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Real Estate - Not A Fail proof Investment
While most people regard realty as an investment that can't go wrong, you do need to watch out for a few pitfalls.
While real estate is generally regarded as a safe investment in India, there are many pitfalls of investing in this field. Here we have discussed some of the common ones and offered suggestions on avoiding them.
OVER-CONCENTRATED IN REALTY
When you buy a second house as an investment, the risk you run is that realty may constitute an overwhelmingly large portion of your portfolio. Borrowings associated with this purchase could result in lack of diversification of the investment portfolio due to inadequacy of funds. If the realty market languishes, your portfolio would take a big hit.
What should you do?
Give thought to diversification before buying a second house.
FLIPPING REAL ESTATE
Many people think that a lot of money can be made through short-term trading in real estate without realising the tax implications.
The taxman comes down harder on short term gains--when property is sold in less than three years after purchase. Long-term capital gains are taxed at 20%. You can avoid this tax by investing your gains in another house one year before sale or within two years after the sale of the first property. You can also avoid paying this tax by investing your gains in Section 54EC bonds. Short term capital gains are not treated as leniently. All gains are added to your income and taxed at the rate applicable to you.
What should you do?
Before you trade, give a thought to post-tax gains.
NO RESEARCH ON LOCATION
One mistake that buyers commit is to not do adequate research on the location, the factor which largely determines future price appreciation.
What should you do?
If you are buying for self-use, give a thought to the distance from your spouse's and your office, and your children's schools. The area should also be well connected via a highway, railway or Metro. Check the state of power and water supply and sewerage. Find out if the area is safe. Get to know the distance to the neighbourhood shopping centres, malls, parks and hospitals. "Speak to the people already living in the area to get a good picture of its pros and cons.
Give a thought to the possibilities of job creation in the area. Areas with bright economic prospects tend to see higher appreciation. If the property is an investment, look at how much supply will come into the neighbourhood in the near future. If a lot of supply comes into that locality, your return on investment will be limited.
NO DUE DILIGENCE ON BUILDER
Not doing adequate diligence on the builder and getting taken in by marketing hype is another common mistake.
What should you do?
With project delays becoming the norm, you must enquire about the builder's track record on timely deliveries. Also find out about the quality of his previous constructions. Find out if he has the title to the land on which he is developing the project and has obtained all permissions for the project. Also enquire which agency will maintain the property after possession and its track record on this count. Finally, enquire about the builder's level of debt from brokers and equity analysts.
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