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Article in Hindu Business Line on Jan 26, 2015

TO BUY OR NOT TO BUY A HOME

Some see it as a dependable investment opportunity, others have had the ground rocking beneath their feet.

Conventional wisdom has it that property is a great investment that gives good returns. And even as many new avenues are now available, investors testify that property can be a great choice still. RK Agarwal, who took voluntary retirement from managing international trade at organisations such as Mahindra & Mahindra and SAIL, is one such proponent.

Diversification Benefit

Agarwal says property has a role in building a diversified portfolio. “Sure, your equity investments can get you better return than the property market; and yes, it is also more liquid,” he says. But, personally, he has seen meteoric property price rise in the Pune area where he owns two houses.

“All asset classes will not work the same way and follow the same cycle. In the last three years, the property market did not do well while fixed deposits have seen good returns. This will change and buying a property can help diversify your investment basket,” he says. He has recently invested in a week-end home in Karjat, near Navi Mumbai, with the dual motivation of gains when the new international airport comes up as well as utility as a vacation home.

Good Profits

Sensing an opportunity when cycles turn, Deepak Jyoti, Vice- President of finance in a private firm in Noida, took to real estate investment. Jyoti was a regular investor in the stock market in the past. “My returns from stock investments were poor and I saw an opportunity with the boom in the local property market,” he says. Jyoti would book flats and sell them within five years, earning annual gains of around 20 per cent. “You have to pick property in a good location and also the right price point. Investing in homes that cost ₹50 lakh may fetch better returns than those that go for ₹1-2 crore.” he says.

Additional Income

It was rental income that motivated Ancy Fernandes, who works overseas, to book an apartment in the Genesis project in Pune. He notes that his new home is located near IT hubs — opening up the option of leasing it as a corporate guest house. “I find that investing in property is relatively less complicated. If you are careful about details, such as location, quality of construction and trust factor with your developer, a home can make for a sound investment,” he says.

Tax Benefits

Sairam, an employee of Neyveli Lignite Corporation, has taken a loan to invest in a flat along GST Road in Chennai. His motivation is both gains as well as a place for his youngest daughter to stay. “The interest and principal are tax-deductible. Since I fall in the 30 per cent tax bracket, my return is higher compared with investing in a fixed deposit and paying tax on the interest earned,” he says.

An open-and-shut case for some

Many investors are rejecting the long-held wisdom that property is a good investment. Take the case of Razia, a professional working for a consulting firm in Chennai. She used to buy land and other property when opportunities came up in the past.

Illiquid investment

She bought a flat in the OMR region in Chennai a few years ago, but due to oversupply of homes in that area, there has been no price appreciation. Neither is she able to sell the home for a decent price, even after trying for nearly a year. “A sizeable fund is lying locked up, not earning any return. If I had invested it elsewhere, I could have built my wealth,” she laments.

In the last three years, she has taken the help of a financial advisor and has started systematic investments in mutual funds. She is happy with the returns and feels that she understands the risks. “The stock market is considered risky. But not many have kept it for the long term. And you have a lot of performance data available for mutual funds and the equity market. The property market is inefficient, closed and there is utter lack of data,” she observes. This makes it difficult to assess the risk of investing and that is a ‘big risk,’ according to her.

Low return

Not earning enough returns after having stayed invested for a while was the experience of Y Sri Prakash, a businessman. “I bought a house in the suburbs of Hyderabad as an investment over three years ago. When I tried to sell the house, I was not able to get a good buyer who was offering a fair price,” he says. “After many months of struggle, I was finally able to lease the house out to a company. But the whole point of buying that house was for investment and it is not working out that way,” he regrets.

Loss of peace

Kamala Thiagarajan (name changed) goes one step further and says that she will not invest in property even if returns are spectacular. She resides in Mumbai and had rented her property. In 2013, her long-time tenant left the house in a shambles when he vacated and she had to fix up the house and find a new tenant. There was trouble again, in under a year — her new tenant refused to pay any rent.

When she asked him to vacate, he demanded ₹1 lakh in cash. She ended up paying this and keeps the house locked now. “Financial losses are easier to deal with. The time, effort and mental trauma have convinced me that it is not worth any return I get,” she says emphatically.

Returns won’t go over the roof

The spectacular annual returns of over 20 per cent that investors were expecting in the property market may be a thing of the past. Future gains are likely to be muted, at around 10 per cent yearly.

V Shankar, entrepreneur and member of The Chennai Angels network, notes that unlike the past when the asset class was re-rated and gave good returns, fresh investments in real estate must be evaluated very carefully with reference to the micro-market, the sector and the specific valuation. Likewise, Noida-based Deepak Jyoti does not expect that gains will be good in the near term. “There is a lot of supply and saturation of demand,” he observes. Pune-based RK Agarwal shares the same sentiment on supply. He notes that premiums will fall as the Government is keen on making housing more affordable for all.

Expert view

Sukanya Kumar, Founder and Director, RetailLending.com, has this to say. “Property may be an interesting investment option to consider by those with a large corpus, say over ₹40 lakh. Before you invest, be sure to put away an emergency fund. Only invest what will not need for at least three years, as the wait period to realising returns is long.

“While half of the property buyers have a pure investment motive, the other half may have other movites – self-use in the future, a weekend home or gifting to children. It is best to pay off loans on your first home, rather than be in a situation of having to handle two mortgage payments.”

R Sundar, partner at V Ramaratnam & Company, a Chennai-based tax consultant says, “Owning a home offers tax advantages by way of interest payment, principal repayment as well as capital gains. The tax advantage under Section 80C has been increased to ₹1.50 lakh for the assessment year 2014-15 and 2015-16. Irrespective of the number of houses owned, you can claim repayment of principal on housing loan. You can also claim stamp duty and registration fees as deduction.

Interest paid on housing loan is also deductible. Also, say, your second home is rented out and the rent received is less than the interest paid. Then, the income from the property will be a loss and this can be deducted. The second home is exempted from wealth tax provided rental income is offered for taxation — as actual rent or deemed rent. If the second house is purchased out of capital gains within the stipulated time, capital gain tax is also saved.”

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