Saturday, July 18, 2015

REAL ESTATE INVESTMENT


Man does not live only for food, cloth or shelter or for himself.  He has certain social responsibilities to provide for his family and also for himself in old age. This naturally makes him save some portion of his earnings and invest them in lucrative portfolios. After the basic needs of food, cloth and shelter are fulfilled he strives to improve his standard of living and to enjoy the fruits of hard earned money.

Investment avenues are many.But the investor should be prudent enough to select a proper area, which is safe and secured with assured reasonable returns. Earlier the bank deposits, stocks, mutual funds insurance policies and bullion were most opted.With increased business, globalization of economy has unfolded many more areas.The investment has become very complex which has led to the emergence of specialized investment advisers.

Bank deposits, insurance policies, mutual funds have become unattractive because of low returns and failure of many companies.Stock market is unpredictable and volatile. Moreover, these investment avenues are for short-term which need close monitoring.  Further the quantum of investment is generally small. In recent past real estate has emerged as a safe and high yielding investment opportunity.Investment in real estate is a long-term investment and needs considerable amount.  It is not only a financial but also a sentimental, emotional investment.

The liberalization initiated by the Government, opened up the hitherto dormant Indian economy and many multinational companies set up their offices in major metros.  The improved pay packets of vast middle class population has offered as many investment routes with a desire to own a roof over their head as early as possible The migration of rural people to urban centers in search of assured income jobs, further expanded the real estate market. However, as the demand exceeded supply, many fly by night operators appeared on the stage and indulged in a speculative and artificial price spiral, which resulted in crash of real estate market in later half of 1990’s.  But now the market has regained its potential. Only serious vendors and end-users are operating in the market.

The yield in the realty market has to be calculated on the capital invested and annual rental returns less property tax, income tax and annual maintenance charges.This return varies according to the type of property,residential property, commercial office space. In Bangalore the returns are about 8% for residential, 12% for office space and 15% for commercial space There are certain determining factors, which play a crucial part in property investment. Where to invest? In other words the location. There is equal demand for all types of space in metropolitan cities and market trends and rates are more transparent on account of competition and frequency of deals. But smaller towns have potential of increased returns because of dearth of space.  Local politics also plays its role in determining the returns in small towns.

Amount of investment:
Investment in real estate needs higher amount and the minimum entry level will be in multiples of lakhs; about 15lakhs for residential and more for office and commercial space.

Time factor:
The sale of property requires a long time for finding a suitable purchaser and complying with legal requirements; further the appreciation of capital value of the land is slow but certain and stable unlike in stocks, debentures.

Local Laws:
The realty investment calls for more discretion and involves complicated processes like title verification, land use according to local laws, floor area ratio restriction on sale for some period and many more unexpected laws, rules depending upon the political environment.

Tax factor:
Uncertain tax rules, rates which vary every year needs to be considered. Property tax is an annual commitment which is being increased every year by self-assessment or capital based assessment.  Rental income also attracts income tax to be paid annually; sale of the property attracts capital gains and purchase invites stamp duty and registration charges, property tax & stamp duty varies from state to state.

Type of property:
As stated earlier, the type of the property is also very important.  It may be residential, commercial or office space. The demand and supply position of each sector needs to be carefully examined.  Residential property calls for smaller investment.  Commercial and office space need higher investment

Type of return:
Real estate sector offers two types of return:
Recurring is a monthly return in the form of rentals, or the returns on the lease amount invested in bank, securities or in business.The other type is return on sale of the property. The amount to be invested also depends on the mode of returns expected.Generally leasing of property is attractive only for business people. Lease amount does not attract interest.Commercial property and office space yield high returns to the extent of 15% where as the residential property yield about 8%.

Risk factor & limitations of legal scrutiny:
Tracing the title of property is most important step in purchasing the property which has to be done by an experienced advocate who is well versed in property laws. The property laws are very complex and vary from state to state.  Further many times, age-old records need to be examined, which may not be available with the parties or even in jurisdictional offices. Further legal scrutiny is based on the documents produced for verification.However, it is not the duty of the advocate to certify the genuineness of the documents from concerned departments. The honesty and integrity of the seller is very important. Certain hidden facts like pending cases, prior agreements, and government notification of the property cannot be traced easily by verification of the documents. However, paper notification about purchase of property would help to unearth some claims.


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