Buying Guide

The Need To Buy Property

When to Buy?

The common dilemma that the consumer at our Open House forum poses is what is the right time to buy? The ‘right’ time to buy your house is when you feel that you are ready for the responsibility that comes along with buying a house. It is important to consider the objectives of buying a house. Ask yourself why you want that house? What really is the motivating factor when it comes to your decision to buy that house? Do you want to buy it because you want to live in it with your family or do you look for an extra income that the house will bring in the form of rent? Or, are you simply buying it for long-term value leverage? The more you know about why you should buy a home, the more focused your search will be and the better you will be able to select one that meets your requirements.

What makes more sense - Rent or Buy?

There is a simple way of judging whether to buy a property or whether you should lease one now. If you find a house that you would like to stay in, that is close to your workplace or easily accessible from there, then buy it. But remember that the Equated Monthly Instalments (EMI) on your property should not be over 40 per cent of your monthly salary. That way you would be comfortable paying it back. You need 10-15 per cent of the cost as your personal contribution to the purchase, as banks do not lend 100 per cent. If you are paying a monthly rent that would constitute over 75 per cent of your EMI please think in terms of buying. (Check out the MB Buy Vs Sell Calculator which can serve as a broad indicator on whether you should lease or buy).

Plot Vs Multi-storey?

In India, plots are much in demand. Even today most small cities are witnessing more demand for plots than for apartments. Multi-storey apartments are becoming the norm in established urban areas where cost of land and the convenience and security that apartments offer have pushed demand from the younger generation. Also, as family sizes become smaller, many are selling large plotted developments in established city areas for smaller more compact apartments with centrally managed facilities, normally in gated communities in the suburbs.

Independent plot or apartment within a gated community?

Gated Community is a form of residential complex, sometimes characterised by high walls and fences. It boasts of controlled entrances, surveillance of those entering the

How to choose the right property?

One should buy property in an area which has adequate basic amenities such as power, water, sewerage, etc. It is important to do your checks and balances while deciding on a project. Infrastructure in the area, connectivity, builder's goodwill and price of the property are key components a buyer needs to take into consideration. A buyer should also carefully check points such as the builder's experience, number of projects completed and delivered, banking institutions involved and present buy options available to suit your requirements. It is better you conduct a field survey before identifying a suitable property meeting your budget and location preference.

What do you think is the best way to buy property?

You can choose options from websites. These days all information, including model apartments, is available on the internet. After this it is important that you or your relatives visit the sites of shortlisted properties and experience the brand before booking.

What is the market checklist before buying re-sale property?

Some important tips one should keep in mind before buying re-sale property are: Locality: Generally, the price difference prevails for different locations but when it comes to price rise, it will always be proportionate to its strategic placement which could be linked to accessibility to highways, markets, business districts and overall living conditions. There is a price differential between different properties within the same complex or even the same building. In India vastu compliant units have a premium on them. Similarly, East or South facing properties fetch better values than North and West facing properties. Users pay more for a view in urban settings. In Mumbai, for instance the price per unit rises as you go higher. If the property is sea-facing, there is a hefty extra that the buyer has to shell out. In other cities that are not quite used to high-rises yet, the premium is for the ground to sixth floor. Higher floors do not command a premium vis-a-vis lower floors. Pool or park facing properties have a higher value. The concept of Preferred Location Charges (PLC) for new properties was based on these principles. Currently, PLC is arbitrary and there are no fixed norms for it. There are developers who charge a PLC on every unit in the complex, which defeats logic. Area-wise Demand and Supply: Price of properties within a certain area is also dependent on the volume of supply. Qualities such as good infrastructure, access to markets and office and entertainment hubs are common to a locality. However, the volume of units available for sale in the market also determines the prevailing price. If it is a new growth corridor, the first project to get off the ground normally comes at a reasonable price. As more developers launch projects it becomes an area in demand and the values keep rising steadily, normally by about 8-10 per cent per year. A developer may break the norm in an existing locality


Should one look at investing in big cities?

When it comes to choosing a location, the consumer looks at connectivity and availability of basic urban and social infrastructure in that area. Big cities have that advantage. Land values are very high in many big cities. When investing in a big city, keep a few things in mind. If you are purchasing for self use, buy in a neighbourhood that has all the conveniences that you require and also has good accessibility to the rest of the city. Even in premium localities, if you keep searching, you will find properties that suit your budget. If you cannot afford the premium rates, look for a locality on the fringes of your area of choice. This will have all the advantages of proximity to the main locality but sport lower price tags. Also, look for property that is being re-developed in city areas. They will be new and come with a maintenancefree period. Older houses come cheaper but make sure you invest in refitting and refurbishing the old plumbing and electrical lines before moving in if you want a hassle-free stay. If you are looking at more open spaces with modern complexes, move to growth corridors on the suburbs and peripheries of cities. Since, they are built to suit modern lifestyles and social facilities benchmarks are raised, you will get more add-ons such as landscaping, cycling and jogging tracks, club houses and swimming pools and other sports facilities. As they are at a distance from the city centre, they come with cheaper price tags and construction linked instalment plans.

How much appreciation can be expected by investing in big cities?

Typically there is a 10 per cent escalation in prices annually across city areas. If you are investing in a new property in a virgin corridor where development work is yet to begin, before infrastructure comes into the new corridor, prices are very low. Once infrastructure work begins prices rise by about 25 per cent. When the property development reaches mid-way point, there is another 25 per cent escalation in prices. Six months from completion there is another 25 per cent escalation. Once possession is handed over there is another 25 per cent increase in rates. This is true for places where Greenfield development is taking place. The mid-end and affordable housing segments will record healthy appreciation in capital values in the short term from a low base. High-value property yields lower rates of appreciation. In new growth corridors where development work precedes real estate, the growth in values is normally about 50-70 per cent. However, these are broad estimates. There is another return that has not been factored in which is the rental yield. Property value attains its true potential when the neighbourhood is fully populated. If you are a long-term investor and want to wait for the property to attain full potential, lease out the property and capitalise on the regular rental returns. The annual yield is computed

What are the taxes you have to pay while purchasing property?

If you are buying a new property, you have to pay Service Tax, VAT and Stamp Duty on the total amount of purchase. If you buy re-sale property, then you do not have to pay any of these taxes.

When is the transaction of sale considered complete?

The transaction of sale is considered complete when either the possession is given or Conveyance Deed is registered.

When are capital gains applicable and how can capital gain tax be saved/reduced?

Capital Gain is applicable when: The sold property has been withheld by a person for a period of more than three years from the date of purchase/possession. The sale proceeds are invested in a residential property which is bought one year before the sale of property or two years after the sale of first property. The new property is bought after the sale of the first property. Capital Gains Tax can also be saved by investing the sale proceeds in Capital Gain Bonds.

What is the difference between long-term capital gain and short-term capital gain?

When a property is withheld by a person for more than three years, it results in Long Term Capital Gain (LTCG) on sale of that property, on which Capital Gain Tax can be saved by investing that money in a residential property. When a property is withheld by a person for less than 36 months, it results in Short Term Capital Gain (STCG) on which tax cannot be saved. STCG is added to the income of a person and tax is calculated according to the slab rates of the Income Tax.

What documents and formalities are required while buying property?

Documents required while buying property are Identity Proof like Voters’ ID Card, Passport, Driving License, Ration Card and Pan Card. Be careful of the Sale Deed/Agreement and also check that the complete property chain is mentioned in the Deed.

Things you should check at the time of signing the agreement?

Here are the important things to check before you sign the agreement with the developer: l Specific apartment allotted, tower number and size Details of area including super area, covered area and carpet area Costing Date of possession, penalty in case of delay Exit option Specifications committed Payment plan Details of Land on which project is constructed and the project approval details Possession related charges

How do you know that a project has legal approvals from authorities?

The best way is to check if the banks are funding the project. Generally, banks approve projects and start disbursement only after all the approvals are in place. Ensure that the documents of Title of the property you intend to purchase are clear. A defective Title will create problems. Ensure that the building has been constructed as per the sanctioned plan and deviation, if any, is in the allowed limits. It should not be in a low-lying area or in a filled-up water body. Ensure that the developer has clearance certificates from the Electricity Board, Water and Sewage Board and other concerned departments. Commencement Certificate and Occupancy Certificate are other important documents that are necessary while buying property. Check out the genuineness of the documents with the concerned authorities. Ensure Agreement for Sale and Sale Deed, duly stamped, executed and registered are in your possession. Both should contain fair clauses for both the parties.

What are the factors you should keep in mind before getting a home loan?

The main criteria are: Your income and your track record of repaying previous loans - this is obtained from the Credit Bureau. Your current expenses including other loans you are servicing. The amount of loan related to the property value. Ownership of the property - this means that the lending bank should be comfortable that the seller has full and complete ownership of the property. Getting a loan depends on the report of the local bank surveyor who will inspect the property and give his recommendation. Home loan eligibility depends on your ability to pay (ie. based on your salary) and not on the age of the building. However, the quantum of loan depends on age and undivided share too, in addition to your repayment ability.

What are the advantages and disadvantages of getting a home loan insured? Is it necessary to get property loan insured?

It is always better to get the property loan insured. I would rather recommend a big term plan of Insurance Policy to safeguard future problems.

Why does home loan interest rate differ?

The banker's home loan interest rate differs from bank to bank because of the cost of funding.

Do you get tax benefits on loan?

Yes, tax benefit on repayment of housing loan is available as per section 80C of the Income Tax Act, within the overall limit of Rs 1 lakh.

Is real estate a better investment as compared to the stock market?

The real estate market is similar to the stock market, with its peaks and troughs always seeming to make perfect sense in retrospect. Also, both markets reflect the economy of the country and offer good investment opportunities. However, the risks must be understood along with the opportunities. Realty index will appreciate five times, but not the stock market.

Investing in stocks:

The profit margin inherent in stock investment has always been higher when compared to other asset classes. Stock market investments offer advantages such as liquidity and flexibility, which real estate does not. Stocks also offer growth rates that the real estate market can rarely match.

Investing in real estate:

Home ownership is the most primary form of real estate investment. Unlike stocks, real estate is a tangible asset that provides for greater psychological comfort, security and satisfaction. Also, the return on investment for real estate is reasonably consistent because of the phenomenon of property appreciation. Stock markets are far less predictable.

What per cent of total income should a person in the age group of 25-39 years invest in real estate?

At a young age, you can invest 300 per cent of your total assets by borrowing for your first house. Experts believe that your total monthly instalments should not exceed 30- 35 per cent of your gross monthly income. This is a good starting point and you should work towards reducing that number over a period of time.

What would be a safe and sound approach to buy property?

Do your complete research on the Web and physical survey of the projects. Invest in projects which are at least 25-30 per cent complete as this will be comfortable in terms of approvals. Brokers may sometime offer better rates than the developer’s sales team. Bank approved projects are preferred since they give comfort in terms of the approvals.

What kind of return should you expect from your purchase after two years?

It is impossible to predict a return in two years. Property buying as an investment must be looked at in terms of long-term holding capacity. While in the last two years, certain properties in metros have gone up by 20-80 per cent, in some cases that cannot be an indication of what the future holds. An exit after four years usually yields great returns.

Is a pre-launch project with a good discount better than a newly-launched one in terms of investment?

Pre-launch is a great time to invest but is fraught with risk. It is purchased on the assumption that while the developer has not received all his approvals, it is expected that these will come through. The problem arises if the approvals are delayed inordinately. If you have an appetite for risk, you can go for pre-launched property. There is high risk but the return even in the short term can be very rewarding if the approvals come soon. If you have missed the opportunity, a newly launched project by a reputed builder in a good location can also be considered. There is lower risk in this property.

How to estimate growth in the value of land in future?

Infrastructure development has to keep pace with the swanky townships being planned in most cities. If water supply, electricity, safety or security, law and order, road infrastructure, etc are progressive, we can only expect appreciation in the land value.

On what basis should I decide to sell my property?

Your decision to sell your property depends on the following factors: Property market in your city/locality : The residential property market is locationspecific and the prices will vary for different areas. How soon do you need the money? Do not sell your property in a hurry if you do not need the money urgently. Getting the best deal may require patience or even spend some money to add value to your house. You also need to consider the rental return from the property as it will be a source of steady income. Price it right : The biggest mistake sellers make is in pricing their property too high. The best way to determine the ideal price for your property is to check with brokers in the locality or by listing it on property portals online. Consider the taxes : How much you actually get after you sell the property will depend on how long you held the investment. If you sell your house within three years of buying it, you will lose the tax benefits. In case of a mortgaged property : Selling a house that has an outstanding loan requires a lot of documentation. So, try to pay the loan and then sell the house.

How do I sell my property?

Selling property is much more difficult than buying one. Unless you know of people who are willing to give a good price for your house, a property broker may be your best bet. Brokers usually have a wider reach and are more clued in to the local property market than an individual seller. You can also list your property online. Property portals such as allow individual sellers to list one property for free. It is also worth listing as a nominally paid service as the portal offers additional services for the fee.

What is considered as the right time to exit a real estate investment?

Real estate is not a 'get rich quick' investment route. It pays off only when one invests in a property for at least 3-4 years. Even with a long-term investment horizon, one needs to have a clear exit strategy in mind before one buys real estate as an investment.

How to make a safe exit from real estate?

Selling the property as fast as possible in challenging market conditions is a wrong investment strategy. The only safe and consistently profitable route is long-term investment. This is why it is extremely important to know what will happen a few years down the line – to the property market in general, the location and property in particular and one’s own finances. A savvy real estate investor must know unrealised gains are meaningless and when to take money off the table.

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