Amit’s eyes shone as Rishabh told him about the 300% gain he made on selling his property at Whitefield, Bangalore. He had bought it for Rs 30 lakh in 2002 and sold it for more than a crore recently. Amit decided that real estate is the asset class he should be investing in! Such statements and cases are not uncommon. Though the gain figure looks quite impressive, there are many things a smart investor who is looking to build his wealth should consider.
We at RoofandFloor always believe in helping our readers make an informed choice while investing in real estate. So, here are some pointers that an investor in real estate should know before investing.
Returns on real estate investment
In our example above, the 300% gain looked very impressive. But the period of holding of 15 years was not taken in to account there. If the Compounded Annual Growth Rate (CAGR) for the same example is calculated, the gain is merely 7.5%, which corresponds to the interest earned on a Fixed Deposit.
Moreover, this is return figure does not take into account the expenses involved in the maintenance of the property over the period.
It is very important for the investor to have realistic expectations out of his investment. One should understand that historic returns are not easily replicable.
Title risks involved
Developers of properties have very low entry barriers, and hence any plot of land can be developed into a residential/commercial complex. Moreover, land records in our country are not digitized, making it difficult to ascertain title. Remember a movie called “Khosla ka Ghosla”! Cases where developers have cheated customers and left them in the lurch are quite common. You wouldn’t want to be a prey and lose your hard earned money.
Financial risks
Investment in real estate is done with leverage (debt) as it is a big ticket investment. While thinking about investing in real estate, make proper contingency plans to deal with each of the situations like loss of job, disability, death etc.
These are real life situations that may crop up at any time. Ensure that each real estate loan is covered by an insurance.
Besides, valuation of a real estate property is a tricky issue. As real estate investment is quite an emotional decision, it is easier to pay over and above the fair market value of the property. Making using of property indices like Residex or Housing Price Index may be a good starting point.
While we talked about the risks involved in real estate investments, there are some important issues that any investor should be aware of. These would act to his benefit.
Implementation of RERA
The real estate sector has been infamous for long for its unscrupulous ways. The government has taken notice of it and has made it mandatory for all States to implement the Real Estate (Regulation and Development) Act.
The Act is aimed at bringing in transparency into the sector. Builders can no more utilise the money collected from buyers for purposes other than the particular project. Project completion deadlines are to be maintained, failing which the builder is liable for payment of a penalty. The quality of construction also is monitored by the RERA. Buyer-builder disputes are also addressed under RERA.
It is very important for investors to only invest in projects registered with RERA.
Real estate investment is a big decision. It is always good to take time, think, do your research well, and weigh the pros and cons before signing the documents.
This article was originally published on www.thehindu.com
Hello there,
Thank you for writing such an informative blog about what to know when investing in real estate. Everyone interested in real estate investing will benefit from your information and they can take safety measures while investing in real estate.