Real Estate Investments |
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If you are willing to putup with a long gestation - period, and can sink in a large sum of money, investing in real estate wisely will give you a good deal. Those interested in considering property as an investment should be willing to hold on to their investment for 10 years atleast to reap the benefits of capital appreciation.
To begin with, there's the minimum three years for which you have to stay invested to get the benefit of the long - term capital gains tax. The three years do not commence from the date of construction, but from the date of possession of the property. Your capital gains are calculated on the basis of the cost ¬ inflation index, which has 1981-82 as the base year. Assume that you acquired a property in 1981 for Rs 20 lakh, and sold it for Rs 80 lakh in 1994. Your investment of Rs20 lakh is multiplied by the cost - in flation index for 1994 which is 259 and divided by the index in the year of acquisition(100). This works out to Rs 51.80 lakh. Deduct this amount from Rs 80 lakh and the balance of Rs 28.20 lakh is taxable at the flat rate of 20 percent. That is, you pay a capital-gains tax of Rs 5.64 lakh. So, your profit is Rs 54. 36l akh. Now, if you invest the taxable portion which is Rs 28.20 lakh in a new property, you won't have to pay the capital gains tax. And if you invest part of it say Rs 10 lakh you will be taxed only on the balance. After the wait of three years for the capital gains benefit, you may have to wait for a further seven years, on an average, to allow for capital appreciation. Real estate is not as volatile as shares are; so, you may not see as many ups and downs in prices. And there is noway you can really lose on your investment. Then, should you need finances, you can always get them by raising a loan on your property.
You can always lease out your property to get are turn on your investment even as you await capital appreciation. You can do this by entering in to what is called a Leave & License(L&L) agreement. L&L is very popular withland lords since it does not give the occupant or tenant any ownership rights. The time period for occupation is specified in the agreement and, on anaverage,ranges from 11 to 33 months. In the case of a lease, it is, generally , a plot of land that is leased out. Such leases have a much longer time - frame, and can extend upto 99 years. Moreover, in the case of a lease, the occupant can go in for a sub - lease to a third party a right which is not grant edunder L&L. What L&L does is to license the occupant to occupy the space for the period specified. Hence, an L&L is more restrictive from the tenant's point of view, but more secure from the landlord's. Arental, on the other hand,is now a days shunned by l and lords since tenants are known to claim tenancy rights , and refuse to relocate. If you, as a landlord, offer your apartment on an L&L basis, you can generate income out of your property in two ways. One, ofcourse, is in the form of the monthly rent. The other is from the deposit. That is, the lumpsum which the licensee pays you. You can invest this deposit in a safe avenue, and generate regular income. However, the deposit is refundable, and must be returned to the licensee when the agreement expires
You should calculate your rent taking in to account a couple of factors. The inflation rate mus tbe considered. And, as with any form of investment, your return should be higher. Then, bench mark against bank fixed deposits and government bonds, which are high on safety. But, while comparing returns, make allow an cesfor the capital appreciation on your property. Assume that a landlord is looking at an annual return of around 12.5 percent on his investment in an apartment that cost him Rs50 lakh. He can ask for a deposit of Rs 1 lakh, and a monthly rent of Rs 8,000. The Rs 1 lakh lumpsum can beparked in a one - year bank deposit for interest at the rate of10 percent perannum. That would earn him Rs 1,0,000. The rent would amount to Rs app. 70,000 by the end of the year. Thus, his total earnings would be Rs80,000 an additional return on his investment of Rs 50 lakh. Make sure that your rent covers all monthly payments that you have to make towards, EMI of a home loan, payments on maintenance and property tax. If you want a higher sum as deposit, the rental will have to be cut down, and vice versa. However, the thing to remember here is that the return you earn is in addition to the capital - appreciation during the period of holding. While comparing returns, you would have to consider the capital - appreciation along with the regular income generated by the property. If you want to make money from an L&L, you should keep the user in mind while selecting the property. For, it is the user who will, ultimately, occupy the property, and generate income for you. On the flipside, investing in a property that is attractive for the user will push the capital value up. The key, therefore, is to choose property which will provide the best return not just in terms of capital appreciation, but also in terms of income ¬ generation.
There turns will be higher in the case of commercial property, but so will be the risks. If economic activity is hit, the one way in which firms cut their costs is by downsizing. In such a situation, commercial property is the first to be hit. In the case of residential property, prices are more stable.
The right time to buy is when the building is under construction. That turns out to be much cheaper. In such a case, make sure that the builder is areputed one. Always check with the developer for the commencement certificate for full work, and make sure that all the titles are clear. You must avoid buying a plot of land . Because the moment you buy the plot, you'll have to fence it, or build a wall around it. Even that is no guarantee against encroachment. Then, getting hold of the basic amenities, such as electricity and water, may be a problem. You also cannot eliminate the possibility of claims on your landand, thus, litigation. Considering all these possibilities, buying aready ¬ built house or apartment is a safer proposition. With reference to your questionon timing, it is a crucial factor. Since income - generation is not the sole criteria, and capital - appreciation must also be taken in to account, timing is as important as the location. Even prime locations at Nariman Point in Mumbai or Connaught Place in Delhi areas susceptible to down turns as their less fancied counter parts. And the maxim that holds for any investment buy low, sell highist rue for realest a teaswell. Those who bought real estate in 1994 -95 , when the prices were at their peak, will, probably, have to wait for around two decades to reap capital - appreciation. In a way,they will be sharing the same plight as the stock market punters who bought scrips like ACC at Rs10,000 at the peak of the Bull Run in 1992. Then, avoid buying in areas which have already peaked, or are going at high rates compared with other locations. The chance of capital appreciation will be lower. Still, deciding the timing is easier said than done. In the past, there was at rend which guided investors: Mumbai was viewed as the benchmark for real estate. If the prices rose or fell in this metro, as imilartrend would be evident in therest of the country, with Delhi following suit with a time - lag of three to six months. Bangalore and Chennai would then follow. Hence, real estate investors could follow the trend by simply keeping tabson the prices in Mumbai. The trick worked even with in locations. For instance, with in Mumbai, Nariman Point was the benchmark.If the price srose here, the prices in the suburbs als orose with a certain time ¬ lag. However,this trend is weakening,and it may no longer be safe to be guided by it. Mumbai is no longer the real estate leader and, with in Mumbai, it is no longer South Mumbai which dominates the estate prices. In the absence of at rend, timing the investment remains a difficult task. And opinion is varied as to whether real estate prices will start rising, slump be fore rising, or just remains stagnant. For the seller of a property, waiting could mean a further loss if prices happen to decline further . For the investor, the quotes are already quite low. True, they could be lower, and the market may not have bottomed out. But , given the gestation period of 10 long years,the risk is not that great at the levels that wesee today.
It is very important to properly inspect any property before occupying it. Most modern building materials have a life of about 20 - 30years. Reinforcement of structural supports may be required after this period has lapsed. Average quality built - in appliances begin to wear out at the 6 to 8 year mark, (with good care). The following disadvantages are obvious if you occupy an old building:
Age of a home as relates to visible cracks, gaps and settlement is one indicator of past, (and supposedly), future structural activity. The age of the home is too of tenam is leading indicator of the overall condition and predictable repairs. The signs of camouflage by the owner on the building structure are of tentoo revealing.
Homes in which they ardare aslo pestoward the house of ten have more problems with water see page into basements, crawl spaces especially during the Monsoons. Homes on "flat" lots of ten suffer from poor site drainage; the bests it esare those where the water drains away in all directions. A guide to Negotiate best property deal.Your skills at the table will be called to the fullest extend in any real estate negotiation. Please remember that everything is negotiable, be it the fair value of the deal, who pays for all there pairs, who pays for property tax or registration feesetc., it is however important to keep a list of those little costs that can add to quite a bit after you have signed the agreement.
Your negotiating power as a buyer increases tremendously if you can inform the seller that you can quickly close the deal as you already have several lenders like HDFC, ICICI etc. willing to give you a loan of up to a certain amount. For this preapproval you will need to approach each of the seinstitutions separately and get your self preapproved after paying a nominal fee in most cases. This gives the seller the confidence that there is a "cash" buyer ready to close the deal quickly. Buying a home is the biggest financial commitment most people will make in their life time. It makes sense to protect that investment against unforeseen circumstances and against the wrath of nature. We’ve all seen the pictures on the news of damage caused by fire, flood, earth quakes, mud slides and other natural disasters. Most home owners choose to buy a house insurance policy to cover the cost of rebuilding their home should disaster strike. A good home owner's insurance policy will also cover the possessions in the home against theft and damage. When buying house insurance, the first thing to determine is how much cover you need. It is better to insure your home based on its replacement costs rather than on its value. Home pricest end to rise over time, some times significantly. If you insure your house for the purchase price, you may be looking at a huge difference between what the house insurance policy will pay and what it will actually cost to rebuild your home. Make sure to ask your insurance agent if you are covered for replacement value. If the policy covers only the purchase price, make sure it is for the replacement cost instead. There is usually not much difference in premiums between the two types of cover. Even if there is a little increase, the peace of mind you gain will make it worth your while. When buying a house insurance policy, it is important to include the items in the house as well. Have you thought how much it would cost to replace your furniture, incase of adevastating fire? What about the cost to replace your new flat screen television if a thief sneaks in somenight and helps him self to your valuable possessions? Most home owners insurance policies have provide a standard level of coverage for the possessions inside the home. This coverage level is of tentied to the value of the home itself. Make sure that the standard coverage would be adequate if you had to repurchase everything in your home, from your furniture to your clothes to all your appliances. If you do not think the cover is adequate, you may like to purchase additional cover. Likewise, if you keep antiques or collectibles in your home, you may need to insure them separately.Always discuss items of great value with your insurance agent when shopping for a home owner's policy. Things like antiques and collectibles may need to be insured separately. You may need to have an appraisal done to assess the value of the items to be insured. If you run a business out of your home, you will want to make sure your level of coverage is sufficient to cover the cost to replace all of you requipment and get your business backup and running as soon as possible.Be sure to discuss anything out of the ordinary with your insurance agent. Remember that house insurance policies are written with the average home owner in mind.If you don't fit the typical mold, you may well have to make some changes to the policy before you sign. In addition to protecting your home and your belongings, home owner's insurance policies typically provide a level of liability insurance incase someone is injured on your property. Be sure to read this section of the policy very carefully, and make sure the coverage limitis adequate for circumstances you are likely to run into. You must read the fine print on your house insurance policy. You may even want to have your attorney take a look at the policy to make sure you are fully protected. After all, the idea behind insurance is to allow you to rest easy knowing that you are protected should disaster strike. You want to make sure you are comfortable with your home owner's coverage before you sign on the dotted line. |
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