A smart investment has the potential to change our lives, providing us sufficient funds to live our dreams. Today, most of us have an investment portfolio comprising of a number of investments, be it stocks, gold, bonds, government schemes, etc., but one of the most underrated or ignored investments in recent times remains to be real estate. Given the huge economic boom in most Indian cities, the average income has increased, providing us added incentives to invest for the future and real estate could be the ideal investment choice for you.
Real Estate and Its Importance
Kingdoms have fought battles over land for centuries, leaving no stone unturned in order to win that priceless property. While kingdoms might not exist today, the truth remains that the demand for land hasn’t changed, with everyone vying for a share of what’s available. Given the fact that prime real estate never loses demand or value, investing in it can be a great move, offering returns far higher than traditional investment options. Owning a home is the dream of everyone, and fulfilling this dream can not only give you emotional satisfaction but also monetary joy. Given the shortage of land in cities across the country, purchasing even a small flat can offer you returns, either in the form of rental income or by selling it for a profit.
Important Points to Consider Before Investing in Real Estate
It is possible for someone who has no prior real estate experience to get carried away by the lure of profits and invest in real estate which offers no returns. Real estate investment comes with certain risks and a beginner should keep the following points in mind before spending his/her hard earned money.
- Stay Patient – Buying a property is a time consuming affair, with most genuine property transactions taking a few days to be complete. While a number of real estate firms offer to complete formalities overnight, the fact remains that exhibiting patience can help you land a good deal. Jumping the gun can see you pay more for the property, or purchase one which doesn’t live up to your expectations. Also, sellers can delay projects, which could see your investment not offering any returns for a certain period, checking your patience.
- Research The Property – Doing your homework before you step out to look for a property is critical today. With a number of projects coming up, it can be confusing to choose the right real estate, for sellers are typically known for sweet talking buyers. The amenities on offer, the history of the construction company, the materials used, the area a property is located in can all play a role in determining the returns you get on your investment. Failing to research before buying could see you regret later, negating your investment.
- Check The Papers – The papers of a property are perhaps the most important factor one should consider, for it is possible for someone who is not acquainted with the real estate industry to get scammed into buying a property with fake papers. Buying a property without clear titles can lead to long drawn court cases or litigations, which essentially nullify the investment. All property papers should be checked by legal experts to authenticate them, for failure to do this could see you purchasing a property which could be mired in controversy. A number of times people sell properties below market rate, which should alert you, for such properties could have litigations or internal issues with the owner.
- Check Market Rates – Most local governments provide a guidance value to help investors know the rate of a property. Knowing the market rate can help you track local trends, ensuring that you don’t get scammed into paying a higher amount than what a property deserves. Researching market rates and working out developments could help you extrapolate the returns you could expect in the future.
- Talk To Neighbours – Talking to the neighbours is a good idea which most of us tend to ignore. This can help you get a first-hand perspective of how things are in a locality, helping you narrow down any problems or areas which could dilute an investment. Talking to them can also help you know the current market rates and see how the area has developed and the scope for future development. Given the fact that neighbours aren’t salesmen trying to sell you the property, one can get a clear picture of the real estate they intend to buy.
- Calculate Your Finances – It is important to calculate the finances you have in order to ensure that you meet certain goals. While it is easy to get loans from banks, calculating the interest and other factors is crucial.
- Remain Positive – It is important to stay positive while executing a real estate deal, for there are bound to be times when deals don’t fall into place. Remaining calm and composed while interacting with property sellers can help you get additional benefits.
- Negotiate – Negotiations are a key aspect of the Indian real estate system, as everyone is looking for a deal which will make them richer. Knowing the art of negotiation can help you save a lot of money and get additional freebies like parking spaces, furniture, etc.
- Consider The Risk Factor – Real estate investments are typically safer than other investments, but that doesn’t mean they are totally risk-free. Legal hurdles and property disputes are extremely common in India and one should ensure that the property they are interested in is clear and minus the hassles.
Owning a property can be the smartest move given the changing dynamics of our times, and keeping these simple points in mind can point a beginner towards the right path to investing in real estate.
Mistakes to avoid when investing in real estate
For most people the main purpose of buying real estate as an investment is to make profit. However, there can be instances where you might buy a property without considering all factors involved and without calculating the full cost. And when you do this, you may not get the returns you wanted, or worse, make a loss.
To make sure you don’t make a loss while selling the property or even end up being saddled with an illiquid investment, here are five mistakes to avoid while investing in ..
Not knowing your credit score
If you apply for a loan for your property purchase, your lender is going to investigate your credit history. Adhil Shetty, CEO, BankBazaar.com said, “Any problems in your credit history may lead to a loan application being rejected or being approved but with a high rate of interest. The best loan offers are typically reserved for borrowers who have a credit score of 750 or more. They get the benefit of the lowest rates.” Therefore, before you apply for a loan, take a few minutes to check your credit score online.
Not weighing full cost of real estate investment
When you invest in real estate, you must weigh the full cost of investment. For instance, on a base price of Rs 100, your additional charges of homeownership such as GST, registration, stamp duty, brokerage, furnishing, costs of borrowing etc. can easily pull the whole bill to Rs 120 or Rs 130.
Shetty said, “In an under-construction property, you will need to pay GST at 5 per cent, and 5-7 per cent on registration and stamp duty depending on your state norms. Furnishing the house maybe another 5 per cent. You may be looking at 15 per cent of your base price easily. If the cost is Rs 1 crore, you will need to spend Rs 15 lakh on these additional costs.”
Shetty further explained: Assuming a base price of Rs 100 for a resale property in Delhi, the additional charges may be Rs 7 for stamp duty and registration. Apart from this, you may pay a charge for costs of borrowing (processing fees and MOD charges), which may be upwards of Rs 0.10, or brokerage of up to Re 1. Assuming the house to be unfurnished, one can also add Rs 3-5 in most cases for furnishing costs, but this is a matter of taste and budget, so costs could vary wildly from one case to another.
Besides, a bank will typically fund 75 percent in a high-value loan or up to 90 percent in a low-value loan. The rest needs to be provided by you. Therefore, in most cases, you are going to need at least 20-25 percent of the budget ready as cash in hand, says Shetty.
Santhosh Kumar, Vice Chairman, ANAROCK Property Consultants said, “A buyer should have checked out at least 10 properties before the search can even begin to be comprehensive. Impulse buying can happen if one has insufficient resistance to sales pitches, or if one is wooed by freebies which have nothing to do with the value of a property. Often, an unethical broker guided purely by commission will be instrumental in one buying an inappropriate property.”
Not doing one’s homework and due diligence
A good property purchase is always the result of adequate personal research on several different variables. Apart from the obvious ones of price and location, the buyer should also factor in how much space he or she will need further down the line, whether the infrastructure of the area will improve, whether the property is under litigation or otherwise legally problematic, and who the seller is. “When it comes to developers, sticking with reputed names is a major way of de-risking the proposition. Likewise, a buyer should check out the neighborhood infrastructure and decide if it is adequate for the family’s needs, what the price trends have been over the last 5 years, and if all necessary facilities are available nearby,” Kumar said.
Not comparing with other forms of investment
Purely as an investment, it’s much easier and far cheaper to invest in financial instruments such as mutual funds, small savings, or equity. The costs of and barriers to financial investing are negligible. Unlike real estate where you’ll need to pay maintenance costs and property tax, there are no costs of maintaining your investments barring minor charges such as Demat annual fees, brokerage, expense ratio in case of mutual funds etc. It’s also much easier to get out of financial investments. Financial investments can be part-liquidated when you need liquidity. But you cannot part-liquidate a property.
Credits: Economic Times and BankBazaar.com