Five things you must Avoid while investing in real estate
Real estate investing has given mind-boggling returns over last 10 years. However one should be careful while investing in real estate. Here are some useful tips that can help you be a sane investor in real-estate
Holistic Investment Planners
There are certain rules applicable to everything we do in our daily lives. The whole idea behind this belief is to fetch the maximal benefits, along with guarding ourselves from any kind of associated risks.
In that respect, our personal finance management is not distinct either. A number of aspects in our everyday financial matters involving loans, investments, taxes, credit cards, etc. are directed by some definite rules. Let us learn about some prohibitions that is, things we must not do while investing into real estate.
1. Say NO to very frequent switches in properties:
People tend to sometimes trade with the real estate investments. Rather than retaining property after purchase, people buy/sell them too often. This high frequency of trading can prove to be worthless. Wondering how? There are no tax benefits retrieved whenever property is sold in a short period of time.
If a property is sold within 3 years of purchase, the gain is treated as short term capital gain and there is no tax concession or exepmtion. If you sell a property after 3 years, it becomes long term capital gain and will be taxed at a lower rate. Even this concessional lower rate, can be withdrawn on long term capital gains from the property if these property transactions are happening too frequently.
If it happens very frequently, the Income Tax officer may treat this as a business income.
2. Do not invest into an unfinished property:
Delay in the complete construction of property is an instance that is too common to happen and is seen often. Postponing the property’s date of completion has become an industry norm that keeps repeating on a frequent basis.
Sometimes, extended delays can even result into postponed or incomplete projects. You cannot afford to put your savings of a lifetime at a serious risk, by overlooking this harsh fact. A long delay in property completion may even put you under the dual strain of rent and EMI. Also, the tax benefits available on real estate investments become restrained with time, in cases of extremely delayed possession. Considering this, purchasing a completed property will prove to a wise decision.
3. Do not broaden your budget too much:
Property purchase can cost you a lot, really a lot. It involves not only putting in all the money saved till date as down payment, but also paying a huge portion of our income as monthly EMI for years to come. This can jeopardize many of our other serious and important commitments such as, a medical emergency or children’s higher education, not to forget our daily expenses and small luxuries.
However, always remember not to outpace your practical limits, when putting money into property either for self or for investment purpose.
Please ensure that
i) You have a fair amount of money after the initial down-payment. In the hurry burry of buying a property, people take money from emergency fund and other resources like the money you kept for meeting another short term goal. Because of this people may face a huge cash crunch. This can be avoided if well planned in advance.
ii) You have at least 50-60% of your net income with you even after the EMI reduction.
4. Avoid too much investment in real estate:
Most of us are big fans of property, gold, or big bank deposits. We generally overlook asset classes such as bond funds and equities. Also we have many misconceptions about investments in property. Here is one - property prices increase at a much faster rate compared to gold and other financial assets. This belief is one reason why most people end up investing entirely, or corpulent sums in property. This leads to negligible amount of money invested in other investment assets.
Transaction costs involved into property are comparably much higher. It is an asset that canneither be converted into cash in a single day, nor can it be sold into multiple parts. With these constraints in mind, one should think twice before locking all their money into property.
Because of its illiquid nature, it is not advisable to invest more than 30% of your assets in real estate.
5. Don’t jump into real estate investment before seeing your big picture
What generally investor considers before investing in a property? Their repaying capacity, loan eligibility and property details… Is this enough?
This may not be enough. Because of this additional property investment, your money is getting locked. To service this loan, your retirement may get postponed by a few
years. Therefore before taking real estate investment decision it is better to consider your big picture in the form of a comprehensive financial plan. That will hep
you take a right investment decision.
Not doing the above mistakes can help you become a better and profitable investor.
The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.