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December 2009
Tips for Real Estate Investment
Anil Rego
The saying, 'timing is everything' holds good for almost everything, especially for real estate investments. Deploying funds at their peak could be quite detrimental.
For example, someone who invested in a 2BHK around mid-2008, would have regretted it when a similar flat was being sold at a 10 to 15 percent lower price this year. In addition, he would also have ended up grappling with high interest rates. For investments such as equities, you have simpler routes to counter the 'market timing' bit – like the systematic investment. However, there is no such luck with real estate investment. Here are a few quickies on how to go about planning your realty investment

Funding Aspects
Invariably, those who invest in realty are likely to avail a home loan. Along with the liability comes the herculean task of adjusting your EMI within your household budget. As a thumb rule, your EMI should never exceed 30 to 40 percent of your earnings. Even after foreseeing the down-payment cost and deducting the EMI, there are other factors to be considered, for example, the HRA exemption claimed earlier would not form a part going forward, though the housing loan benefit would kick-in (albeit after occupation of house). Currently, one is able to avail home loans at lower interest rates of around 9 percent and this makes your house purchase a lot more affordable compared to when real estate was at a peak.

Structuring the Deal
There are a host of tax benefits available on home loans. Interest can be claimed as loss from house property (u/s 24) for upto Rs 1.5 lakh per annum (for a self occupied property). Principle can be claimed (u/s 80C) till the overall limit of one lakh, alongside other investments. To optimise on your tax savings, you need to assess how to structure the registration of house property and the loan. In case both you and your spouse would want to claim the benefit, then both the property and the loan should be jointly held. You can claim the benefit in any preferred ratio or as per the deed if it mentions the ratio of ownership. Also, you cannot change the ratio over the term of the loan because it is assumed to be the ratio of ownership.

Yield from Investment

Real estate inherently has one of the longest investment cycles. While equities are believed to have a three to five year market cycle, realty clearly has a seven to 10 year market cycle. One who is stuck with a wrong investment has to wait a long period for the turnaround to happen. These days, investors are looking at multiple property holdings – the first one intended for self-stay and the other, generally from a purely investment perspective. If one is looking at a second residential property investment, then subtleties such as the likely rental yield, possible vacancy and maintenance costs need to be kept in mind. Real estate, as an investment, has to be evaluated on the grounds of the capital appreciation that it would offer in the medium term, considering that the rental yields on residential real estate can be low.

Prepare for the Unexpected
When the Interest rates spiralled from a meagre 7.5 percent to 12.5 percent, loan borrowers with a floating rate became a pretty frustrated lot. With the increasing interest rate, they were required to either increase the tenure of the loan or bear an increased EMI. This clearly shows the importance of a buffer within your monthly budget. You need to have at least a five to 10 percent of your monthly savings towards contingencies to ensure that such EMI increases do not adversely impact your lifestyle. .

Liability vs. Cover
Often, loan liabilities are seen in a singular sense. What often goes amiss is the need to adequately avail a life cover when you add on to your liabilities. You surely do not want to leave your family fending unpaid EMIs. If affordability is the issue, go in for a mortgage cover – this will offer cover on the liability. As the outstanding loan liability reduces, so will the cover. Further, prefer a regular premium payment option, as this can be stopped earlier if so desired. This is definitely a time to consider realty investments: the prices remain fallen, there are more options for the mid–tier segment, and interest rates are also lying low. Some of the most reputed builders have started targeting the middle class segment, which means there is a host of choices at attractive prices. This Christmas, maybe you should gift yourself a new home!
Anil Rego is Founder and CEO of Right Horizons, an Investment Advisory and Wealth Management Company

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