It is the general trend in a civilised society that people do earmark a portion of their income for meeting unforeseen circumstances and for meeting the future needs of self and family during the lean period, including old age.

Financial management if adopted in a scientific way would bring in attractive returns on the investments made. Till recently, bank deposits, stocks, mutual fund, insurance policies and bullion were the most opted for avenues by people.

Presently, bank deposits, insurance policies, mutual funds have become unattractive because of low returns while the stock market is unpredictable and volatile. Moreover, the investment avenues in stock market need close monitoring.

With the investment strategies becoming very complex, this has led to the emergence of specialised investment advisers who say investment in real estate is safe and high yielding.  But, this investment is a long-term one needing considerable capital.

New system

As a welfare measure, Government is considering introduction of a new banking system called Reverse Mortgage system to facilitate the elderly persons to get housing loan upon mortgage of their immovable property to meet expenses of certain specified categories such as medical expenses, repairs to the dwelling house, etc, on the security of his dwelling house.

The borrower can repay the money borrowed along with interest during his lifetime in instalments or allow the debt  to accumulate to be realised on the death of the borrower.

The amounts outstanding will be a charge on the property.  Thus, investment in immovable property would help the investor get financial assistance without any commitment of repayment of amount borrowed during his lifetime.

Factors to consider

The yield in the realty market has to be calculated on the capital invested and the annual rental returns less property tax, income tax and annual maintenance charges.

This return varies according to the type of property: residential, commercial or office space.  In Bangalore the returns are about 6% for residential, 12% for office and commercial space.

Selection of a proper location is a primary determining factor in property investment. There is equal demand for all types of space in metropolitan cities.  The demand and supply position of each sector such as residential, commercial and office space need to be carefully examined.

 Residential property calls for smaller investment.  Commercial and office space need higher investment.  In metropolitan cities the market trends  are transparent on account of competition and frequent dealings.

In smaller towns there could be higher returns because of shortage  of accommodation with limited transactions.  Local Government politics also plays a role in determining the returns from the investment in properties.

The investment in agriculture properties other than the city area  and farm houses are not remunerative. The income from agricultural property, is seasonal and depends upon weather and climatic conditions. Further, the sale and purchase of agricultural lands has many statutory restrictions and cannot be purchased by everybody.

Procedure

The real estate investment involves complicated process like title verification, land use according to local laws, floor area ratio, restriction on sale for certain  period and certain type of lands, compliance with the rules, regulations and laws made thereunder. Property laws are very complex and varies from state to state.

Tracing of title of the property is the most important and specialised job in property matters. To trace the title of the property, examination of age-old records may be necessary and in many cases, these records may not be available with the parties or even in jurisdictional sub-registrar’s offices making the tracing of title difficult.

Further legal scrutiny is based on the documents produced for verification and therefore, the honesty and integrity of the seller should be above board since certain hidden facts like pending cases, prior agreements and government notification of the property cannot be traced easily by verification of the documents.

However, paper notification about purchase of property would help to a certain extent.

Type of returns

Real estate investment offers two types of returns to the investor: [a] recurring and [b] capital gains on sale of property.

Monthly return in the form of rentals or the returns on the lease amount invested in bank securities or in business can be considered as recurring income or return while the profit on sale property after lapse of a period can be considered as capital gain attracting capital gains tax under the IT law.

The rental income from the properties is in the range of 0.5% to 1% pm on the investment. Apart from this income, the value of the property appreciates regularly. Whereas in the case of bank deposits, the value of the money deposited gets eroded on account of inflation. 

Generally, leasing of property is attractive only for business people. Lease amount does not attract interest. Commercial property and office space yield high returns to the extent of 15% whereas the residential property yield about 6% per annum.

Property value

The value of immovable properties are always on upward trend and hence any investment in immovable property would also get him the higher value for his property whenever sold.

Further, the investment in house property gets the investor income-tax rebate both in respect of repayment of the  principal amount borrowed and also the interest paid on the amount borrowed up to a certain limit.

Limitations

[a] Liquidity:
Unlike in stocks and shares and bank deposits, the capital invested in property cannot be encashed quickly.

It requires searching for an intending purchaser, discussions and negotiations, settlement, arrangement for finance by the intending purchaser, preparation of sale agreement and sale deed, registration of document and handing over the property on receipt of sale consideration.
 
All these steps consume considerable time. Further, the appreciation of value of the property is normally slow but it is certain and stable unlike in stocks and shares.

[b] Government policies
The major source of revenue to the Government is from the transactions of immovable properties in the form of stamp duty, registration charges, VAT, service tax, property tax etc.  It has become the practice for the Government to revise at frequent intervals the tax structures on immovable property leading to speculations in property transactions.

[c] Other adversaries
There are several other adversaries which play a crucial role in determining the value of the property. For example, introduction of one-way traffic and construction of flyovers near the property would decrease the value of the property. 

Similarly, the property not conforming to the Vaastu specifications would have limited buyers of such property.

A critical analysis of the advantages vis-à-vis disadvantages in investment in real estate and other securities would go to show that investment in real estate would score more than the other type of securities and the investor in immovable property would be a gainer in as much as he would get the recurring rental income, tax exemption on the amount borrowed and the interest paid thereof and the higher resale value when the property is sold at a later date.

The author is an advocate who specialises in property matters.  He can be reached on E-mail : editor@realestatereporter.net  Ph: 25526644/45.