Why making quick bucks in real estate is far from reality?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Many of us invest our savings in various investment instruments such as stocks, bonds, fixed deposits, real estate, gold, etc. There is always this great desire that our investment runs smooth and yields highest possible returns. Of all the investment class, real estate has become a much bigger asset class in India. Within real estate investment, there are different categories of investors. One, who would buy a home for end-use which effectively hedges them against inflation, second category of property investors would primarily buy offices or commercial spaces to make money on rentals. There is however, the third category of investors who would indulge in property trading. These investors would invest in under construction residential projects and sometimes would book multiple apartments, hoping to sell them at higher prices to other buyers or end-users. These short-term investors would be betting that property prices will appreciate substantially as happened from 2003-2007 and they would be able to make windfall profits. However, things don’t always turn up as one imagines:

Here is why?

Liquidation issues:
Real estate is one such asset class that is always prone to liquidation risks. During our survey with some of these short term investors, we noticed that, majority of them are finding it increasingly difficult to sell these apartments within their desired time-frame. Due to this, these investors would end up selling the apartments at much lower price. In Delhi NCR, especially in Gurgaon, an apartment that is available at Rs 6000 per square feet from the developer is being sold at Rs 4400-4500 Rs per square feet in the resale market from these short term investors. Now, why would an investor sell at low prices? Most of them would book the apartment in early stages of an under-construction project as per construction linked plan. And accordingly, they would make initial payments equivalent to 10-12% of the property value. However, as construction advances and there is demand for the next installment from the builder, these investors would have no other option but to sell the apartment at much lower prices.

Capital Gains Tax:
Now, having sold the apartment within a short period (less than 3 years) of booking it would attract capital gains tax. The short term capital gains tax stands at 30% of profits booked.

For example, an investor buys an apartment at Rs 3000 per square feet in early stages of an under-construction project. And he paid the booking amount of 10%. He sells the apartment at Rs 4500 when the builder is charging Rs 6000 per square feet. In this case, the investor would be liable to pay 30% of Rs 1500 per Square feet as capital gains tax.

Now, many of you would question that who pays capital gains tax in India? Right… and all of this lead to rapid influx of black money into the real estate sector.

Transfer charges:
Having identified the next buyer, the investor would now transfer the apartment in the name of this new buyer. Transfer charges are costly and would range from Rs 50 to 100 per square feet.

Transaction charges:
Identifying the next buyer is always difficult and one would have to pay a transaction fee of about 1-2% of property value to real estate agents. Let us assume the apartment size was 1000 square feet and since it was sold at Rs 4500 per square feet, the transaction fee at 1% of property value would come out to be Rs 45000.



Here is the illustration:

Therefore, as shown in the picture above, the returns are not as expected by the short term investor. There are many factors that one should look into before jumping into the business of property flipping.

As the saying goes, invest for a long term and cherish the rewards that come along with it.

Cheers

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What is Land use Zoning in India? What are the uses that are permitted for various types of zones?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

While developing the master plan for a particular city, the town planning officials make use of zoning regulations. So, what are these zoning regulations? Based on the city’s geography, the land use is zoned by town planning officials. For example, in flood prone areas, the land use may be restricted to parks, gardens, playgrounds. The construction activity in these areas/zones may be restricted. Similarly, in hilly areas, construction of residential premises may be prohibited. Therefore, in essence, zoning regulations are tools used by town planning officials to clearly demarcate land use for the purposes of development, welfare, and safety.

In cities, Zoning is done to earmark residential, commercial, industrial, recreational development. Certain zones within a given city are demarcated as residential zones, some as industrial zones, and some as institutional zones. All of these zones are clearly highlighted within a master plan of a city. The town planning department then invites private developers to bid or buy the piece of land within these Zones. Some developers may buy or bid for residential land, while some may opt for institutional land.

Zoning is a complex subject because it involves the optimum usage of limited land available to city officials. Zoning regulations are in operation in all major cities and towns of India to regulate the use of property within their jurisdiction. Agricultural, industrial, residential, commercial, recreation and forest areas are clearly marked on city maps.

Find below the ‘Types of Zones’ and the uses permitted for these Zones.

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Be wary of the hidden charges while buying property in Delhi

Description: Hidden Charges increase the actual cost of the property; therefore, it’s better to keep in mind these charges while preparing the budget for a new property.


Buying a property in Delhi is one of the most important decisions for those who want to settle in the capital. The buyer goes out of his or her financial capabilities and prepares the budget to buy the property. But often, the buyer ends up paying extra which he or she does not realize. There are a number of extra charges in the form of extra taxes and other fees which comparatively makes the property much costlier than its actual price. This extra amount other than the actual cost of the property hurts the buyer’s pocket as it gets out of the buyers allocated budget for the property. Hence, the buyer needs to be aware of these hidden charges to prepare the budget accordingly, before investing in a new property.

1. Stamp duty and registration fees: 
Getting a property in Delhi registered is an important aspect in the property buying process. It is a final agreement between both the parties that indicate the change in ownership of the property. In order to get the registration done, one has to pay a certain amount to the government. The registration form costs a particular amount, depending on the total property value. Though the charges for stamp duty and registration for Property in India varies from state to state, but usually it is between 4% to 10%. Typically, in a majority of the states, this registration and stamp duty fee adds up to 5% - 14% of the cost of the property. In addition to this expense, there is another registration fee that is payable to the court which differ from state to state and varies between 1% to 2% of the value of the property.  And, above all, there are additional costs that include lawyers and notary fees, who get the agreement done in the court.

2. Service Tax and VAT:
The service tax is applicable on the purchase of any property in India that is under construction while the VAT is charged over the value of the construction of the project. The imposed service tax is 12.36% of the 25% value of the under constructed property. Whereas the imposed VAT is between 1% to 5% of the under constructed property value. Altogether, the service tax and VAT can add up to 8% to 10% of the entire property value.

3. Preferred Location Charge (PLC):
The term Preferred Location Charge, commonly known as PLC refers to the extra charge that is levied from the buyer to buy property in Delhi in their choice of location. This is applicable specifically in a housing complex, layout or residential community. Though this charge differs from builder to builder and project to project. Lavish villas, penthouses facing the sea or garden are most likely to have higher PLCs.

4. Utility Charges:
The charges referring luxury amenities or those linked with the building come under utility charges. This includes parking in open or closed space, clubhouse membership for a lifetime or yearly, firefighting provision, electrical and various other charges associated with Government utilities as well. Apart from these there are other charges involved while buying property in Delhi such as maintenance, security charges, and others also. Security charges refer to the expense for employing security personnel, installing and maintaining security arrangements like CCTVs camera, intercom among others. These extra charges add up to the initial cost of the project in a huge way and become a burden on the shoulder of the buyer.

5. External Development Charge (EDC):
EDC is usually meant for the maintenance of roads, water, sewage, electric supply, lights and development of the surrounding area. It varies from location to location and adds up to 10% of the entire cost of the project. Sometimes the government also levies development charge on the developer. These charges also are also charged in the form of maintenance fees in advance for a longer period of time. This is a great disadvantage the buyer as he has to shell out extra amounts for which he does not prepare himself.


This is a guest post by Seema Chauhan