Real Estate Query

Every individual has a dream of owning one day his own house.The motivation to invest in property will vary from one investor to the next. Though certain property investors place an emphasis on capital growth, others focus on a property's ability to secure a rental and a market related yield.For most investors the challenge lies in securing a total return that incorporates both capital growth and yield.

The expertise acquired by an investor may also influence the type of investment undertaken. Such expertise may reflect the investor's knowledge of a specific geographic market or a particular market segment - for example retail property.

No matter what route an investor takes, an investment in property is different to an investment in the equity or bond market. A property investment encompasses certain unique characteristics.

These include:

Large individual value. Commercial and residential properties are generally of large individual value and few investors have the equity (cash) to cover the entire value of the property. This means property investments usually rely on a high level of debt funding and the desire of the financial sector to lend. Yet the very characteristics of property means that it provides collateral that can be used to secure debt funding.

Not a standardised investment. Property, unlike many other investments, is not of a standardised nature. No two properties are alike and every building is located on a unique erf with specific legal and geographic characteristics. Also, the investor has to understand the unique qualities of a property as well as the specific risks and opportunities that it can provide.

Low Liquidity , extensive documentation and due diligence- property unlike bonds, mutual fund and equity cannot be liquidated on demand. The investor also needs to be careful on the documentation, clean title , regulatory clearances etc.

In this section, we attempt to make life easier for a young investor who is putting his life savings and taking large mortgage to fulfill his dream of owning his house.

1. You buy what you see
When you buy Ready to move properties, you exactly get what you have seen. There is no chances of getting duped at least in those things which you can feel and experience. This is not in the case of Under construction properties , because you never see the actual thing , you see samples or the “projections”. You can know what kind of people live around you.This is one big advantage of ready to move houses. You can already see who your neighbours are, what community they belong to , what income level they have and if you would like to be with them or not.

2. Immediate relief from Rent & travelling cost
A lot of people who are paying very high rent or travelling very far for their work tend to buy the ready to move houses because they want immediate relief from the high rent or travel cost and one can get it in ready to move properties.

3.Keep in mind Delays in project & Dispute of the Land & Permissions
If you know of any project which was delivered on the exact day that it was promised, its rare! Delay in the project for various reasons is one of the top most issue with under construction properties. On an average 2 years is the deadline given by the builders, but it gets delayed and further delayed most of the times. 2 yrs can turn out to be 4 or 5 yrs of wait in a lot of cases and this adds to the frustration of buyers.
This delay is caused mainly because of the dispute on the land, cash crunch and most of the times incomplete permissions from authorities. Builders start the construction after obtaining most of the required and most important permissions, but at times there might be few permissions which are still going on, but builders start the construction. So it becomes very important thing for a buyer to check all the required permissions and the ownership details of the lands.

4. Income tax claim is headache unless you get the possession certificate
You can avail for tax benefits only after you get the possession of the house. Saving tax on the EMI’s is one of the big reason why many people plan their house buying, only to realise later that they never thought about this aspect. So if you are going to buy under construction property , be ready to pay rent + EMI and not getting any tax benefit unless you get the possession certificate, and incase the construction gets delayed by few years, it is frustrating.

5. Thorough investigation , getting documentation checked and due diligence
Your hard earned money deserves attention to detail. Visit site multiple times , meet neighbours and keep asking direct and tough questions to builder / seller . Get the documents verified from a bank / mortgage company.

6. Service tax
Buying under-construction property comes with the liability of service tax which is now 3.50 per cent of the total property value or 4 per cent if the property is larger than 2000 sq ft or costlier than Rs 1 crore. The service tax is levied on properties which do not have Completion Certificate at the time of purchasing.

7. Rental yields and calculating loan cost

What is Rental Yield?
Before we get into where you can invest, let’s be clear on what rental yield is. Sample this: If you earn an annual rent ofRs.1.8 lakh on a property which is priced at Rs.50 lakh, then the rental yield is 3.6%. It essentially measures the return you make on the asset without considering the expected capital gain or loss. Rental yields on residential property in India are lowest in world. In case property does not appreciate , the real return could be negative . ( 2% rental yield - 10% mortgage cost )

As an investor, knowing that capital appreciation is harder to come by compared with the last decade, it is now time for you to also consider rental yield. Balance your property investment and look for deals which get you comparatively (depends on location) higher rental yields to safeguard against declining capital values. In case of residential property, it may be worth your while to just do a check of relative yields across locations before buying.

So the final conclusion from various experience is that if you want to buy the house from investment point of view, then buying an under construction house of a reputed builder makes sense. However if its mostly from living purpose and you want to consume it for your own purpose, then buying a ready to move house makes more sense. Also all the pros and cons discussed can vary from case to case and the points discussed here are based on a general information and feedback. People buy house for investment without any consideration on rental yield , borrowing costs and most importantly estimated time of delivery.