Tuesday, January 6, 2009

Real-Estate as an Investment

Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary, or fixed in a particular location. Real estate is often considered synonymous with real property (also sometimes called realty).

So much for the technical definition of Real-Estate. In layman's term Real-Estate is nothing but "Buying a house"

Buying/Owning a House is the dream of every individual who is earning or who has just found a job or even someone who has been earning for years. It is a significant change in a Man's life the moment he owns a house. Believe it or not, almost everyone in this country dreams of owning a house. Owning a property that reads his/her own name. There are millions of Indians who are fortunate enough to have already had their dream come true but at the same time there are millions more who are working hard everyday to achieve their dream.

How important a decision is Buying a house?

Buying a House/Property is a big decision that any earning individual has to make. It is not a matter of a few hundreds or few thousands of rupees. It involves a commitment to pay huge sums of money. Investing in real estate is much more difficult because of the sum involved when compared to other investment options like shares, Mutual funds etc.

Only rarely do people buy property and settle the entire amount using surplus cash in their hands. In most cases the cash is met out by some form of debt. A home loan from a bank or a loan from a family member etc. In almost 80 - 90% of cases where property is being bought, the source of money is a home loan.

This is the reason why buying property is a very important decision in an earning individuals life. A home loan is nothing but a commitment to repay a huge sum of money every month for the next 10 - 20 years to realise our dream of owning a house. For example if you take a home loan of 10 lacs you may have to repay atleast Rs. 10,000/- every month for the next twenty years. This is not a simple task.

So Before you buy a house, make sure that you have worked out your monthly cash flow and ensured that you would have enough cash to meet out the home loan EMI after making all your routine monthly expenditure like electricity bill, gas, petrol, groceries, school fees etc. Also make sure that you can keep aside a small sum of money every month in a kitty to take care of your emergency expenditure. This is a very good habit considering the fact that you are going to enter into a commitment that is going to eat away a significant portion of your income and you do not want to be in a position where you are stuck and do not have sources to pay off unexpected expenditure.

Things to consider before buying a house:

Before investing your hard earned money you have to ensure the following:

1. Financial Credibility of the promoter/builder.

2. professional Capability of the promoter/builder to deliver the Project in time.

3. Past Projects delivered by the Promoter/Builder.

4. Ownership title of the Project.

5. Necessary Government approvals to start the project.

6. Names of the Banks which have approved the project for Loan Purposes.

7.Exit Clauses (That is in case, you wish to sell your property before completion of Project)

Not forgetting to go through the clauses of "Buyer Seller Agreement" with the Builder and if required take an Expert’s opinion before finalizing the deal.

If you are going for a home loan, usually the bank would do all kinds of checks on the property before granting you the loan, but still it is better to double check all points ourselves before investing our money. After all it is our hard earned money.

Why is Real-Estate such a lucrative investment option?

This is a question for which everyone knows the answer. The answer is simple, appreciation in cost. Land in my area, that was being sold at Rs. 500/- per square foot 10 years ago is being sold at Rs. 4500/- per square foot. This is the appreciation that has happened in the past 10 years. The cost of land and property is going up at a pace which far outpaces the rate at which our salaries increase. Most importantly a house is part of the 3 basic needs of man Food, Clothing & Shelter. The amount of land that we have is limited but the population is growing at a good pace. Everyday the number of people who need a house is increasing but the amount of land still remains the same. So as per the demand & supply theory, the cost of property would keep going up no matter what.

If you do not own a house, plan to buy one soon. If you own a house and can afford another, don't think much, buy :)

Also, buying a home using a home loan gives you tax benefits of upto Rs. 2.5 lacs per annum which is a straight tax saving of Rs. 85000 (Approx) every year. Who would want to miss out such tax benefits when you know that you would also be owning a house on your name if you take this loan.

Because of significant capital appreciation and also because of significant Income tax benefits, Buying a house has been one of the prime investment options for us in the past years.

Things to do before buying a house:

1. Take a pure term life insurance policy which is worth as much as the home loan you are taking. This policy would eat a small amount of your income but will give your family the much needed protection. In case of the unfortunate event of your demise, your family and dependents need not pay the remaining EMI's. They can use this policy to repay the home loan. Even if you are not present with them, your home would be.

2. Take sufficient Medical insurance for you and your family. The medical insurance should cover both critical illness cover for everyone and disability benefits for you (The earning member) Medical expenses form bulk of the unexpected expenditure that we face in our family life. It is better paying an insurance premium of a few thousands from our pockets than paying lacs of rupees when any serious illness happens.

The above mentioned points do not mean that something negative would happen to us, but a home loan involves a commitment of a significant portion of our salary and we may not have the liberty of spending on certain things that we were used to. So it is always better to be safe than sorry.

The Last Million Dollar Question:

With the sub prime crisis causing a recession in the world economy, is this the right time to buy a house?

If you ask me, my answer is a YES. The price of property around the big cities has come down marginally. This has been done by the builders to increase the buying of their property. This would be the right time. In a few months the steps taken by the government world over would start showing results and the economy would again be back on its feet. Then as usual the price of property would go up the way it did during 2006-2008.

Buying a house is a one time investment, think wisely and buy your dream home...

Happy Investing.


  1. Great article. Thanks for sharing this "Things to consider before buying a house".

    Deirdre G

  2. Many people consider real estate as an investment, you can know all the details from the post here


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