Real estate has always been seen as a potential gold mine for investors, not only in the country, but all around the world. Taking aside the odd sub-prime market crash or two, real estate is by far the safest option to invest your money where you are assured of a profitable return, the scale of which may vary on your timing. However, in this sector, investments are usually very heavy, and it was often seen that only the filthy rich could afford to invest in property and constantly replenish their overstuffed bank accounts.
But now, the past few years have seen the rise of middle class investors as a major part of the real estate market. Awareness created by various media have cemented this psyche into their minds that even if they have to cut down on their costs today, it would ultimately lead to gains of mammoth proportions.
Hence, here we are, witnessing a flurry of constructions going on and many middle class families owning two residential properties on an average in metros. While this is all good for raising the overall standard of living of the quintessential Indian, there are a few points that should be taken care of before deciding to invest in real estate. Often, the flat or plot you purchase would come with a lot of, let’s say, fringe costs.
Taxation
There are two categories in this regard: wealth tax and income tax. Wealth tax is charged when you own more than one residential property. Mainly, it is when your net wealth crosses Rs. 15 Lacs, and applies to cars, jewellery, and many other assets.
Apart from that, you have to pay income tax over the potential rent that your residential property is expected to bring in, even if it is not rented out. This potential rent is decided by authorities, and is based on your property’s annual value.
The flipside is that it would allow for tax savings due to the government’s tax policy which exempts housing loan amount from the taxable income slab upto Rs. 1.5 lac. It might increase your take-home pay, but would further burden you with your cash outflow by the means of EMIs. The best option in this regards would hence be to take the minimum amount possible and to pay it off as soon as possible.
Leverage
Leveraging refers to borrowing money to make an investment, and affects the expected returns on your investments quite significantly. Suppose you bought a home at an interest rate of 10%, and the value of the property goes up by 50%, your returns would be 40% only, after deducting the interest charged. To further up the ante, if, by a stroke of bad luck, real estate prices fell by 10%, you would be burdened by a further 10% to take you 20% lower on the investment scale. Hence, the main focus should be to pay off the loan by the earliest.
Liquidity
Another important point in this regard is the liquidity issue. While you may own a plush 3BHK apartment in the suburbs worth Rs. 80 lacs, it is of no value if it does not get a buyer who is ready to pay that kind of money. Keeping this thing in mind always helps, since real estate does not come under your disposable income, but is instead a means for future security
In the end, it all boils down to this. Investing in real estate is a good decision if you have your financial strategy planned out, which includes all the points mentioned above. It is true that real estate most certainly helps in getting better returns, but also results in heavy initial investments. Hence, proper planning is most essential.
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