Earning money is important but increasing that money is a smart move. Investment planning is something that nearly every individual who earns, looks at. Property investment is one of the most typical and crucial decisions involved in investment planning. Whether you are buying a family house or a commercial space or a property purely as an investment, it requires a lot of research, awareness, calculations, etc. You need to be sure about what is the purpose of your investment, what is your expectation out of that investment and is that going to be a successfully affordable investment. Once these basic doubts are cleared, we move to another set of questions concerning location, true worth and choice of a property. Before we forward to the tips for buying property, we need to understand the pros and cons of buying property and in which case we should go for it.
Step 1 – Should you invest in real estate or property in India?
1.1 Is buying property a good investment option?
Of course, investing in property requires a fairly great amount of investment. One with a few holdings can’t go for it. You need to have a large amount of surplus in hand. Unlike equities or gold investment where you can start with a few thousand, the property requires a handsome number of lacs. For this investment to produce some significant profit you need to give it time. The property requires a couple of years to grow in worth and even more to perform better. If you want to get returns in a year or less, property is not a good option for you even if you have a large amount to invest. Say, you buy a property today and you plan to sell it after 12 years because you would be having an event which requires expenditure. In such a case, you won’t have any significant profit in hand. The reason is the value of property do not increase in such a short period of time and even if it does then after taking out the additional costs such as maintenance cost. Taxes, etc. from the profit you are not left with anything attractive. Also, the time-taking feature of property investment does not allow circulation in investment. The amount and kind of investment can’t be modified as in equities or gold. So, one needs to have patience while opting for this.
1.2 Benefits of Real Estate Investment
1. Real estate always enjoys appreciation in its value. So, there is no risk of losing the investment.
2. It performs great in a long-term, says 5 years & above. You can enjoy great profits. At times, up even 100% of your investment.
3. This means of investment can also be used for other than just the investment purpose. You can own it as you family house, rent it or use for commercial purpose.
1.3 Drawbacks of Real Estate Investment
1. This option of investment comes into play only when a large investment is involved. For small investors, it is certainly not a feasible option.
2. It takes time to grow. The investment needs to be kept for a few years to produce a good profit. People who are looking for returns within a year or so should think hard before going ahead with it.
3. Money is blocked for a considerable duration of time. Thus, the investment can’t be regulated or disturbed before a specific time of length. Since, real estate investment is a big decision, one needs to be clear with all its aspects before making a mind to go for it. And once you are done with it & have taken the decision, here a couple of things that are required to be taken in concern while choosing a property.
Step 2 – If property is the right investment for you, then what are the things one must watch out for?
2.1 Checklist for a successful real estate or property investment in india
The basic necessity for a successful investment is to be completely clear with why you want to invest, how will the investment serve your needs and what will be its impact on your future. Once you are sure with these things you have
already progressed towards a great and productive investment.
2.1.1 Location -The major purpose behind any investment is to increase your money. So, it becomes important to invest in something that has a good potential to do that and investing in best option available with you will maximize your returns. In case of real estate, the performance of property depends greatly on its location. For example, if you are looking for a house, choose the colony that has a nice maintenance system or a good infrastructure. Look if it is near any public facility zone such as market or metro station etc., or if you are investing in a commercial land make sure or lies in a commerce or business hub, all these things add up to the worth of the property. People often buy property at remote places or in unauthorized localities. This creates a problem at the time of sale as there may be only a few people interested in your land which can make you settle at a lower price than the one expected. Moreover, appreciation in such areas is too low. Thus, choose the location taking in consideration its present state as well as future development prospects.
2.1.2 Land rates – After when we are done with the location and property is chosen what comes next is the pricing.
Never settle with what the first person tells you. Research the market well. Different sellers and dealers may provide you different rates. Every locality in India that is authorized by the development authority for that area, has pre-defined rates which can be easily found on the official website. These rates are decided by the government formed development authorities. Falling prey to overpricing will make you invest more in the property than its worth.So, be conscious about it and search the market a bit so that you are well informed and aware.
2.1.3 Effective cost – One major problem that is often seen is that at the beginning people do purchase the property but they are not able to keep it for as long as it should have been. In other words, people buy property but fail to maintain it. This happens because of poor calculations or no calculations at all. At the time of purchase, people consider only the purchasing cost and do not take a decision pre-considering the future expense. The affordability of the house does not depend only on the initial cost but also on other costs like maintenance costs, yearly taxes, etc. One should take note of all such elements that are either certain or uncertain to occur. If you raise a loan for the property, its EMI must be well incorporated and you should analyze how easily you can repay it so that later on if you fail to do that, it does not cost you your investment.
2.1.4 Future planning – Another reason why people end up selling off their property without realizing any real profit is due to lack of planning. They put their money in real estate without taking note of its upcoming need and are therefore forced to dissolve their investment. Suppose, one has a surplus of 20 Lacs today which he needs to invest and there is an upcoming event after year which may roughly require an expenditure of 15 Lacs. Now, in such a case the person can either take a loan against the property which will add up to the holding cost of the property or he can dissolve it. If the person chooses to sell the property, he will have an unsuccessful investment. Selling out property in such a short period of time does not provide any significant profit. Thus, after one year he is at the same value. Had he invested in some other option that provides returns in a comparatively shorter period of time, he would have been in a better position. Therefore, one should be clear with the tenure they can keep their investment.
Step 3- Tax Implication of Real Estate Investments – Capital Gains
For property investment in india, this is one important feature of selling property which should be taken in notice at the time of purchase only. This will help you plan better for how long you should keep your investment and when is the right time to dispose it.
What is capital gain? Capital gain has broadly two main aspects-
a. Tax on earnings
b. Tax on holdings
Tax on earning is applied at the time of sale. In India, most forms of earnings are taxable. When we sell off a property, the profit that is generated is our earning or capital gain. So, a certain percentage of these earnings goes to
the government as tax. Now, why this should be considered while deciding on the life of investment is because the tax rate varies with the time in which you dissolve your investment. If the profit from the property is earned in a short time, the tax rate is higher than the rate that applies when the same profit is earned from a long-term
investment. Also, if the profit gained is invested in another property, they are non-taxable.
Consider, two investors X and Y invest 10lacs in two different properties. X realizes his profit in a short-term and sells his land for 15lacs whereas Y sells it off after long-term investment at the same rate as X. Even though, their
profit is same i.e., 5lacs, X will pay a higher tax. Also, if any of them re-invests these 15lacs in any other property, no tax will be levied on these earnings. Another kind of tax that applies on your capital gain is the tax on your holdings. The government puts this tax in order to promote investments and to prevent blocking of money. This tax levies on the earnings from real estate that are kept uselessly for a long period of time. The government of India provides a tenure of 3 years to invest your earnings, not necessarily in property only, after which tax becomes applicable on it. Suppose, X who earned 15lacs from his investment deposits this money in his account and he does not happen to use this money either for investing or for his other needs. So, after a term of 3 years, he will have to bear a tax on this amount. Even if he uses some proportion of his earnings, the residual will be taxable. Owing to these features of capital gain, it becomes important to take it in concern at the time of purchase and include it in your calculations so that you do not face a problem in the later phase.
Step 4- Conclusion
In our country for property investment in india, most of the people are not able to build more than one or two properties in their whole life. So, it naturally becomes a very important and sophisticated decision of one’s life. Thus, it should be taken very wisely and patiently. Finalizing your land with full research and calculations may take a few months but that’s okay. A good decision will shoot up your financial position whereas a wrong one can cost you heavy.
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