Buying real estate for the purpose of investment, earning hefty long-term profit is the key incentive. However, buying property without considering a few important factors like calculating full cost may hurt your actual return expectations, or worse make a loss.
To ensure that you do not make losses while selling property or even end up being saddled with an illiquid investment, here are a few key mistakes to avoid while investing in the real estate:
1. Credit Score
Applying for property loans invites lenders to investigate your credit history. If there is a problem in your credit history, your application may get rejected or you might be offered loans at a higher rate.
If your credit score is 750 or more, the best loan rates are offered by the lenders. If your CIBIL score is more than 700, you can get a home loan of Rs 2 crores at about 6.7 percent interest, which of course can shoot up to 7.5 percent if your CIBIL score is less than 600. You will save about Rs 24 lakhs if your credit score is a top-notch play.
2. Full cost of real estate
The real cost of a property should be calculated before you buy any property. One should ensure GST, registration, stamp duty, brokerage, furnishing, cost of borrowing, etc. This can push your cost 25-35 percent higher. There are additional costs that may vary from one place to another and the location of the project.
For an under-construction property, the buyer needs to pay GST at 5 percent, 5 to7 percent for registration and stamp duty depending upon the state norms. If you are buying a house worth Rs 1 crore, assume the furniture cost to be around Rs 7 lakhs, i.e. 7 percent of your price. So the actual cost of Rs 1 crore turns out to be Rs 1.25-1.3 crore in real terms for the buyer.
Apart from this, lenders are willing to fund 75 percent of high-value loans or up to 90 percent of low-value loans. So if you believe that your Rs 10-20 lakhs are enough, then do not fall prey to it. The additional burden of Rs 30-50 is to be borne from your end.
3. Skimping on Research
Before buying a new smartphone, we often compare various models and choose the one that fits our requirements. The same goes for real estate, which demands a more rigorous due diligence ranging from the construction, design, location, disaster zone, the reason for selling, facilities nearby, growth opportunities, commuting problems, and more.
The buyer must know the objective of the purchase. They must look if they are looking for a home to live in or a place to rent for. Also, if you are willing to resale it, how long are you planning to hold it? Also, you must understand that real estate needs regular maintenance and renovations, which need additional capital from your pockets. Clarity on these pointers can ease your job.
4. Impulsive buying
A buyer should not jump the gun if they like a property, which has its own consequences. Before selection, consider the factors of costs, paperwork along your return expectation from the property. Do not overlook the same details by blindly trusting anyone, which can lead you to trouble. Timing is key to everything in life and a real estate deal is no different.
Impulsive buying can happen if one has insufficient resistance to sales pitches or the buyer is wooed by the freebies which have least to do with the property. For any unethical dealer, the high commission is the key incentive to sell an inappropriate property.
5. Comparison of return with other investments
Purely as an investment, it is much easier to put your money in far cheaper financial instruments such as mutual funds, small savings, or equity. The cost and barrier in such financial investments are almost negligible. The service charge, annual account cost, brokerage, and expense ratio are too low in such asset classes. Also, these investments are highly liquid.
On the other hand, real estate investments require you to pay property tax, maintenance costs, and renovation. Along with it, real estate investment is highly illiquid and the prices are not usually fixed for the same or similar asset. However, real estate is a social status symbol and even the most preferred investment class in the country.
The bottom line
If investing in real estate was so easy, everybody would be snapping their fingers. Fortunately, many of the struggles investors endure can be avoided with due diligence and proper planning before a contract is signed.
Authored by Aman Gupta, Director, RPS Group
