, as per this section of the Income Tax Act.
Mortgage Interest Deductions (Section 24)
Investors can also claim deductions on the interest paid on loans taken for the purchase, construction, repair, or renovation of commercial properties.
This interest deduction can be claimed against rental income generated from the property, reducing taxable income. But the initial principal repayment amount is not eligible for deduction, under this section.
Tax-Deferred Exchanges (Section 54)
The Income Tax Act’s Section 54 offers relief to investors selling their commercial properties and reinvesting the proceeds in another such property. By investing the capital gains from this transaction into a new piece of real estate within typically two years, these individuals can access tax exemptions on said profits. Such provisions incentivize investors towards rolling over their earnings into fresh investments – an action that defers any imminent tax liability.
Tax Benefits for Rental Income (Section 32)
Rental income from commercial properties is subject to taxation. But, angel investors can claim deductions for various expenses incurred in generating that rental income. These include: property taxes, maintenance costs, repair expenses, insurance premiums, other operational expenses.
These deductions help you in reducing taxable rental income, and thus lowers the tax liabilities of investors, leading to maximised gains and profits.
Bottom Line
Talking about commercial real estate, JLL India Real Estate Market report for Q3 forecasted significant office space absorption of approximately 45 million square feet in 2024, easily exceeding the benchmark set in 2023.
Looking forward, India’s commercial real estate sector paints a picture of potential and opportunity. With its fractional ownership model, Assetmonk invites investors to become active participants in this story rather than passive observers.
Assetmonk is leading the line in providing fractional ownership models for commercial properties; ushering in a new era in the dynamic real estate sector in India.
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