Buying real estate for the purpose of investment, with long term perspective ensures good profits. However, buying property without considering a few important factors like calculating full cost may hurt your actual return expectations, or worse result in a loss. In order to ensure that you do not make losses while selling property or not end up being saddled with an illiquid investment, here are a few key factors to consider while investing in the real estate:
Maintain Good Credit Score
When someone applies for property loans, lenders investigate that person’s credit history. If there is a problem in your credit history or the credit score is low, your application may get rejected or you might be offered loans at a higher rate. However, if your credit score is 750 or more, the best loan rates are offered by the lenders. If your CIBIL score is more than 700, you can get a home loan of Rs 2 crores at about 6.7 percent interest, which of course can shoot up to 7.5 percent if your CIBIL score is less than 600. You will save about Rs 24 lakhs if your credit score is quite high.
Account For Transaction Cost of Property
The real cost of property including transaction cost should be calculated before you buy any property. One should ensure GST, registration, stamp duty, brokerage, furnishing, cost of borrowing, etc. This can push your costing 25-35 percent higher. There are additional costs that may vary from place to place and the location of the project. For an under-construction property, the buyer needs to pay GST at 5 percent, 5 to 7 percent for registration, and stamp duty depending upon the state norms. If you are buying a house worth Rs 1 crore, assume the furniture cost to be around Rs 7 lakhs, i.e. 7 percent of your price. So the actual cost of Rs 1 crore turns out to Rs 1.25-1.3 crore in real terms for the buyer. Apart from this, lenders are willing to fund 75 percent of high-value loans or up to 90 percent low-value loans. So if you believe that your Rs 10-20 lakhs are enough, then do not fall prey to it. The additional burden of Rs 30-50 lakh is to be borne from your end.
Rigorous Research & Due Diligence
Before buying a new smartphone, we often compare various models and choose the one that fits our requirements. The same goes for real estate, which demands a more rigorous research and due diligence, ranging from construction, design, location, disaster zone, the reason for selling, nearby facilities, ease of commuting and growth opportunities and more.The buyer must know the objective of purchase, whether it is for self-occupation or renting out. Also, if you are willing to resell, you should have clarity about the holding period. Also, you must understand that real estate needs regular maintenance and renovation which requires additional expenses. Clarity on these pointers can not only ease your investment, but also make it worthwhile.
Avoid Impulsive Buying
A buyer should not jump the gun if one does not like property because it can result in unpleasant consequences. Before selecting a property, consider the cost factors, paperwork along with your returns expectations from the property. Do not overlook it by blindly trusting anyone, which can lead you to trouble. Timing is key to a real estate deal. Impulsive buying can happen if one has a weak resistance to sales pitches or the buyer is wooed by the freebies which have the least to do with the property. For any unethical dealer, the high commission is the key incentive to sell an inappropriate property.
Compare Returns From Real Estate With Other Asset Classes
Purely as an investment, it is much easier to put your money in far cheaper financial instruments such as mutual funds, small savings or equity. The cost and threshold barrier in such financial investing is almost negligible. The service charge, annual account cost, brokerage and expense ratio is too low in such asset classes. Also, these investments are highly liquid. On the other hand, real estate investments require you to pay property tax, besides incurring maintenance costs and renovation. Along with it, real estate investment is highly illiquid and the prices are not usually fixed for the same or similar asset. However, real estate is a social status symbol and even the most preferred investment class in the country as it fetches good returns in the medium to long term. Therefore, before investing in real estate, compare effective returns from real estate vis a vis other asset classes.
The Bottom Line
If investing in real estate was so easy, everybody would be snapping their fingers. But then many of the hardships investors face and endure can be avoided with due diligence and proper planning before a contract is signed.
Aman Gupta, Director, RPS Group