Real estate investment is reputed to be something only experts at the game should play at. Nothing could be further from the truth. Unlike stocks, residential real estate is an investment asset class that is quite predictable and very familiar. In fact, anyone who has ever bought or even rented a home will know instinctively what kind of home will work as an investment.
The term ‘location, location, location’ is a very familiar one, and it is the time-tested maxim behind every successful property investment. When making an investment in a residential property purely for capital appreciation, it is imperative to consider the location and surroundings of the project. It is the location and its immediate surroundings that determine how the area will develop in the time it takes for under-construction projects to become ready for possession.
To understand how the location factor drives consumer demand for properties, the investor should assume the role of an end-user of the property in question. For a home to work, it is essential to consider distance and accessibility to workplaces and social infrastructure such as shopping malls, neighbourhood shopping arcades, parks, etc. Road connectivity and infrastructure such as power, water and safety and security parameters must also to be considered alongside.
Another familiar maxim of residential real estate investment in India is that the developer’s track record should be considered. In fact, this aspect cannot be repeated often enough, and its importance must not be under-estimated. When contemplating investment into an under-construction project, the developer’s performance with regards to past projects, quality of finished projects, attendance to consumer complaints and timely delivery must be verified.
Also, on-going projects, sales in the project under consideration and status of statutory approvals should be considered. While it is not unusual for projects to be granted some pending permissions and approvals only further down the line, not all developers are able – or even willing – to complete the approvals process. Many developers with little or no past experience in the real estate business simply abandoned this process once their projects began selling.
Thankfully, with the Real Estate Regulatory Bill now an enforceable Act, we will see this breed of unscrupulous builders being weeded out. Nevertheless, it must be kept in mind that with reputed developers, obtaining all necessary approvals is firmly wired into their business culture. They have better relationships with the approval authorities and are able to see this vital process through with a minimum of fuss and delay.
No property investor – especially not one who is investing for capital appreciation rather than rental income – should be ignorant about how capital gains taxation works in residential property sales. Long-term capital gains are calculated for the sale of a property held for more than three years. When long-term capital gains made by the sale of housing property are invested in another house property, the amount invested in the new asset is exempt from capital gains tax.
The new property must be purchased one year before the transfer of the first house, or within two years after the sale. Deduction is also available in case one wants to construct the house or invest in an under-construction property, if in both cases construction is completed within three years of sale of the original property.
The sale of any property within three years of its purchase will mean that that the seller has to pay short-term capital gains tax, which is taxed after being added to the taxable income for that year. In case of a short-term loss, the same can be set off against short-term or long-term gain in the same year. Else, the loss can be carried forward for a duration of eight successive financial years.
Quick Reference Guidelines
- A cheap property is not necessarily good investment. This may hold true in low-cost emerging locations which will grow in the future, but larger homes with better specifications tend to perform better in already developed areas
- Freebies do not necessarily mean a good bargain. Check the developer’s track record and delivery timelines.
- Give preference to properties in integrated townships, as these will attract the bulk of demand from home buyers in the future
- Due diligence as to project approvals and land acquisition must be done to the best of one’s capability.
- Read the agreement’s fine print related to sale of the property.
- Take a long-term perspective on property investment to get the most capital appreciation. Look to sell just before possession.
- Invest in projects/property markets where an active secondary market exists or is possible.