What to keep in mind while investing in real estate
“Buy land, they’re not making it anymore,” said author Mark Twain. Most people invest in land or real estate to earn profits in the near or distant future. Like all other investments, investing in a property necessitates careful consideration of many factors or evaluation of the total amount that would be spent. This may impede returns intended from the purchase or sale or unforeseen losses. A property or land is not a liquid asset, which makes it impossible to convert into cash, if and when needed. Here’s what to keep in mind while investing in real estate:
Check your credit score
Banks and non-banking finance companies (NBFCs) first check the credit history of people applying for property loans. This is a factor that most people continue to be unaware of and ignore to check their credit score online before applying for loans. A lower credit score can result in the loan application being rejected. The ideal credit score is 750 or more, which means that borrowers with high credit score benefit from low-interest rates on their loan applications. However, lenders may also charge high-interest rates from loan applicants with credit score less than 750.
Real cost of investment
Face value of the property is just one part of the cost incurred. In real estate investment, there are more expenses involved including Goods and Services Tax, registration, stamp duty, brokerage, furnishing, loan-related fees, etc. Adhil Shetty, CEO, BankBazaar, an online market place for financial products and checking the credit score said, “The GST on under-construction flats which are not in the affordable housing segment is 5% without input tax credit (ITC). For affordable homes, the GST is 1% without the ITC. Sale of completed properties (where completion certificate has been issued) or the resale of old properties does not attract GST. In this case, you will need to pay stamp duty, not the GST.”
Reiterating details regarding stamp duty, Shetty added, “Stamp duty on property registration is set by the state government, and different states have different stamp duty and registration charges. Even within a state, the stamp duty on property differs based on the jurisdiction under which property falls – municipal corporation limits, municipal council, or the gram panchayat. The age of the property may be taken into account, as may be the age and gender of the purchaser while calculating the stamp duty. For instance, many states offer rebates and discounts in stamp duty rates to women. States may also have special time-bound discounts on stamp duty to boost the sector. For instance, the Maharashtra state government announced a 2% reduction on stamp duty between January 1, 2021 and March 31, 2021, bringing down the stamp duty on property registrations to 3% for that three-month period.”
Furnishing may cost extra. Besides, banks finance only up to 75% of the loan sought, which means that you must be ready to ready to bear 20-25% of the cost of the property.
Check out the area
Extensive research must precede any property purchase. Apart from the amount that one must pay or retrieve as property loan, you must check infrastructural details of the area. Whether the price of the land or property would increase or remain stagnant in future is dependent on the surrounding area and infrastructure. Also, check if the land you propose to buy falls under the category of disputed property. CS Sudheer, founder & CEO, IndianMoney.com, an online advisor on financial products said, “Check for property title papers. Property should have a clear title. Take an encumbrance certificate, and cross verify. Check if the sanctioned plan is available with local municipal and town planning body. Ask for home loan approval from a reputed bank. As banks check the background, this will help you understand if the property that you intend to buy is free from litigation. Take help of a forensic documents examiner and advocate for getting better clarity.”
Explore other investments
Parking all money in a major land or property transaction is futile. There are equally good investments that fetch equally good returns sans any loan or the burden of added taxes accruing from the possession of property. These include a healthy mix of mutual funds containing equity and debt. Investment and maintenance costs including yearly fees on Demat accounts, expense ratio, brokerage, among other things are negligible unlike the costs of maintaining your property. Besides, you can sell these financial instruments, in part or full, if you need money. However, selling off property for cash is not that easy, which means that you are likely to feel stuck during a sudden financial crunch.
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