Buying property is not just about owning a house. Real estate has become a popular investment option. Though it comes ridden in risks and complexities, the massive gain involved makes it a good investment tool. SHAlINI SAKSENA tells you more

For 38-year-old-year Sunil Singh, the question facing him when he came in for some money after his father’s death was where to invest it. Friends and family suggested that he put the same in Fixed Deposit. But Singh wanted the value of the money grow as well. His financial advisor told him that he could invest in real estate. The question facing him was the advantages and disadvantages of investing in real estateIJ

The longer one holds on to properties, higher has been the capital appreciation as demand for real estate is normally rising. If the property can be rented out it generates an additional income for the property owner and finally owing a property gives a sense of security. Properties are considered less volatile compared to paper securities like bonds or shares. But it has a flipside as well.

“The legal issues involved are complex and an investment in land should be considered only if an investor has a thorough understanding of these. Sometimes the land may be mandatorily acquired by the Government for State development which sometimes even leads to a loss, as the compensations are low. Property can’t be sold as quickly as stocks or bonds. Urban house property owners are required to pay maintenance charges to co-operative housing societies for common facilities like lifts, security, water, common lighting,” Anil Rego, CEO and founder of Right Horizons says.

Therefore, financial experts opine that those investing in real estate for the first time need to have a look at a few key areas. First, the location of the property. Second, check the paperwork and the seller’s history and background. Third, the size of the plot, if investing in land. Fourth, it is important that the buyer compares the prices of various properties. Fifth, it is necessary to check the facilities available like gas station, hospitals, schools and shops. Finally, the cost involved, the amount of stamp duty, mortgage related fees, etc.

Agrees JC Sharma, vice-chairman and MD, Sobha Developers ltd based in Bangalore. Things like the locality, the rate of return, the objective of the purchase and budget should be considered. “Investment in real estate has the potential of earning high returns. But there are some pitfalls. First, it is important to go with a trusted developer which is known for its quality and timely delivery. Second, one must see that the project has all the approvals, a clear legal title. The trick to not fall prey to fraud,” Sharma advises.

But then the question arises whether one should invest in commercial or residential propertyIJ “Commercial property is more expensive than residential. Also most commercial properties make it difficult for investors to get an accurate valuation without proper advice. It’s relatively easy for residential investors who are likely to require more time to manage than commercial property due to smaller unit sizes, shorter lease lengths, and lesser maintenance and repairs,” Rego explains.

This also including taking into consideration whether one should take out a loan to buy property for investment. “If one takes a loan and the income is good, the chances are that one is in a high income tax slab. By borrowing 100 per cent of the property value one can buy a property right now with the maximum possible leverage and reduce the tax bill. One can also buy more properties. By reducing the amount of money required to buy a property, they can increase the number of properties and maximise one’s capital gains. large property portfolios can become complex with many loans from different lenders secured by different investments. By borrowing 100 per cent you can avoid cross securitising your investments and in doing so keep your investment simple, Rego states.

But he quick to point out that there are some negatives as well. Very few take a balanced approach to assess risk involved. Investors tend to be either overly conservative or spend too much time focusing on why they shouldn’t invest or they are blind to risk and look at everything with rose colored glasses.

So, should one invest in real estate considering the complexities involvedIJ “Real estate should ideally be on everyone’s investment list, especially for the young. It is one of the more affordable options with banks funding up to 80 per cent of the cost. The investors also get tax benefits. The key benefit is derived from the fact that one is expected to pay fixed installments over years which in effect amounts to purchasing an asset at a lower cost, whose value will appreciate while you own income rises too. Also, real estate has a better hedge against inflation, so it makes for a safer choice,’ Sharma tells you.

Hence, like any other investment portfolio, one needs to keep tabs when to sell it. But the same depends on the kind of property bought. Is is land, commercial property or residentialIJ Also one needs to decide whether one is an investor or a speculator. A speculator buys into the market with a view to selling in the short term as the market rises. An investor holds the land for the long term and may or may not sell the property for a very long time. If the investment is in land, there will be no returns. In fact, one will need to bear expenses like council rates, mowing and fence maintenance. The return will only be when the property is sold. On the other hand an established home offers good capital gains over the years.

“Commercial units offer greater rental return and is a great investment if one is able to get a good long term tenant. It is common to have long vacancies in commercial premises, but once one has a long lease, with a solid tenant, it can be rewarding. But there is a catch. Commercial property is generally located in prime positions, however a meticulous study of supply and demand and projects that are planned for the near future is essential,” Rego says.

Top mistakes

• Allowing your emotions to cloud your judgement. One should always buy an  investment property based on analytical research
• Most people do not plan
• Many people get into property investment hoping to become overnight millionaires. They think, property is a quick fix to their financial problems, but the truth is seeking short-term gains in real estate is more about speculation than strategic investing
• Buying the wrong property
• Understanding all costs involved in acquiring and holding property can be difficult. Many don’t take the advice of experts. Always seek the advice of a professional accountant who knows about real estate investment

The Pitfalls

• If the property does not belong to the seller
• The same property sold to many buyers
• Documents are fake
• Property is an encroachment and the buyer can’t do anything
• Property exists only on paper