Real Estate Investment on Installments vs Cash in Pakistan

Real Estate Investments on Installment vs Cash in Pakistan

Real estate investments on installment and properties you can buy on cash are the two options available to you when you are planning to invest in property in Pakistan.

We can further classify these two options as under:

1. Possession plots on cash.
2. Non Possession plots on cash.
3. Non possession Plots on installments.
4. Constructed properties on cash.
5. Under Construction properties (Houses, apartments, shops) on installments.

In general buying a property on installment is a facility for those who are unable to pay the prices upfront. However if you are planning to invest, you can use it just like leverage and invest small amounts to gain huge returns. So even if you have the cash available with you, it may be better to invest smartly and pay using installments.

Installments Vs Cash Investments

Before we continue with the case study we must first understand the general advantages and disadvanatges of cash vs real estate investments on installments.

Advatanges of cash vs real estate investments on installment

1. The first one is obvious, you can buy a property even if you do not have the complete payment, thus making it easier for you to save and pay as you go.
2. You get a leverege as the property prices increase is over the entire property and not just what you have paid for.
3. It offers usually more flexibility as you can buy more number of properties in the same amount of money and later on liquidate them partially on profit.
4. Under Construction properties (Houses, Apartments) on installments are usually available in less or equal price than the similiar possession properties.
5. You can take advantage of Dollar apprecetion if it happens during that time period.

Disadvantage cash vs real estate investments on installment

1. Plots on installments may be a bit more expensive than on cash payment. Usually plots on installments cost 10 to 20% more than buying a similiar property on cash.
2. Buying a cash property in possession is more secure than investing in a property on installments which is yet to be developed.

The comparision

If you do not have the cash than your choice is obvious, you are only left with buying a property on installments. However if cash is not constraining you than it is time to evaluate all options to find what works best for you.

Possession plots on Cash

When you have the cash, you can certainly find many opportunities waiting for you in the market. You can also take full advantage of speculative trading and enjoy the market spikes as recently seen in 2020-21 in DHA Lahore.

However you are not always going to get it right and some losses are always on the horizon. Buying a plot in a mature area which has already reached its full potential is like putting your money in a gutter.

Non possession plots on cash

Buying a property in cash which is available on installments is not very economical as such. The issue is usually most developers will just offer a 10% discount on cash payments. This is very less in my opinion and it is far better to pay on installments over a period of 3 years than buying it on cash. Obviously if the installment period is less or around an year than it does make sense but not otherwise.

Plots on Installments

There are various ways you can take advantage of buying plots on installments. You can leverage your position and invest in bulk. Just like speculative trading you need to formulate a plan to include:

1. Expected apprecietion of the plots in near future.
2. How long you are able to hold the properties without draining all your cash.
3. A formidable sale planning on profit/premium.
4. A fall back plan in case your plan doesnot work.

This all seems good, however trouble with such an investment is that under developed societies require a decade or more to fully develop. However if you are a smart investor you may take advantage of investment/speculative bubbles within this time period.

Constructed properties on cash

This is always a good option to acquire a mature property to generate solid cash flows. Rental income in my opinion is the mother of all real estate investments in pakistan and in the world. However many people are unable to do it because of financial restraints as constructed proeprties are usually more expensive. Therefore speculative investments in plots still remain the most popular real estate investment in Pakistan.

However popular doesnot mean successful as well. The success ratio of people who invested in rental income generating properties far surpasses those who invested in plots.

Under construction properties on installments

Besides just buying plots on installments, you can also invest in construction projects on installments. These include, Houses, Malls, Apartments etc. Such kind of investments come with some additional advantages such as:

1. Apartments, houses or Malls are usually made in areas which are already mature. So technically you are investing in an already mature property.
2. The maturity time of a construction project is usually less than those of complete society developments. It takes anywhere between 3 to 6 years for a construction project to fully develop & mature, which is far better than a society which will take more than a decade.
3. The price of property gradually increases in a set pattern as the construction progresses. It is easier to plan and take a profiteable exit.
4. The product of your investment is an asset which can be rented out and used to increase your passive income.

The one and only major disadvantage I see in this type of investment is that resales are usually slower compared to plots. This is due to the fact that these are usually end user properties following a natural gain process and does not serve the purpose of part time investors, looking for speculative bubbles. However this aspect is also improving as the trend of construction continues to grow all across Pakistan and investors are getting more and more involved.

Winner winner chicken dinner

The winner in my opinion is construction project on installments followed by rental income producing properties on cash. The thing is that property adds a capital gain in access of around 50% while it is being constructed. In addition the end result will produce a property which generates cash flow unlike plots and you will not miss out on making money as so many people did between 2016 to 2020, who invested in plots.

The past has taught us one thing, plots investment in Pakistan has long periods of zero to negative growth. If you get stuck in one you will be waiting for half a decade before you can even think of liquidating your asset.

Capt (Retd) Shahnawaz Yaqub Bhatti

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