Cost and calculations

Avoiding a few mistakes can get you the best return from real estate investment

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 bring 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:

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 ₹2 crores at about 6.7% interest, which of course can shoot up to 7.5% if your CIBIL score is less than 600. You will save about ₹24 lakhs if your credit score is a top notch play.

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 costing 25-35% 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%, 5 to 7% for registration and stamp duty depending upon the state norms. If you are buying a house worth ₹1 crore, assume the furniture cost to be around ₹7 lakhs, i.e. 7% of your price. So the actual cost of ₹1 crore turns out to ₹1.25-1.3 crore in real terms for the buyer.

Apart from this, lenders are willing to fund 75% of high value loans or up to 90% low value loans. So if you believe that your ₹10-20 lakhs are enough, then do not fall a prey to it. The additional burden of ₹30-50 is to be borne from your end.

Skimping on research

Before buying a new smartphone, when 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, reason for selling, facilities nearby, growth opportunities, commuting problems and more.

The buyer must know the objective of purchase. They must see if they are looking for a home to live 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.

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 with your return expectation from the property. Do not overlook the same details by blindly trusting anyone, which can lead you to troubles. 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, high commission is the key incentive to sell an inappropriate property.

Comparison of returns

Purely as an investment, it is much easier to put your money in the far cheaper financial instruments such as mutual funds, small savings or equity. The cost and barrier in such financial investing is almost negligible. The service charge, annual account cost, brokerage and expense ratio is 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 cost 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.

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.