Things to Avoid while Investing in Real Estate

If you were to believe the latest national news, consumer confidence is on the decline and cash deficit on builders on an incline. In Mumbai, Delhi-NCR, and other popular cities, the demand has come down to around 50% for new property launches.

But not everything in real estate is gloomy, the Reserve Bank of India has recently made a cut in policy interest rates. While this news may cause haste in investing in the sector, say in buying luxury villas in Bangalore or any other metro cities, there are some things you need to consider before making an investment. These are mentioned below for your consideration:

• Trading in real estate properties frequently

When you trade in real estate properties more frequently – that is, buy or sell your property in shorter duration – you may incur a loss in tax benefits.

To be precise, if you sell your property within 3 years of making your real estate acquisition, such acquisition would then be called short term capital gain, which entitles you to zero tax concession or exemption.

But, if you sell your real estate property after 3 years, it entitles you to long term capital gains and the taxation for this would be at a comparatively lower rate.

Be wary that if you trade-in too many times even in long term capital gains as it could alarm your Income Tax officer, who may consider this dealing as your business income and withdraw the low rate on long term gains.

• Investing in properties that are due completion

It’s easy for your agent or builder to make excuses for not completing their project on time and completing it at a much later date than promised. They may not have any hidden agenda behind this, except prolonging time. It means a little more number of EMIs for you than which were originally expected.

The second of the two-pronged effect of the delay is this: The tax benefits that you receive on your property investment are restrained on possession, which is a direct effect of long delays.

Being alert on investing in incomplete or overdue properties is therefore very important, at least for your pockets.

• Planning your budget before investing

We know that if a budget is unplanned or unsupervised before investing in real estate, it may deplete most of your saved resources, back-up money, or hamper your short-term investments. It may also affect your daily expenditure and can create dearth in your cherished small purchases every now and then.

Purchasing properties not just involves a down payment but also what seems like an endless array of EMIs – directly affecting your monthly salary.

Seek the professional advice of your financial consultant before buying a real estate property. A good recommendation would be saving at least 40% of your total income after you have made your investment.

• Considering all the factors before making your investment

As again like planning your budget, it is equally important in knowing and fully understanding all factors involved with making your investment, because knowing the loan criteria, real estate details, and repaying capacity are not adequate. Consult a financial adviser for a complete financial plan on your investment.

• Plenty of investment in properties may not result in profits always

The best idea would be to divide your finances into different types of investments, and not just stick to investing in real estate. First, because transaction costs in real estate are much higher than say investing in gold, bank deposits, bond funds, equities, etc.

The prime reason that people choose to invest in a lump sum in properties is that their prices increase at a faster rate compared to other most forms of investments. While this may not be true always, it’s wise to be aware of the current changes or trends in the market for accurate predictions.

If you are planning to make any investment such as buying villas in Bangalore or Chennai, etc., these above-mentioned points should hopefully help you in making the right investment.


This is a guest post by Dinesh Dhawde