May 14, 2022 6 Min Read
Don't make these 8 mistakes while investing in Realty
Betting Big on Real Estate? Here's a list of common goof-ups and how to avoid it.
Did you know that you can partly own a skyscraper, at the cost of a hatchback? Are you aware that the Gen X way of investing in real estate for steady income has proven to be a dud? Real Estate has the potential to be a goldmine, but it can also be an endless resource drain, in the wrong hands.
The real estate industry is projected to become a $1 trillion industry by 2030 and will contribute 13% to the country's GDP by 2025. It has stronger shock absorbers in the event of a crisis, than other asset classes. A good example was seen in how the coronavirus crisis failed to take down real estate in India.
So do you want to ride this wave? Here is a list of potholes to avoid on your investment journey.
Not knowing your end-game
Your profit multiplier is in your hands. Figuring out if your investment is for dwelling or for wealth generation should be the first step in your journey. This will help you identify investment avenues you might normally skip.
- Purchasing a Home to live in: If the intention is for residing or rental, research should include builder's history, projected living expenses and maintenance costs. To earn a higher rent, invest in larger cities with a significant migrant population looking for rental space.
- Pure investment : If your goal is wealth generation, look beyond the building shell.Invest in a plot, as land appreciation could be your golden ticket. Consider buying plots in emerging realty markets in tier 2 and 3 cities, which have lower ticket sizes but with potential for exponential growth.
Beat the crowd. Keep an eye on the local news, and invest in areas with upcoming infrastructure developments like metro stations, highways or airports, since land prices soar as the area develops. The Jewar airport case study is a prime example of this. Residential plots near the airport that fetched ₹22,000 per sq. yard a year ago are now selling for ₹32,000 per sq. yard.
Not getting into the Act
In the past decade, new rules and regulations have been introduced to protect the investor.
- RERA Act : The Real Estate Regulatory Act protects buyers and aids speedy dispute resolution. For eg., if a developer defaults on a delivery date, they have to either return the capital or pay a monthly sum, with interest. Builders who don't comply can be fined up to 10% of the total project cost or a 3-year jail term.
- Benami Transactions (Prohibition) Act : Ensures that the property is listed in the name of the actual owner and prevents certain kinds of financial transactions.
- GST Act : In the earlier tax regime, buyers had to pay multiple taxes and duties like VAT, Service tax, sales tax (CST), custom duty and OCTROI. Under GST, properties under construction are subject to a single tax rate of 12%, whereas completed or ready-to-sell properties are not subject to GST. This article breaks down the details.
Not learning about Debt financing
Reduce your home loan burden. Here are some tips to manage your debt better.
- Shorter tenures could drastically reduce the amount of interest payable. Check the difference with this EMI calculator when you compare a 10 year to a 25 year loan. You can also compare interest rates of different banks here.
- Making regular prepayments will reduce the principal amount and, as a result, the total interest payable. Check if your bank charges a percentage for this payment though.
- Choose a larger down payment : The larger the 1st payment, the lower the loan amount, which reduces the interest load.
- Check your credit score : People with good credit scores of 750 and above tend to get the best loan offers. Clear previous loans the first chance you get, to keep the credit score lean.
While investing, research the hidden costs like one-time expenses and recurring maintenance charges.
- Registration charges, Legal fees & Stamp duty in different states.
- Deposits & monthly maintenance charges like parking charges and club charges. Include GST levy.
- Differential cost of Living. This article breaks down the average cost of living in Hyderabad. Lifestyle expenses differ in different parts of the city.
Investing in houses for rental-income
Some investors make the mistake of buying houses for steady income. If we compare commercial vs. residential properties, it is seen that the rental yield for commercial falls between 6-10% as compared to residential which is at 1.5-3.5%.
Property Average Yield Builder Floor 3.1% Multi-storey Apartment 2.9% Independent House 1.7% Villa 2.5%
Not keeping up with the trends
Profit margins are higher in luxury housing (5-6%), but it pales in comparison to the 8-12% yield from Commercial Real Estate (CRE).The caveat is that CRE is exorbitant and accessible only to HNIs and UHNIs. That's not the case anymore. Emerging trends are making Grade-A CRE available, for the fraction of the cost of a house.
Pooled Real Estate wins
The booming rentals market and long-term leases provides a safer haven, to think beyond residential. Pooled investments bring the ticket size down from 10s of crores to a couple of lakhs. The types of Pooled Realty investments are:
- Fractional Commercial Real Estate : Allows the buyer to invest as low as ₹15 Lakhs and benefit from the stellar return rates (8-12%) of Grade-A CRE. These properties are managed by SPVs (special purpose vehicle) and an investor becomes a shareholder in the SPV.
- REITs (Real Estate Investment Trust) is an older channel but still a golden avenue since its launch in 2019. This is similar to owning real estate stocks, and can go as low as ₹300. The investing mechanics in REIT is similar to mutual funds, for CRE. This form of investment is subject to market volatility.
Don't ignore farmlands
Taxes burn a hole in your earnings. Your 8% returns from Fractional CRE will look more like 5.6%, post-tax. That's where tax-free farmland investment can be your saving grace.
Rising land prices in tier-1 cities have made farm plots in tier-2 and tier-3 cities an attractive investment proposition. Increasing government backed infrastructure development in smaller cities makes this investment more exciting. The cherry on top is that farmlands act as a solid inflation hedge due to a steady demand for agro-resources.
See Also : Buying a Farmhouse? Think again!
Figure : Managed Farmlands, visualised
Investing in farms is perceived as cumbersome due to time-consuming paperwork and overall complexity. This can be effortlessly handled by professionals. By owning Managed Farmlands like Gulbarga Eucalyptus farms, you can even earn passive income passively, through produce buy-back from corporates. That's a 3.3x investment multiplier, completely tax-free.
Not Taking Professional Advice
Real estate agents and property lawyers offer professional guidance and have access to multiple investment channels. They help you stay within budget, negotiate the best deals, navigate the pitfalls and guide you through the paperwork, for a nominal fee of 1-2%. Buyers who come without a broker, generally end up overpaying.
Not doing Legal Due Diligence
Your property lawyer will guide you, but you will need to understand the legalese, before you proceed. Due diligence reports are required to know the property's history and to get a clear title.
- Full search report : Covering a 30 year period, the report thoroughly scrutinises ownership rights, encumbrances and litigation status.
- Limited search report : Done over a 15 year period, the report covers transactions for leased properties.
Learn more about title verification and search reports from this article. Most property deals involve the following documents :
- Occupation and completion certificate: Needed to make a property's possession valid. The municipal authority issues an occupancy certificate to a building after verifying all supporting documents.
- Title deed: The transfer of property ownership is documented in the title deed. Check if the seller has complete ownership of the asset and is free to sell/ mortgage it.
- Allotment letter and possession letter: When a property is acquired from the State Industrial Area Development Board, documents relating to allotment, lease-cum- sale agreement, possession certificate or builder-buyer agreement are required to be verified.
- Land records and mutation entries: Record of rights, tenancy and cultivation, issued by the registrar of land holdings. They could be obtained from the Tehsildar's office.
- Khata extract and certificate: For any registration obtained after paying the tax, a khata certificate is issued to the owner of the property or to his family members. This certificate is required to apply for water and electricity connection.
For detailed information, follow these links:
Let's Wrap Up!
“Making money from real estate needs a lot of good luck”. Not true. The most important quality for an investor is temperament, not intellect, as Warren Buffet once said. With the right information about the market and a strong understanding of your finances, you can navigate the waters smoothly to achieve your wealth creation goals.
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