Things to Know Before Making Property Investment

Besides cost and quality of construction there is much more to study before you cut a property deal. Unfair practices in real estate are far too common in India. If you are planning on buying property as investment look beyond what meets the eye. Some of the important parameters are detailed below.

1. Location

Profit strategy in property investment is to buy a piece of property at a time nobody wants it and sell it off when it is in demand. While it is not difficult to locate cheap properties that are not finding many buyers what is more important is that the property is located in place that is set to get strategically benefited in the future.

People easily get carried away by interesting advertisements floating online and in posters pasted on local trains about property at throw-away prices in far-away places. If you only concentrate on getting cheap property you might end up with a wasted investment plus trouble involved in acquiring the property. This is all the more crucial for those whose property investment is sponsored by borrowed money.

Look out for a good deal at a location you are fairly certain property prices will pick up in the future. Not to get into prediction business but you can be fairly certain. How? In metros demand is constantly increasing. Rarely do prices go down unless there was an irrational price hike when you bought the property. In other places ascertain if the location has developments that can spike demand in the future. Take the example of satellite cities of Mumbai. Many of them were marshlands or uninhabited places two decades ago but property prices have spiraled up in hitherto unlikely nodes of Navi Mumbai like Ulwe and Taloja because of demand for realty there. Mumbai being congested, many people are interested in moving to places that are in proximity yet offering more space.

Location is an important parameter from the point of view of both capital appreciation and rental income. Good rental income can be expected from towns near big cities and in the metros. If the location has water supply or power supply issues it may not fetch good rental income. If you would be paying EMIs on the property, you can get additional tax benefits if it is rented out.

2. Due diligence

If you are buying resale property verify the title is clear. Clear title means the property is free from encumbrances; it has not been liened for a mortgage loan. It will free you of worries in the future. Title can be verified at the sub-registrar's office.

In case of new properties ensure that the builder has permission from relevant authorities for constructing on the site. Verify that he has clear land title. Ensure that the project drawings have been approved by an architect and local authorities. Ask for the Commencement Certificate which shows the builder/developer has received permission from relevant authorities to start construction.

If you are taking a home loan your job is almost done. Banks do the job of verifying title and if the builder has necessary approvals before sanctioning loan.

3. Carpet area vs super built-up area

The flat area flaunted in your builder's advertisement is usually super built-up area. Not all of super built-up is exclusively yours. Some of it includes spaces you might never use.

Carpet area is the habitable area. In simple words it is the area in your house a carpet can cover. It includes area in all the rooms from wall to wall plus half the area of terrace. FSI applies on carpet area.

Built-up area is carpet area plus the area covered by all walls and columns in the house. This includes thickness of the building's external walls as well. You can expect built-up area to be around 10% more than carpet area.

Super built-up area is the built-up area plus proportionate share of area in the staircase, lift room, motor room, security room, lobby, passage way and other spaces like gymnasium, swimming pool, meeting room, club house and even parking lot. Of course, this applies mostly to apartments in buildings and where there are multiple houses. It is also known as saleable area or in certain jurisdictions as useable area. Super built-up area comes to around 20-40% of the built-up area.

While buying a house as investment, verify what the super built-up area covers to judge if it is worth paying all the money. Find out how much the carpet area and super built-up area amount to. You might want to ensure both appear on the sale agreement. Try to strike a bargain with the builder, if possible, on reducing the super built-up area.

4. Total cost involved 

There are some builders who demand maintenance deposits for 5-10 years upfront. This might mean peace of mind to people until they realize that depreciation will soon come asking for more. Some charge separately for elevator, power generator and other electrical appliances.

Buying under-construction properties involves more complexities. Many builders quote the per square feet rate but often you actually end up paying a few thousands or lakhs more by the time of possession. Delayed projects seem to be the norm today and in fact it would be surprising if a project were completed on time. The escalation in cost of construction due to delay is passed on to buyers. Many builders include escalation clause in the property agreement. Refuse to accept this clause. Escalation cost could be as high as 25%. If your bank loan has already been sanctioned, there is no way to revise it midway.

Until completion certificate is awarded by relevant local authorities the property is considered an under-construction one. Service tax is payable on construction. Although the builder is supposed to pay this you can expect him to charge it from you. Delayed construction again means higher outgo as service tax.

Delays cannot be predicted but you should be prepared to shell out 25% more by your own means. Else you can resort to gold loan if you possess some yellow metal.

5. Stamp duty & registration

Before your priced property can be called your own you need to first clear dues to the government. Stamp duty has to be paid on sale agreement. It is calculated on the value of purchase in the sale agreement or market value, whichever is higher. Stamp duty can be paid on the day or the following day of executing the sale agreement. These days, stamp duty can be paid through banks. Make sure you pay the correct duty. Failing to do so can leave you open against legal action, if discovered. More importantly a document on which stamp duty is unpaid has no legal recognition. It will not be accepted as evidence in any court of law in case of a property dispute.

The next procedure to follow is registering the document. This mandatory process is slightly more cumbersome. Along with the seller and witnesses you need to visit the sub-registrar's office in person. On payment of registration fee (which is 1% or maximum Rs 30,000) and producing documents your property gets registered.


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