US NRI Investment Guide - Part 4 - Real estate

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

An NRI can invest in homes or land in the USA, and also in the same in India. Investing in real estate in the USA is more transparent and secure, but is currently under what might be the beginning of a long downturn, where people may not be able to get mortgages approved for at least the next few years. However, once the real estate market bottoms out, it may make sense to buy into US real estate as well. The US also provides investment in real estate through REITs in the form of ETFs – these are simply traded on the exchange and avoid the logistical overhead of buying or selling land directly. Consider for instance, RWX (international REIT ETF) and VNQ (US REIT ETF). However, for the same reasons listed above, this may not be the best time to buy into real estate in any form.

Real estate in India, on the other hand, is a more complex beast, which we will discuss next.
First off, the real estate scenario in India is fraught with legal and bureaucratic risk. Many stories are told of lands that have been sold simultaneously to multiple parties. What documentation is needed for clear transfer of a piece of property to another person is not a universally accepted norm in, for instance, Bangalore, India. Some buyers are satisfied with just a GPA (general power of attorney) transfer, whereas others are particular about all the documents being clearly available. Some legal documents are not being released by the government due to various reasons, and hence the risk associated with purchase of land is higher today in many cases.

Clear land with clear title documents in a reasonably developed location is now exorbitantly overvalued, and the upside potential of such land in most tier I cities in India is suspect.
However, the rewards of buying land in India have been tremendous. Most people who bought land in a then suburban area of a major city in the 90s or early 2000s, and held onto it till date, are enjoying returns that can only be described as astronomical. For example, one piece of land close to the center of the city has grown around 8 to 9 times in a period of about 4 years.
Also note that an NRI is allowed to invest in most real estate, but not in some kinds such as farmlands. (See http://www.rbi.org.in/scripts/FAQView.aspx?Id=52 )

I have listed below a general process for benefiting from real estate investment in India (I have avoided discussion of commercial real estate since I do not know much about it – all these recommendations are related to residential real estate):

1. Focus on city suburbs (land sold in grounds – one ground is 2400 square feet) or rural land (land sold in acres – one acre is 43560 square feet).

2. While purchasing city suburbs, focus on buying land that is less than 500 rupees per square foot. This is because land in most cases plateaus out somewhere in the range of 5000 to 10000 rupees per sq ft. The lesser the price the higher the theoretical potential for growth. As long as the area is growing, or has a reason for growth, the percentage growth of a property worth 500 rupees per sq ft is likely to be higher than the percentage growth of a property worth 5000 rupees per sq ft.

3. An exception may be made to the last rule in case of unusual demand. For instance, you may buy land worth 1000 rupees per sq ft if available in, say, a distress sale, in a more central area of the city that has huge upside potential (which may be measured by close by properties being sold for say, five times that value).

4. While buying rural land, make sure that the land is already converted – conversion is a process where the government has converted formally agricultural land into land that can be used for residential purposes. Conversion is a process that has a lot of risks associated, so, avoid any land that has conversion under process.

5. Avoid agricultural land and farm houses. NRIs are not allowed to purchase such properties in most cases, and they need to be converted to be saleable as residential properties.

6. Avoid buying apartments as an investment – apartments, especially in tier one cities, cost way more than they can get in returns, and the upside potential is also stunted by the fact that the supply of apartments is, in general, increasing by the day. For every apartment complex that is completed, there are at least three or four new ones being built in the neighborhood (in most developing areas). Also, the growth in value of investment in an apartment is automatically slower than the growth of the investment in land – since the cost of construction material does not go up as rapidly as the underlying land.

7. Avoid buying homes as an investment – homes in most developing areas are likely, over time, to be replaced by apartments. Also, in most cases, the land is the appreciating part – the value of materials, etc. increases more gently than the value of the land.

8. Buy land that can be protected from encroachment – encroachment, or illegal occupation of land is a common problem in India – hence, if you are buying land, be sure to fence it, and if possible, have someone you trust watch over the land periodically.

9. Buy land that is recommended by someone you know and trust personally – this is critical for most land dealings in India, as there are several land based scams – people selling land that they do not own, people selling the same land to multiple people, people selling land that has a lien on it, people selling land that has a legal dispute over it, are all cases that have become commonplace.

10. Do not buy land that is too close to a developing government project such as a new highway, or a road widening project, etc. – recalculation of the dimensions could lead to your land being taken over by the government.

11. Preferably buy land (especially city land) that has some construction nearby – this reduces the chance of the land being grabbed by miscreants, or used by government or other projects.

12. Check the price of the land from neighboring sources – before buying any land, ask neighbors or people in the area, what the land in the area is worth – sometimes the easiest scams are where the land is worth a lot less than what you pay, since the prices change very frequently.

13. Always verify all documents associated with the land – have a lawyer, preferably from the same state or region (since laws vary by state in terms of what documentation is needed, etc.) look at the documents and certify that it is in order.


Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

US NRI Investment guide - part 3 - Debt

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

Debt is the safest form of investment short of securing your money as cash in an environment proof and heavily guarded fortress. The most secure form of debt instrument is in government backed instruments, such as treasury bonds in the US. However, the returns of such instruments is very low, and barely covers inflation in the US or in India. The minimum amount required to invest directly in such instruments is usually very high for an average retail investor, and so, most people invest in such instruments indirectly, through mutual funds.

Another similar debt investment is bank deposits, which provide similar yields. Such deposits are generally insured by the FDIC upto some limit in the US (usually 100000 USD), but arent generally insured in India. You can find options for bank deposits in the US at http://www.bankrate.com/brm/rate/deposits_home.asp and in India at http://www.ratekhoj.com/fixeddeposit/index.php . Note that the best NRI deposit rates in India are usually in the one year term.

Corporate deposits in India are riskier, but yield slightly higher returns. Again, speaking in general, the risk involved in corporate deposits is usually not worth the associate return potential. I would rather invest in equity if I want more returns, or in bank deposits if I want to minimize risk. Other instruments, such as income or debt based mutual funds are also available in both countries. The US also has exchange traded debt funds, such as BND.

Some guidelines for investing in debt instruments for a US NRI:

1. India provides better returns overall in debt instruments than the US – Indian returns are to the order of 9% per annum, which is much higher than the US returns (of 3.5%) at this time (Feb 2008).

2. Park US money in a money market fund in the US for the best returns: for instance, Fidelity municipal money market funds gave 1 year returns of 3.29% and lifetime annual returns of 3.76% (see http://content.members.fidelity.com/mfl/summary/0,,316048107,00.html ) – since this income is tax free, it beats most US bank deposits – which return about 3.5% (see http://www.bankrate.com/brm/rate/deposits_home.asp ). There are also savings deposits such as those from ING Direct and HSBC, but they also invite tax, and hence do not match the returns of the money market funds. They have an advantage of further liquidity, since money can be removed from it at any time, as opposed to a bank deposit, which has a term.

3. In India, divide the debt portion of your portfolio between NRI Fixed Deposits and fund based instruments - FMPs and quarterly debt interval funds.

a. NRI FDs yield much higher rates in non-repatriable FDs (NRO FDs) than repatriable FDs.

b. FMPs or Fixed Maturity Plans are like debt mutual funds, and they provide the benefit of not being taxable (if held for a minimum period of one year). However, FMPs have gone out of favor among asset management companies after the cost of starting an FMP was increased fourfold (see http://sify.com/finance/fullstory.php?id=14535046 ). A better choice today may be quarterly debt interval funds (QDEFs). Both FMPs and QDEFs have very low expenses as they invest in other debt instruments.

c. Quarterly debt interval funds are mutual funds that in general have a high exit load (i.e, the amount you have to pay if you withdraw), but every quarter, they give the choice to withdraw at no load. This provides a good degree of liquidity, and the benefits of mutual funds – no tax, etc.

The preferred mode for investing in India is in quarterly debt interval funds – though they are slightly riskier than bank NRI FDs (they do not guarantee a fixed return), they provide tax benefits, and also usually provide slightly better interest rates than a bank FD of the same term. In the US, park your debt portion of the portfolio in a money market fund, and maybe a portion in a high yield e-savings account for diversification. Another portion can be put into an inflation protection fund or ETF (such as TIP) which may protect against the event of hyperinflation in the case of a US recession.

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

US NRI Investment Guide - Part 2 - Investment Avenues

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

There are several investment avenues available to the US NRI investor. The choice of which items to invest in, and in what proportion, is driven by a combination of the risk-reward nature of each security, the individual’s understanding of the security, and the risk profile of the individual. For instance, based on my understanding of investment options, the following securities are the only ones I am considering at the current time: debt, real estate, equity, gold and international currencies. Of these, debt, real estate and equity are the growth/sustenance portion, while gold and currency are used to hedge against inflation and currency devaluation risks.

There are other avenues such as commodities, art, franchises, etc. which we will not discuss here at this time.

In general, the safer (less riskier) the security, the lower the potential of returns, and the higher the predictability of returns. Hence, an ideal portfolio will ideally consist of a mix of low risk, low reward securities and higher risk, higher potential return securities. For example, a sample mix in today’s scenario could be 20-50% in debt, 20-50% in equity, 2-5% in gold, 20-50% in land in India and 2-5% in international currencies. What actual percentage you choose would be based on your appetite for risk, and the risk associated with each security.

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

>13% of US households will owe more mortgage than their house is worth

"As for the sub-prime crisis, it is estimated that by the end of this year, 15 million U.S. households could be 'upside down' on their mortgages."

That's over 13% of all US households!

Read entire article here.

US NRI investment guide - part 1 - background

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

An NRI (Non-Resident Indian) in the US has several choices to invest: in the US stock market, in the Indian stock market, in funds in either place, in real estate in either place, in gold, commodities, foreign currencies.

In order to make the right investment choices, the investor should understand the following facts about the US and India.

1. The indian rupee has been strengthening against the dollar.
This means that the number of rupees to a dollar has been decreasing in recent times.
The exchange rate is currently around 39.6 rupees to the dollar. This chart shows the drop in the last five years. Especially note the steep drop in 2007 from around 44 to 39.6.
What caused this trend? (See http://economics.about.com/cs/money/l/aa022703a.htm for a great overview of exchange rates and what causes exchange rates to vary). There are several factors in the rupee dollar trend:
a. The PN problem:
Foreign Institutional investors (FIIs) are allowed to channel investments from individual investors in their country anonymously into the Indian market, using a mechanism called Participatory Notes (PNs).
Recognizing the potential of the Indian stock market, huge fund inflows from such investors, through FIIs, have been pouring in. In order to buy indian securities, foreign investors need to get Indian Rupees in exchange for dollars. This high demand for Indian Rupees and excess supply of dollars caused the rupee to strengthen against the dollar.
b. The Indian stock market has been growing at a rapid pace:
The Sensex, India’s key stock index, has grown from 7000 in Jun 2005 to 21000 in Jan 2008 (see ). This has also led to a demand for Indian rupees, to buy shares in the Indian stock market as opposed to other choices, causing the rupee to strengthen vis-à-vis the dollar.
c. The US stock market has been falling in the last few months. This causes US investors to sell dollars and invest them in other economies. This surplus of dollars in the market also leads to the weakening of the dollar.
d. The real estate market in the US has been falling.
This further weakens the dollar, as US investors look elsewhere to invest their money.

All these factors together have caused the rupee to strengthen relative to the dollar.

2. The Indian stock market has been growing rapidly in the last three years, and a correction is beginning to happen.
As you saw, the Sensex has grown threefold in the last three years (7000 in June 2005 to 21000 in Jan 2008), but it has dropped 5000 points to 16630 from Jan 8th to Feb 11th 2008. This drop was triggered by a combination of recession fears in the US, overestimation of the quick money potential of the Reliance Power IPO by FIIs and the consequent disappointment in the Indian stock market.

Expert predictions range, as usual, from the market reaching back to 4 digit figures, to rebounding at 15000 to already beginning to turn around. That pretty much means anything can happen – but, there seems to be consensus that it is unlikely to see astronomical growth as seen in the last few years.

3. Gold has seen significant growth in the last year: This is a common situation in turbulent economic conditions. However, gold (in rupees) has had almost consistent growth in the last thirty years.

4. Real estate boom in India is also beginning to plateau out:

The BSE realty index launched in mid 2007, is an indirect indicator of the real estate trends in India. It shows that real estate grew till end 2007, and began sliding down slightly from January. This was to be expected, as land and housing costs were growing astronomically. See, for instance, an excellent explanation of why renting makes so much more sense than buying an apartment in Bangalore.

5. Fundamentals of Indian stock market are strong compared to the US stock market.

Real GDP Growth rate

US - 1.9%
India - 8.4%

Inflation

US - 2.3%
India - 4.4%


Current account balance : This is the sum total of money received versus spent through import/export, transfer of fund between residents and non-residents.

US = -788.293 billion USD
India = -32.301 billion USD

In the next part, we will look at the different investment avenues available to the individual US NRI investor, and analyze the pros and cons.

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.