As mentioned in the previous blog, there are 4 investment propositions in Real Estate. Let us look at them in detail.

1. Buying a plot in developing areas:

An investment in land is an option as a vacant plot owner is exempt from the wealth tax. The exemption is subject to some conditions. You can either build your home or sell the property at a profit by investing in plots of land in urban areas. The purpose of the investment is not important, but the investor should consider certain income-tax and wealth-tax factors.

Which area should you buy? Choose an area close to your village or city with an infrastructure project such as a ring road, railway flyover or airport, metro underpasses or railway station, stadium or university, SEZ, refinery or SEZ.

These areas are home to many property dealers and brokers. This is called the micro-market for real estate. If property prices rise after you invest, this means that your investment was right.

Benefits: An investor who invests in a plot of land is exempt from income tax if the land is not leased or given as rent or hire. An investor can profit from the rise in the price of land and either sell it later for a large profit or use the money as a long-term investment.

However, keep in mind that if you own the land for longer than three years, your entire long-term capital gains will be subject to income tax at a rate of 20%.

For the Assessment Year 1999-2000, all individuals and HUF can complete exemption for one residential house for their personal use and vacant land up to 500 sq. m under Section 5 (vi), 1957 Wealth Tax Act.

Drawbacks: An investor may need to borrow money from a bank, an organization, or a relative or friend if he doesn’t have enough cash.

In this case, interest on funds borrowed to invest in the vacant land plot is not allowed as a deduction. The land must remain vacant and not be let out for hire or lease. The benefit of interest paid on funds borrowed to invest in vacant land can be deducted when calculating the taxable capital gains.

Precautions. The land must not be in dispute. The seller must be the real owner. However, keep in mind that any local/government authority shouldn’t acquire the land in the near future. There should not be any proposed project to build any highway, railway track or other government projects on the land.

2. Booking a flat or flats in a multi-storey building.

You will need less money to book a flat in a project because most of them have construction-linked plans. The chances of getting great returns increase. You will only have to pay the monthly interest on a bank loan up until the building is completed. Booking a flat in the pre-launch stage is beneficial. You can sell your flat if the price rises.

 For those with limited funds, you can look for property under construction and offer a payment plan. Also, keep in mind that possession may take 2-3 years. Make sure to choose a reliable and reputable builder.

Lapses

1. Due to lack of funds or diverting funds, the project could be delayed.

2. Sometimes, there are developments in an area because of government projects. Then the newly elected government pulls out from the projects, and the area’s development slows down. The new investors lose interest in projects in these areas, making it more difficult for builders to complete them.

3. Project delays due to strikes, labour costs, etc.

4. Without informing, the builder may alter the dimensions of the carpet without notifying.

5. At competitive rates, there is a lot of property available in the subject area.

6. Flats/apartments are less expensive than plots, houses, and commercial properties. These flats can be financed with loans.

3. You can purchase a ready to move-in house

If you have the funds you can purchase directly and immediately.  When you buy a ready-to-move in house you don’t have to wait for your home to be built. You only get what you see because the house is already built and the neighbourhood is populated.

Although the property will be more costly than when it was built, you, as a buyer, are protected from delays and over-runs. The project structure is complete and possession will occur soon so you know when you can expect to occupy the house. You can also avoid paying EMI while the house is being built. Ready-to-move property is ideal for those who are looking to purchase a home to live in in the future or as an income stream.

Drawbacks: A ready to move-in property is more expensive than an under-construction one. This means that your monthly instalments will be higher. The downside is that the potential for price increases are not as large with an under-construction property. This means you might not be able to make a lot of money by selling the property later.

Are you looking for a new or resale property? The best thing about buying on the resale marketplace is the fact that construction is nearly complete. This can come as a relief in a time where most projects are in a delay mode. Not all properties on the market for resale are old; many may still be new and unsold. Some properties, like those that were bought up by investors in the pre-launch phase, may have a lower price than the builder’s quote. The down payment may be higher in the resale marketplace. The seller may ask for a portion of payment as cash. This will allow you to get a lower home loan as the seller will agree to sell for less than the listed price. There may be additional paperwork and homework required for a resale transaction.

Being a homeowner means you don’t have to deal with pushy landlords or poor maintenance. You will also feel fulfilled about one of your most important financial goals.

Although the joy of owning a house is a motivator, it is not easy to make a living from it. The rental income, which is between 3 and 5 per cent of the property’s annual value, attracts income tax. It is also difficult to find tenants who are trustworthy these days. It is not certain if the house will be available for rent for the entire year.

The rental income could be as low as a fraction of the total cost of the house. If the house costs 40 lakh, then the rental income per year will be between 1.20 lakh and 2 lakh.

Whether you live in the house or rent it out, owning a house can bring up many problems. Free movement can be a constraint. you have to pay an EMI over a period of time; and you may need cash to sell the house. Some people choose to rent a house over buying one, even though it might feel like they are draining their money.

4. Commercial property investment:

Investment in offices, shops, and other commercial properties is a source of rental income. Rent can be a source of income as well as price appreciation. 

There are four options for investing in commercial property.

1. 1. Direct purchase from the builder

2. To buy shares in real estate companies

3. Real estate investment trust (REIT).

4. To invest in mutual funds that invest in commercial real estate companies

It is important to choose a commercial property that can be let out once the purchase is complete. Choose a commercially viable area that has the potential to become commercially active in the future. A prime location is better for investors who invest in smaller units. It is easier to rent the property in prime locations. The investor could also use it to start his own business. These commercial spaces are useful for doctors, lawyers, CA, and businessmen to establish their office or practice. Investors must ensure that the economic conditions, employment market, and population growth are favourable before investing.

Commercial properties should be purchased when they are ready to move in the next 5-6 months. It is now a common belief that commercial real estate has become oversupplied. 

Investments in only real estate are risky, just as putting all your eggs in one basket is not a wise choice. Diversifying your investments is important as it allows you to manage market fluctuations. Before you invest in real estate, it is crucial to have sufficient liquidity and diversification in your portfolio.

Benefits

Office space investments have the greatest advantage. They offer a higher rental return than residential properties, which averages 1.5-2.5% compared with 7-8%. Your return will be even greater if you include the standard deduction of 30%. Rental income rises by 5-7% per year, and the property’s worth also increases over time, although it is less than residential properties. It is crucial to have other sources of income in these difficult times. An office property can also be a great option if the interest is in starting your own business. Avoid monthly rental payments if you’re starting a business or consulting company in your 40s and 50s.

Advantages and Risks

​1. One of the biggest risks of investing in office space is that it might remain vacant due lack of tenants. You will need to keep spending money on maintenance. The economic cycle affects the rental income of office space. If you have a building that was built for IT clients and the economy is slowing down, it may be difficult to find tenants. It may be necessary to compromise on the rent. It may also be difficult to raise the rent after the lease expires.

2. Availing of a  bank loan is usually a choice to purchase residential properties. However, if you are looking to purchase an office property, it may be difficult to convince a bank to lend you one. Banks will extend their support when you are able to mortgage another property or if the property yields rent.