Residential Properties

Real estate refers to immovable properties in the form of an open plot of land or commercial and residential structures.

The real estate industry is always looked upon and known for its glamour for generating extraordinary returns for its investors and help them multiply their wealth with many more benefits.

However, since the last few years, this asset class has not been at its best and has failed to generate impressive returns due to various macroeconomic market forces.

Despite the above fact, it continues to remain one of the most attractive investments and a favourite of many investors due to its ability to generate monthly consistently, securing retirement, involved and many more benefits attached to the property ownership.

To begin with, let us understand the types of real estate investments:

• Open Plot of Land – This is the open land that can be agricultural or non-agricultural. 

• Residential units – Some of the examples of residential properties are bungalows, apartments, row-houses, residential structures, etc.

• Commercial units – Some of the examples of commercial properties are Industrial galas, offices, warehouses, service apartments, Malls, shop establishments etc.

 

In this section, we are going to discuss various aspects of investing in residential properties and why it is a must-have for every investor irrespective of returns it generates.

 

 

WHO CAN INVEST IN RESIDENTIAL PROPERTIES IN INDIA

Any Indian citizen including non-resident Indian or person of Indian origin can invest in properties in India.

 

 

WHY YOU MUST HAVE A RESIDENTIAL PROPERTY IN YOUR INVESTMENT PORTFOLIO?

The following are some of the benefits of having an investment residential property in India.

1. Guarantees passive income – Real estate is the only asset class that guarantees fixed passive income consistently every month in the form of “Rent”.

Moreover, the home-owner can demand a 10% increase in every year to keep up with .

Also, in the last few years it has been observed that due to urbanization, the number of migrants in metro cities is increasing which has spiked the demand for rental properties in respective areas.

Again, due to ever-increasing property prices in India and increasing job opportunities in metros, the demand for rental properties is also increasing day by day. This has made the residential property space a very attractive for those who can leverage this opportunity.

 

2. Secures income post-retirement – Retirement is a phase of life where for most individuals, regular income decreases and dependency either on their children or their life savings increases.

Hence, it is of utmost importance to have a plan B in place in case none of them works out. This plan B is nothing but the that they can fall back on during crisis and go on till life.

Further, assuming things get even worse and a medical emergency strikes, which goes beyond the scope of their then apart from having a , retirees can also generate additional income by way of which is available only to retirees having their own immovable residential property.

 

3. Role of rental income during the financial crisis – Financial crisis always comes uninvited. During the uncertain event of job loss while you are young, medical emergencies or a sudden increase in household expenses, a fixed rental income can play a great supporting role in bailing your family out of the financial crisis.

 

4. Safety and security – Fixed deposits, mutual fund investments and all other liquid assets are vulnerable to cyber frauds in India however, “Real estate” is the only asset that cannot be stolen or lost or are vulnerable to cyber frauds.

Also, after making mandatory, the possibility of fraud and forgery is minimized. This provides the highest level of security to its investors as it is highly unlikely that its value will become zero.

 

5. Forced savings – If the property is bought with a home loan, then a home loan EMI will not only instill financial discipline in its investors but also prevent them from incurring unnecessary expenses and instead help them put their savings towards building a highly productive asset.

 

6. Government Subsidies – The introduction of various government schemes and subsidies like PMAY in the affordable housing segment have further helped individuals in reducing the financial burden while buying a house for themselves.

 

7. Helps reduce tax liability – Home loan provides tax benefits up to Rs. 3,50,000/- per annum (towards interest payments and principal repayments) which can help its investors save as much as up to Rs. 1,00,000/- every year in tax outgo. This particularly helps individuals in the highest tax bracket the most.

 

8. Capital appreciation – The ever-growing demand for residential properties in both affordable and premium housing segments continues to push property prices in India thus, helping its investors generate attractive gains from their capital investment.

Also, given the fact, that India is one of the fastest growing economies in the world and the development of various infrastructure facilities in and around the city is making properties look very attractive in the present and the future.

 

9. Ability to raise cheap funds at ease during crisis – Home loan borrowers have the privilege to avail of top-up loans to meet their short-term and long-term financial needs.

These loans involve zero and the minimum rate of with the lowest possible as compared to other unsecured loans.

Considering the lowest rate, some borrowers also use it for investing in assets generating higher returns for them.

The facility is no less than a blessing as it had come to the rescue of many borrowers in the past who were facing a severe financial crisis. This facility is extended to borrowers only.

A top-up loan is the cheapest loan available for personal use. Moreover, this option prevails until the loan is fully paid off.

In case there is no home loan, homeowners can still apply for a loan against property which is also available at very competitive terms as compared to personal loans.

 

10. Home loan overdraft reduces further interest loss – Home loan overdraft facility is a wonderful invention in home loan space.

Investors can deposit their monthly salary, and an emergency fund in their loan account to reduce the burden and make the most of their property . There are many more benefits of this product which are explained .

 

11. Helps diversify investment portfolio – Real estate is a different asset class altogether. It not only helps investors generate cash flow and long term wealth but also helps them diversify their investment portfolio and minimize concentration risk.

 

12. Can artificially increase the value of an asset – Unlike other asset classes like equity, debt or gold, investors can make some improvements and amendments in the property to make it more valuable and artificially appreciate its value.

 

 

CHALLENGES INVOLVED BEFORE AND AFTER BUYING A RESIDENTIAL PROPERTY IN INDIA:

The following are some of the challenges that every property investor must consider before and after buying a residential property in India.

1. Selecting the right property that will not only appreciate in value but also offer attractive rental yields – This is one of the most important and critical aspects while finalizing the property. An investor needs to be very careful at this point and ensure that the property has all the qualities like good quality construction, good location, basic amenities in place like regular water supply, car parking facility, spacious rooms, Vastu compliant, infrastructure projects being undertaken to improve quality of life, etc. to appreciate in the future.

 

2. Maintenance and finding tenants – Soon after an investor completes the humongous task of short-listing and buying the right property and becoming the proud owner of it, they are confronted with another challenge of finding good tenants who will not only pay the rent regularly but also take good care of the property and remain co-operative as and when required.

Until then, the property needs to be maintained and looked after by the owner himself.

 

3. Illiquid – Real estate is a highly illiquid asset and during emergencies, liquidating the asset will be very difficult.

The challenge is not only with finding the right buyer to get the best price but also with the process involved in selling the property and managing taxes. Instead, taking a works out better than any other option.

 

4. High transaction cost – Even though real estate in the last few years did not appreciate much in value, it continues to remain one of the most attractive investments for investors due to its ability to generate monthly rent consistently, tax benefits involved and many other benefits attached with the property.

However, the high ticket size or transaction value involved in the transaction has kept many investors deprived of this opportunity.

 

5. Volatile – Properties are highly volatile and in the worst-cases can even result in negative returns. Hence, it is always advisable to study various aspects to ensure that you lay your hands on the right property and at the right time.

 

6. Update your knowledge on the subject matter – Real estate is a very technical subject and investors need to know all pros and cons before leaping forward and investing in properties.

Also, this asset class is vulnerable to many risks associated with cheating and fraud like selling the property with insufficient or improper documents, concealing unresolved title issues, etc.

Hence, it is of utmost importance for every investor to have in-depth knowledge about the subject otherwise they can seek professional advice.

Taking a from a reputed bank can also help investors confirm the authenticity of the property.

 

7. Fear of losing the property – Buying a property is the lifetime and one of the biggest investments for most of the investors. Hence, it is natural for them to get nervous and get caught with fearful thoughts like losing the job or land in a difficult situation if they fail to service their home loan EMIs due to any reason.

Here, the investors need to understand that having an property is difficult but necessary. If they don’t take this opportunity then someone else will.

Also, no one ever made a real estate by being in a comfortable situation. All you need to do is being more planned and organized and move ahead with a positive mindset.

 

8. High EMI payments every month – The home loan EMI in some cases may consume most part the investor’s salary. This in a way is good for investors as they are forced to give up on unnecessary expenses and divert their savings towards creating an asset.

 

 

 A PIECE OF ADVICE BEFORE MAKING AN INVESTMENT IN A RESIDENTIAL PROPERTY IN INDIA 

The following are some of the suggestions that every property investor must consider before buying a residential property in India to add value to their property investment.

1. Assess your risk appetite and future cashflow – Real estate is a highly volatile asset and requires huge investment. Before you start enjoying its benefits, you need to contribute at least 20-25% of the total property value from your personal savings and the remaining amount can be managed via home loan.

In the whole journey, you need to assess various factors like your risk-taking capacity, future cash flow requirements etc. before leaping forward in this high-value investment and long term commitment of servicing the home loan.

Even a miniscule miscalculation can put you in severe stress and cost you more than you could gain from the investment.

 

2. Getting your home loan pre-approved – No one would like to see themselves in a situation where they have already come halfway through in their home buying journey, incurred major expenses towards stamp duty and registration charges and then get a shock that their home loan application is rejected.

Home loan can get rejected due to various reasons which investors may or may not be aware of.

Hence, we advise that investors must get their home loan pre-approved before paying the token or a booking amount as the case may be.

 

3. Include other family members in the agreement – Including other family members in the sale deed will by default include them in the home loan application.

This will not only help them build their but also help them save them tax on and principal repayments. Moreover, they can also avail of all the other benefits of having a house property.

 

4. Explore all possible options before shortlisting the property – The primary goal of investing in real estate is to make your investment grow in line with inflation and earn decent rental income every month and generate cash flow.

However, to make it a successful investment, it is very important to do some groundwork and ensure that the property has all qualities that can enhance its resale value in the future.

Investors must look for factors like location of the property, whether it is high in value and low on price, are there any future development expected that can improve the quality of life of people migrating there, whether all clearances are obtained in case of under-construction property and OC for completed projects, is the quality of construction good enough and so on.

Besides these, some of the secondary things one can consider are amenities, sq ft area, proximity from the railway station, view from the balcony, Vastu approved, parking facilities, etc.

 

5. Conduct pre-search and pre-valuation – Pre-search and pre-valuation are the due diligence processes that banks undertake before the registration of the property.

These processes confirms that the said property is free from any irregularities pertaining to the title of the property, pending litigations, valuation and other critical aspects that the property may have.

Hence, it is in the interest of the buyer of the property to get the due diligence and other necessary checks done before incurring major expenses towards the stamp duty and registration.

 

6. Know everything about the home loan process – Home loan involves a very exhaustive process. It is not as simple as it may sound. Hence, one should go through an end to end process involved in getting their loan approved before confirming the deal.

 

7. Negotiate for a better deal – There is always a scope to negotiate with builders and sellers.

Many of them will purposely quote a higher price as they would expect you to negotiate for a better deal.

Hence, show them that you are interested in buying a property but looking for other options too. Never show desperation even if you like the property.

To win the bargain, you can carry the home loan pre-sanction letter which depicts that you are a serious buyer and genuinely interested in buying the property.

 

8. Assess your investment goal – It is very important to know your investment goal and analyze your requirements. If you are looking for a property for self-use, then you may want to buy a house as per your family needs.

However, if you intend to buy a property for then you may want to buy a house near corporate hubs or areas which tenants would prefer and so on.

Also, instead of buying a bigger house, 2 small properties or jodi flats should be preferred as they are easy to sell and rent out.

 

9. List down cost of Investment – Property transactions involve a lot of hidden charges and expenses that are small enough to get overlooked during the planning stage. Hence, it is advisable to take stock of all major or minor expenses involved in the property transaction.

Always remember, how much you make out of this completely depends on how well you plan it and how organized you are.

 

10. Avoid going heavy on this asset class – Real estate is a highly volatile asset hence; it is wise to spread out your investments across different asset classes like gold, equities and debt. Heavy exposure to real estate can prevent investors from leveraging opportunities that other asset classes offer.

 

11. Always cover a loan with basic term insurance – Your house does not belong to you until your home loan is paid off and the lien is released by your loan provider.

If your bank for any reason stops receiving payments, they will give you only 3 months to clear all pending dues. Post the given deadline, they will start the to recover their money by selling your property.

Imagine being in a situation where all of a sudden something happens to you and your family are left with nothing but 2 choices.

Either make arrangements to repay the or lose the house.

Nobody would want their families to land in this situation whatsoever. Hence, always get your covered with the basic term life insurance.

 

12. Don’t make over commitments to sellers or builders by blindly trusting bank timelines – Home loan sanction is a result of multiple processes like pre-sanction, legal check, valuation, home/office and site verifications and final processing.

Loan approval is subject to delays and rejections due to various reasons at any of these stages. Many times, due to the high volume of loan applications and bank internal challenges, delay in processing is inevitable which borrowers or banks may not be able to foresee.

Hence, one should always be mindful of all these factors before making any commitments to any party on timelines.

 

 

VARIOUS METHODS THAT CAN BE DEPLOYED FOR RAISING FUNDS USING A RESIDENTIAL PROPERTY IN INDIA

The following are some of the methods that you can deploy for raising funds during financial crisis using an immovable residential property in India.

1. Home top-up loan – “Home Top-up Loan” OR “Home Equity Loan” is an extension of home loan which is as good as a personal loan given against the property. A borrower may want to renovate the house or wants to go on a vacation or start a business for which he can apply for this facility.

The money under “top up” loan is given in the borrower’s personal bank account hence the same can be put to any personal use except using it for speculative activities like gambling etc.

However, it should be noted that since this loan is an extension of , it is available to existing borrowers only.

 

2. Loan against property – A “Loan against property” is a secured loan which is being given for personal use against the residential or commercial property owned by the borrower.

A borrower can put this money to any personal use like making a down payment of some other property, starting a business, home renovation, wedding expenses, etc.

Usually, the maximum limit of loan is in the range of 65% to 70% of the market value of the property.

The difference between the “Top up” and “Loan Against Property” is that a is an extension of and is available only to existing borrowers at a much lower rate whereas “” is like a secured that is taken against the property which is already owned by you.

 

3. Reverse mortgage – “Reverse mortgage” is a loan product and a blessing for senior citizens as it protects them from severe financial crisis during the non-earning years.

Retirees who are left with no means for survival post-retirement can mortgage their house to receive regular income for a period of 10 to 15 years.

The money borrowed from the bank will then be recovered from their legal heirs if they want to claim the property back.

The difference between “Loan against property” and “Reverse mortgage” is, in case of reverse mortgages, banks make monthly or lumpsum payments to applicants as the case may be whereas, in case of loan against property, the borrower pays EMI to the bank every month.

 

 

EXPENSES YOU ARE MOST LIKELY TO INCUR IN THE HOME BUYING PROCESS

The following is the schedule of charges that you are likely to incur while purchasing a residential property in India.

1. Cost of the property – This is the upfront cost of property like its agreement value and other related costs like advance maintenance, parking charges, legal charges, club membership charges, etc.

 

2. Cost of borrowing – This is a cost associated with home loan processing including processing charges, franking and mortgage charges etc.

 

3. Stamp Duty – Stamp duty is a tax that property buyers pay for getting their agreement stamped. Usually, it ranges from 5% to 8% and differs from state to state.

 

4. Registration charges – It is the cost of getting the property registered which is either 1% of the agreement value or Rs. 30,000/- whichever is lower.

 

5. Property insurance premium – This is the premium charged for securing the property against natural calamities and perils. Also, the life insurance protects the family of the borrower from losing the property in the event of his death.

 

6. Life insurance premium – This is the premium charged to protect the family of the borrower from losing the property in the event of the borrower’s death.

 

7. GST – It is a tax that ranges from 5% to 8% of the total agreement value and applies to the purchase of under-construction properties only.

 

8. Agent fees – This is a fee for availing services of the registration or home loan agents.

 

9. Brokerage – In case, a real estate agent or a property broker is hired in the transaction then brokerage in the range of 0.5% to 2% needs to be paid to them.

 

 

TYPES OF INCOME YOU CAN GENERATE FROM YOUR RESIDENTIAL PROPERTY

The following are different types of income that a residential property can generate for its investors.

1. Rental income – This is the upfront benefit or privilege that investors enjoy for owning a house property.

 

2. Interest earned on the deposit amount– This is the interest earned out of a onetime deposit that a landlord receives from the tenant.

The landlord can either book a fixed deposit or park it in short term debt funds or liquid funds.

 

3. Tax saved on a home loan – This is for investors who have availed home loan facility for purchasing the house property. On home loan, they can save tax as much as up to Rs. 60,000/- per annum from interest payments. As it is rightly said that a penny saved is a penny earned.

 

4. Capital Gains – The property also appreciates with time which adds to the overall gains. With this, the rental value also appreciates which spikes the cash flow for investors.

 

5. Government subsidies – Government in 2015 has announced subsidies like “Pradhan Mantri Awas Yojana” which is a major boost for the affordable housing segment.

Though this scheme is not for property investors, it gives the 1^st time owners upfront benefit of up to Rs. 2,67,000/-.

It is in a way an income since the penny saved is a penny earned.

 

6. Interest earned from the home loan overdraft account – HOME LOAN overdraft feature is one of the best and the most innovative developments in the home loan space.

It helps borrowers save lacs of rupees in and helps them pay off their loan faster without waiting for to change or having to make any prepayments at all.

This facility gives borrowers all the liberty to transfer all excess funds they have in their savings account (at low- rate) to their home loan account (at higher rate) and save on the entire sum.

The interest thus saved will be paid to the borrower and can be withdrawn.

 

7. Returns earned from investing the savings – All the benefits discussed above which include monthly rent, interest earned on onetime deposit, tax saved on home loan interest and interest earned on a home loan overdraft account can be further invested in SIPs to achieve wealth creation targets.