- Date : 09/11/2019
- Read: 7 mins
You need to know of a lot of things before buying a plot of land. This piece will answer most of your queries.
Several questions come to your mind when investing money on land as compared to investing in a house or flat, jewellery, government bonds, equity stocks, and mutual funds. Bank savings are not named here since we all know that it is the safest form of investment, albeit the low returns.
In the case of equities, the risks are more and so are the profits, which also requires a deeper understanding of the market. However, a piece of land or property is considered as the safest bet in terms of appreciation of the investment. People do a lot of research as well as soul searching while buying a piece of land. Nothing wrong in it; and on the contrary, it is necessary to ascertain specific facts before purchasing a piece of land.
Here we list some of the most important factors to keep in mind before you invest in land.
1. Establish your financial capacity
The most important point is, of course, the financial capacity of the investor. Every investment can be limited as per that capacity. Even if the investment is a suburban flat, because of skyrocketing prices of property, the allocated amount can turn out to be very high.
Most of those who have a salaried income will find EMIs eating up a bulk of their monthly expenditure. In the case of land, it is not so. The investment amount is often much less, especially if the property is on the outskirts of the city and away from the commercial establishments. Of course, any land you purchase within the city limits will cost you much more than a house.
2. Investing in land is not just for the super-rich
This brings us to the second part of the point mentioned above. More often than not, it is heard that NRIs, industrialists and movie or sports celebrities have purchased massive plots of land. It is a myth that land can be only purchased for investment purposes by the rich and the millionaires. However, it is not always true.
The fact is that land purchase is something that is very much within the reach of middle-class working individuals. However, it may depend upon the location of the land and the future civic and commercial growth plans of that area. This requires a lot of painstaking efforts through an extensive network of friends, relatives and trustworthy agents.
A lot of patience and effort goes into the process and therefore, many people prefer to start scouting for a flat which can be selected in a very short time frame.
3. Employ a macro and micro approach when investing in land
It is necessary to consider a macro as well as a micro approach while purchasing land at a particular location. The investor needs to continuously monitor major economic trends, reports of local and national real estate consultants, etc. This includes the past as well as on-going trends.
It is equally important to know the type of returns that various other forms of long-term investments will yield, mostly in terms of mutual fund, gold, insurance policies, pension plans, etc. It was estimated that from 2008 to 2013, land investments had shown the highest performance in terms of its appreciation as compared to other long-term investments.
However, this trend may change. Again, the particular place needs to have future value for the land to appreciate. With the government coming out with projects on SEZs, industrial corridors, newer airports, smart cities, etc., there may be a sudden rise in the value of plots. You should always be on the lookout for those.
4. Small investments could also yield big
Try to select plots of land which are small in size and clustered next to one another. The main reason is that an additional plot can be bought as the financial strength of the investor increases and the land value is showing a steady appreciation over a particular time frame.
It is not necessary to invest in big chunks of land and be straddled with less than expected returns. It is better to buy a small plot in the beginning and then keep on adding the land at a slow pace without feeling a pinch on the financial capacity. It is necessary that the investor considers such an area where this existing flexibility is available. This is one big advantage that any prospective land investor will have when compared to investing in a house as your options of buying the adjoining space will be limited there. At the same time, if the land value does not appreciate much, then selling a small portion of the land will be much easier.
5. Evaluate the tax benefits eligible for the land you are purchasing
It is equally necessary that anybody interested in land investment has to get every aspect of tax savings clarified. There is a lot of myth vs reality statements which go on regarding the tax savings accruing when purchasing a piece of land. Sometimes, it is even assumed that no tax benefit can be availed in any form of land investment. It is better not to assume and do some groundwork and research instead.
The loan amount you avail for purchasing land is not eligible for any benefits. The interest amount payable can be capitalised and clubbed with the acquisition cost. This will give capital gains tax benefits while selling the land at any future date. Similarly, if a house is being constructed on the land, then it is possible to get a tax benefit on the principal and interest portion of the construction amount, but only after the same is completed.
6. Exercise caution when applying for bank loans
The criteria for bank loans are not so easy while going for land investments. Every investor has to consider this angle carefully. In the case of residential and any form of housing loan, the loan disbursements happen at a swift pace. This is because most of the housing projects in metros, tier 2 and tier 3 cities are bank-approved.
However, only specific land loans are subject to bank approvals. Mainly these are residential plots residing within municipality limits. Interior village lands and agricultural lands do not fall under the bank loan approval scheme. Again, the loan to value is lesser for a plot of land as compared to housing loans. Typically, the loan amount sanctioned comes to not more than 70% of the land value. This might slightly differ from bank to bank.
7. Be thorough with the paperwork
The paperwork involved in the possession of land is much more detailed and needs to go through a process of careful examination and documentation unlike other investments such as house ownership papers, which is relatively simple. There may be many hidden claims with reference to the title deed and ownership. First and foremost, the title deed should be very clear, and the transfer claim should not be questioned at all.
There should not be any impediment on the land, be it illegal construction, encroachment, ownership dispute and litigation etc. The release certificate should be given by the bank which is a go-ahead from the bank that there are no debt payments pending on the land. You must also take care of the necessary local approvals from the municipal office giving the green signal against any form of legal or compliance hurdles.
Jagadish Puttaraj an Independent Consultant Editor on Newsilike.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.