Planning to invest in real estate? Here are few things you must know

If you are planning to add real estate to your investment portfolio, having sound knowledge in this area is a must. Here are some things that will help you make wiser decisions.

Here's what you need to know before making an investment in real estate
Indians have always had a weakness for land, given that India is basically agriculture-dependent and has a huge population competing for limited resources. Alongside this, economic boom has led to a massive growth of urban centres, leading to a shortage of real estate. Consequently, investment in real estate has become an attractive proposition.

The problem is that there is always the danger of getting carried away by unrealistic hopes of easy profits, and the temptation to invest in projects where there are no real gains – and possibly even losses because of legal grey areas and outright scams. No investment is totally risk-free, and real estate too has its share of risks.
 
Risks and gains

Investing in real estate involves multiple variables, and inability to come to grips with these enhances the risk element. Let us consider a few risks:
 
  • First, as is the case with any investment, there’s no guarantee of profit if you invest in real estate – for example, a new flyover blocking your property can lead to a crash in its value overnight.
  • Second, inadequate understanding or knowledge of real estate laws is dangerous. It is your money that is on the line, and if anything goes wrong – say, a scam (which is not unlikely in India) or a law that’s been broken, it is you who would lose money.
  • Third, you have to understand market sentiments, which can be fickle, and be financially prepared to rough it out during slowdowns. E.g. after the Benami Act was passed last year, property values in many areas tumbled south.
 
This brings us to the fourth issue: cash flow risks. If you are into renting out your property, an empty asset or two can easily lead to cash flow issues. In India, a difficult tenant is also a common problem.

Finally, real estate is not an in-and-out investment option; investing in this sector must be for the long haul. If you need liquid cash at short notice, forget it. If you want instant profits, this is not for you. Be sure you can afford to block your money for at least a few months, if not years.

Yet people make real estate investments, given the gains, and maybe you too have invested for these very reasons.
 
X-things-to-know-if-you-have-real-estate-investments

 

The Benami Act

As stated earlier, if you are into real estate investments or are planning a foray, knowledge of the rules and regulations governing the sector – or legal advice on the same – is a must. Otherwise, you could find yourself contravening the law.

One such law is the Prohibition of Benami Property Transactions Act, 2016 (PBPT Act) – informally referred to as the Benami Act – which came into effect on November 1, 2016. Under the Act, owning assets under a different name constitutes a crime.

Benami is a Hindi word meaning ‘without a name’ or ‘nameless’. This Act uses the word ‘benami’ to define a transaction in which the actual beneficiary is one who is financing the purchase from behind the scenes; the person in whose name the property is purchased is basically an identity cloak – the ‘benamidar’.
 
A notification issued by the Central Board for Direct Taxes (CBDT) said the PBPT Act defines benami transactions, prohibits them, and further provides that violation is punishable with imprisonment and fine.

The Act is explained in detail in the government journal Gazette of India.

So, when is a transaction deemed ‘benami’? Earlier, it was deemed so when the property was held by or transferred to one person but was provided for or paid by another individual.
 
X things to know if you have real estate investments

 

The Act provides for stringent punitive measures for violations. For instance, property involved in benami transactions can be confiscated with no compensation paid. People found guilty can face rigorous imprisonment for a period not less than one year, and it may be extended to seven years.

There could also be a penalty of 25% of the property’s market value. Further, anyone found guilty of intentionally misleading investigators can be handed rigorous imprisonment of not less than six months. This may extend up to five years, along with a fine of 10% of the property’s market value.

Payable duties

If you are looking at the real estate sector for investments, you need to be familiar with two terms – the ‘stamp duty’ payable on the property and the ‘registration’ of the property or asset being transacted. Let us look at each:

Stamp duty: This is a tax that the government applies on both commercial and non-commercial transactions of property (e.g. land) and documents (shares and debentures). Thus, it is also legal evidence of purchase or sale of property.

It is important that you pay this duty in full, and at the earliest. If this is not done, you are liable to be penalised. Also, stamp duty varies from state to state. It is therefore advisable to check the correct stamp duty applicable in your state and use the correct stamp paper.

What is stamp paper? Under Indian laws, all commercial transactions and contracts – from a simple employment contract to a sale deed for a flat – must be executed on a ‘stamp paper’ of appropriate value. When this is done, stamp duty is deemed to have been paid.

The payment of stamp duty means that the state will step in to adjudicate if there is a breach of contract. Agreements that are not stamped to the correct value are not enforced by courts until such difference in duty is paid along with a fine that may be in the region of ten times the difference in duty payable.

The procedures and legalities for property transactions are governed by the Indian Stamp Act and the various state stamp-related Acts and rules. Reports say the Government is thinking of revamping the Indian Stamp Act, so it is advisable to be on top of developments.

Registration: Section 17 of the Indian Registration Act mandates that certain documents have to be presented to an officer who maintains public records (like a sub-registrar) for registration.

Registration of a property is a full and final agreement signed between two parties. Once a property is registered, it means that the buyer in whose favour the property is registered is the lawful owner of the premises and is fully responsible for it in all respects.

A real estate purchase is incomplete without registration, and one becomes the owner only after getting the papers in hand, signed and stamped by the legal government authorities. The registration documents are a proof of ownership and protection against encroachment.

The registration process has now been computerised, making the middleman passé, but still steps need to be taken, as listed below:

Property Verification:  The buyer is required to get the property and its title verified before proceeding further for property registration;

Property Value Estimation: Following this, an authorised property valuer has to estimate the property value, based on which the stamp duty will be fixed;

Stamp Paper Preparation: The next step is calculating the stamp duty on the property and preparing the stamp papers; non-judicial stamp papers can be got either online or physically purchase from licensed stamp vendors;

Sales Deed Preparation: Next, the sales deed has to be prepared; also called the conveyance deed, it contains details like sale value and establishes ownership to the buyer, enabling him/her to sell it in future;

Deed & Stamp Paper Registration: The stamp papers and the sales deed have to be registered at the office of the sub-registrar, where both buyer and seller have to be present along with two witnesses to the sale deed registration. All have to produce identification proofs, photographs etc., along with the original copy and two photocopies of the deed to get it registered;

Completion Stage: The property registration process is completed once all the documents are submitted at the sub-registrar’s office. The buyer gets a receipt and can collect the original copy of the sale deed seven days later.
 
Last words
The government implemented the Real Estate (Regulation and Development) Act or RERA in May 2016 to make the real estate sector more accountable and transparent.

As a result, total transparency eludes India’s real estate sector. So much so that India managed to move up only one spot in the global real estate transparency index – from 36 in 2016 to 35 in 2018. So, as a buyer of real estate, it is up to you to ensure that the property purchase remains free of ambiguity relating to serial number of the flat/floor, carpet area/built-up area, floor plan, and even amenities (flooring, door, window, etc).

Apart from this, you must make sure the agreement document clearly mentions the sale amount, is signed and stamped, and lays down the payment schedule. Moreover, ask the seller to hand over the original stamped receipts and previous sale deed in case of a resale property. This should keep you covered in case of any eventuality.
 
 

Related Article

Personal Finance News

8 Simple ways to check gold price before you buy

8 Simple ways to check gold price before you buy

 

Most Shared

Poll

What kind of gift would you like to gift your sibling this Raksha Bandhan?

A. Systematic Investment Plans
0%
B. Health Insurance
50%
C. Gold/Gold ETFs
50%
D. Others
0%