Real Estate FAQs

What is a real estate?
Real estate is the property, land, buildings, air rights above the land and underground rights below the land. The term real estate means real or physical property really exist.

What is a real estate investment?
Real estate investing involves “the purchase, ownership, management, rental and/or sale of real estate for profit.” Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development.

Who is real estate investor?
A person or an organization who is investing in the development of property, purchase or sale of land and building property with an intention to do such business and earnings from the same.

What real investor do?
Handling, maintenance and other responsibilities that build, buy, let-out and sells them to investors as fixed investment or acquisitions or rental properties.

Valuation of property?
Before making a valuation of any parcel, the appraiser must know all the data related local real estate aspects, open market price, government valuation, operating and non-operating expenses relation to construction, financing charges, sale prices, appropriateness, accuracy, the quantity of market information etc.,

Three methods of valuation:

  • Sales prices comparison using only sales where the buyer and seller both acted without undue pressure which given the greatest consideration while valuation called the sales comparison approach.
  • Calculate cost, labor and material prices cost of today in case of new property. If the structure is not new, the appraiser estimates how much it has depreciated since it was built, in addition, the estimate of the market value of the land called the cost approach.
  • Analyse market rental occupancy rates, vacancy and collection allowances, and operating expenses to estimate what an income-producing property should earn which factored to estimate value called the income approach.

Leasehold property means?
The property which is taken for the purpose of use from the landlord for lease for a particular period of time with legal rights agreement. In other words, property from freehold owner to leaseholder.

Generally, maintenance of the common parts of the building like entrance hall, staircase, exterior walls, roof, maintenance fees, annual service charges and their share of the buildings insurance, sub-letting etc., depends on agreement while entering into the contract.

Freehold property means?
One who owns the building and the land it stands on outright in perpetuity in the land registry as “freeholder”, owning the “title absolute”.

You won’t have to pay annual ground rent

You don’t have a freeholder either failing to maintain the building or charging huge amounts for it

You have responsibility for maintaining the fabric of the building – the roof and the outside walls

Whole houses are normally sold freehold – there is no reason for a standalone house to be leasehold though there is an increasing trend for leasehold houses, particularly with new build homes, so check before you buy

What is meant by REIT (Real Estate Investment Trust)?
Real Estate Investment Trust refers to an entity created with the sole purpose of channeling investible funds into operating, owning or financing income-producing real estate. It is a type of security that provides all types of investors big or small, an outlet for regular income, portfolio diversification and long-term capital appreciation. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centres, hotels and timber lands.

What are the risks involved?
A lot of investor cannot get through their plans of investing in real estate just because they do not have a lot of time on hand to invest. It needs a lot of research to be done before you make any decision.

Real estate market happens to be one of the slowest growing markets i.e., may increase or decrease.
Re-sale of the property, demographical conditions may influence.
The maintenance, taxation and closing costs will cause you much more than you earn by investing in real estate
Asset concentration – it increases the value of your house and the owner can charge a good amount of rent from the renter.
The greatest criticism is that investment in real rental property or land is not liquid, means it cannot be converted into money quickly.

Who are involved in real estate investment group?

  • Any one
  • Individual
  • Institutions
  • Organisations
  • Trust,
  • Body of individuals
  • Association of persons
  • Companies
  • Foreign investors (depends on govt. permissions)

Advantages of real estate investing?

  • Investing in real estate can be much easier to understand than complex investments.
  • Gives more benefits in the long run if one controls fluctuations.
  • Real estate is one of the few assets that reacts proportionately to inflation.
  • Investors who do their research especially with help from industry experts, can find great real estate bargains.
  • Real estate can be financed and leveraged.

Limitations of real estate investing?

  • Very high transaction costs.
  • Real estate investors must be prepared to own a property for months and years, especially if it will be leased out.
  • Liquidity is very low.
  • Investors with rental property deal with fluctuating demographics and volatile economies, which can either add or take away from their bottom-line profits.
  • Real estate investing involves taking on a great deal of financial and legal liability.

How inflation effects real estate investment?
If the monetary supply is increasing according to the government goal by 2%/year, then the existing pool of money chasing the same pool of products and services devalues by 2%. There is 2% more money in the pool which is meant to buy the same amount as before. To achieve equilibrium, the amount of goods and services that the newly increased monetary supply is to pay for needs to grow by 2% as well. If that doesn’t happen, then the price of all items will increase by 2% to accommodate expansion of monetary supply.

The cost of material, labour, rentals will become more expensive.

Real estate v/s stocks

  • Actively managed real estate provides better returns and lower risk than stock market investing.
  • Real estate investments provide cash flow and can be a hedge against inflation.
  • Real estate is a market where you can buy low and sell high.
  • Real estate investors can use leverage to build wealth.
  • Real estate investing provides unique tax advantages.

Real estate investment v/s mutual funds

  • Investors in India have a preference for real estate investments over mutual funds:
  • High return expectations from real estate even though the asset is not valued on a daily basis.
  • Considered easy money once invested in the form of rental income.
  • Income of the spouse is also considered while applying for a home loan to avail additional tax benefits.
  • Lack of availability of loans for mutual fund investment.
  • Real estate is the only asset that can be largely funded by long-term debt, up to 75% provided by banks.
  • Loan-funded real estate investment comes with tax benefits.
  • Investors lack confidence in mutual funds.
  • Inadequate knowledge of mutual funds and equity.
  • Lack of understanding of the equity market, wealth building through SIP, and the power of compounding.
  • Insufficient information about asset allocation, loss aversion and risk.
  • Not understanding the difference between saving and investing.

What are the charges included like brokerage?
Brokerage charges are collected by the broker depends on area and valuation of the property. These charges are varying from each situation, kind of property. Generally, real estate broker (agent) receives 1% to 2% from both buyer and seller either individually or clubbed.

Are the commissions and charges being negotiable?
Of course, these charges are negotiable. The fixed charges are like government charges, stamp charges, etc. are not negotiable. Mediator charges are variable and negotiable.

Real estate investment is good or bad? /Factors influencing real estate investment? /Why it is not good to invest in REIT?
Reasons for smart investors are not investing in real estate:

  • Windfall gains come to the extremely lucky or the incredibly astute or those who have prior knowledge that a particular area is about to experience a development boom.
  • Around more or less the same returns as Fixed Deposit over a period of 30 years.
  • Barely beat inflation in a given 5-year period unless the market is incredibly gung-ho about real estate
  • Real estate remains an under performing asset class with huge periods of stagnation.
  • Emotionally charged assets which are an unpredictable asset class.
  • Not able to liquidate into cash whenever they actually need.
  • Challenges in tracking the market information.
  • Included with high cost and high keep up the effort.

Why it is good to invest in REIT?

  • Diversification of the portfolio as it offers competitive returns and is not dependent on other sectors.
  • Due to development going on a massive scale across the country, real estate is also prospering.
  • Gives safer returns because less volatile than corporate profits.
  • Corporate level tax which could be as high as 35%, REITs save that 35% of taxation at the corporate level which would mean extra dividends for the shareholders.

Should I consider this for the long or short term?
Generally, people who invest in real estate are looking for the return in long run. The investment made in real estate is not suggestible for short term because it does not able to liquidate whenever we required and at the same time for long term say 20 years then the market movement, government policies and regulations may affect in long run. The option to choose either for short term or long term will be depends on the place, valuation and local government.

What would be the returns?
The returns on real estate returns would be depends on property valuation, size, goodwill and etc., and also a classification of asset viz. 
Residential property or residential rental property.
Commercial property.
Lease of vacant land.
In all the scenarios based on return, the taxes like a municipal tax, property taxes, and some expenditures will be attracted.

How to invest in real estate with little money?

  • Invest money with an installment or some amount as down payment.
  • Enter into an agreement to pay partial or installment payments.
  • May find the financier like a bank loan or look into alternative investor like partner or co-investor.
  • Work with real estate investment broker for the experience.
  • Market tracking is very important.
  • One will need to build up a good credit record and while interviewed by the bank after applying for a loan, you’ll have to convince the manager you have the skills required to pay the bank back its money.

Types of real estate investment?
There are two types of REITs namely Equity REITs and Mortgage REITs:

  • Equity REITs: This type of REITs owns large commercial buildings, retails storefronts, hotels, or apartment buildings. The returns are earned by giving these buildings on lease and subsequently dividends are paid to the investors.
  • Mortgage REITs: This type of REITs does not own the properties themselves, but the debt on the properties. These own mortgages against the properties and collect payments.

Rules and regulations

If defaulted on agreement or regulation:

  • If the builder or developer has not handed over the property by the date mentioned in agreement for sale or if the registration granted by the Regulatory Authority has been suspended or revoked, we have the right to withdraw from the project.
  • If you choose to withdraw from the project, we have the right to be compensated for the full amount which paid till date along with interest.
  • If you choose not to withdraw from the project, you have the right to be compensated with interest for every month of delay. Interest amount will differ from state to state and regulations issued.

Legal procedure – Non- compliance:

  • We have the right to file a complaint before the regulatory authority, if the builder or developer is not voluntarily compensated.
  • State regulatory authority individually is supposed to appoint an officer who performs the functions of a judge.
  • They will conduct an inquiry and pass an order once she has decided whether you are actually supposed to get the interest or money spent.
  • Not mandatory to hire a lawyer to represent yourself and also can appear yourself or even hire a chartered accountant or cost accountant or company secretary.
  • If you are not satisfied with the decision of the officer, you can file an appeal before the Appellate Tribunal set up under this law within 60 days. Every state is supposed to have one such appellate tribunal.
  • Every state and union territory are supposed to have such an authority and an appellate tribunal. Since this is a very recent law (important provisions came into force on May 1, 2017) and a number of states have not yet set up authorities, you will need to check if the state in which the property is located has set up the Regulatory Authority and Appellate Tribunal.

How govt. decisions and subsidies affect real estate investment prices?
Decisions and subsidies:

  • The real estate prices will definitely affect with the decisions taken by local and international governments:
  • Interest subsidy for first-time home buyers.
  • The finance minister proposed 100% deduction in profits to an undertaking from a housing project for flats of up to 30 square meter in some cities.
  • Change in arbitration norms for construction companies exempted any distribution made out of the income of the Special Purpose Vehicles (SPVs) to the Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT) from the levy of Dividend Distribution Tax
  • Permanent Residency Status for foreign investors.
  • 100% deduction in profits for affordable housing construction.
  • Service tax exemption on construction of affordable housing
  • Real Estate (Regulation and Development) Act, 2016.
  • Benami transaction Act and its amendments.
  • Currency demonetization.
  • Implementation of Goods and Services Tax structure.
  • Interest rates hike by the Federal bank.

Are FDIs involved in Real estate investment in INDIA?
Until October 2015, 100% FDI was permitted in Construction-Development projects with following conditions:

  • Minimum floor area for development – 20,000 sq. meters.
  • FDI of minimum USD 5 million within 6 months of the commencement of the project.
  • The investor was permitted to exit on completion of the project or after the development of trunk. infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
  • Transfer of investment from the foreign investor to another non-resident investor required government approval.
  • However, the Government in November, 2015 has re-looked at the policy and relaxed it.The amended policy broadly provides as follows:
  • Minimum thresholds related to the area to be developed and the amount to be infused was removed.
  • The foreign investor has been given liberty to exit the project even before its completion or development of basic infrastructure subject to lock-in period of 3 years.
  • No prior approval is required for the sale of investment by the foreign investor to another non-resident wherein no repatriation of investment is involved.
  • Each phase of the project would be considered as a separate project for the purpose of investment.

What is the market size for real estate?
In the period FY 2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent.

Private equity and debt investments in India’s real estate sector grew 12 per cent year-on-year to US$ 4.18 billion across 79 transactions in 2017.

In 2017, M&A US$ 3.26 billion worth of deals have been made in India’s real estate sector.

The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP).

What if interest rate increase?
Sound cash flow management, along with investment in high growth assets should shelter you from interest rate fluctuations.

If already made investment then amount of interest paid will remain consistent for the duration of the fixed term, even if retail rates increase, because you know your repayment amount in advance it’s easier to budget your cash flow and plan ahead.

To recognize that effective property management will see your rents rise in accordance with inflation at the very least.

What about liquidity?

Expansion Falling vacancy level Low, but increasing level of construction activity Rising demand with continued low absorption Stabilizing to slightly rising rents in the prime segment, whilst rents continue to fall in the non-core segment
Book Very low vacancy level High level of construction activity High and increasing level of demand with the high level of absorption Rapidly rising rents in the prime segment and rising rents in the non-core segment
Recession Increasing vacancy level Continued, but the decreasing level of construction activity Falling demand with significantly negative absorption Collapsing rents in the prime segment and rents starting to decline in the non-core segment
Depression High vacancy level

Low level of construction activity

Low and consolidating demand with negative absorption Stabilization in the prime segment, but rents contracting in the non-core segment

This refers not only to overall economic growth measured in terms of gross domestic product (GDP) but also to changes in employment levels, prices and in interest rates.

Percentage of DEBT and Equity in investment?
The debt-equity share will be depending on or be considered:

Net worth
Past payment information
Present repaying capacity
Future projects in hand
Capital requirement
Working capital requirements
Financier and their rate of a loan.

What is meant by LMI?
LMI (Lenders Mortgage Insurance) is a fee charge according to the loan to value ratio that banks pass on to some borrowers, depending on the size of the mortgage you apply for. Generally, LMI charged if you borrow more than 80% of the property’s value. In other words, bank outsources insurance to protect themselves from the risk of higher lending ratios, in case of a default on the loan.

What is meant by PIO?
A Person of Indian Origin (PIO) means a foreign citizen (except a national of. Pakistan, Afghanistan Bangladesh, China, Iran, Bhutan, Sri Lanka and Nepal).

Is it involved with high input cost?
Of course, definitely yes. Even a small construction or purchase of property involves with higher amount say minimum in lakhs. Not only input cost but also included with opportunity cost because when we invest in some, we may not convert into liquid money whenever we need. Here we are losing another alternative.

Source of finance and possibilities?
Real estate finance is the cornerstone of loan books for many banks and financial institutions involved in lending. For the majority of borrowers with real estate assets, this type of finance is a significant factor in their overall finance package.

  • Angel investors
  • Anchor investors
  • Venture capitalists for the share
  • Crowdfunding
  • Traditional loans through banks
  • Commercial loans from banks or financial institutions
  • Private lenders through family, friends, and others
  • Funding for partnership
  • Mortgage brokers

How the realtor fee to be paid?
Generally, the realtor is fee is predetermined while entering the agreement in terms of fixed percentage on construction value or a certain amount. It may be paid either in proportion to completion of work or after work completed or before as agreed upon.

What are the guidelines for acquisition of agricultural / farmhouse property by NRIs and PIOs?
A person resident outside India who is a citizen of India (NRI) can acquire by way of purchase, any immovable property in India other than agricultural land/plantation property/farmhouse. He can transfer any immovable property other than agricultural or plantation property or farm house to:

  1. A person resident outside India who is a citizen of India or
  2. A person of Indian origin resident outside India or
  3. A person resident in India.

He may transfer agricultural land/plantation property/farm house acquired by way of inheritance, only to Indian citizens permanently residing in India.

Payment for acquisition of property can be made out of:

  1. Funds received in India through normal banking channels by way of inward remittance from any place of India or
  2. Funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India from time to time.

Such payment cannot be made either by travelers’ cheque or by foreign currency notes or by other modes than those specially mentioned above.

How should the purchase consideration for immovable property be paid by PIO’s?
A person resident outside India who is a person of Indian Origin (PIO) can acquire any immovable property in India other than agricultural land/farm house/plantation property:-

  1. By way of purchase out of funds received by way of inward remittance through normal banking channels or by debit to his NRE / FCNR (B)/NRO account.
  2. By way of gift from a person resident in India or an NRI or a PIO. By way of inheritance from any a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property.

A PIO may transfer any immovable property other than agricultural land/Plantation property/farm house in India

a) By way of sale to a person resident in India.
b) By way of gift to a person resident in India or a Non-resident Indian or a PIO.

A PIO may transfer agricultural land / Plantation property/farm house in India by way of sale or gift to a person resident in India who is a citizen of India.

Do PIO’s require RBI permission to purchase property in India for residential use?
Reserve Bank has granted general permission to foreign citizens of Indian origin, whether resident in India or abroad, to purchase immovable property other than agricultural land/farm house/plantation property, in India. They are, therefore, not required to obtain the separate permission of Reserve Bank or file any declaration.

Do NRI’s require permission of Reserve Bank to acquire immovable property in India?
No, NRI’s do not require any permission to acquire any immovable property in India other than agricultural/ plantation property or a farmhouse.

Can such property be sold without the permission of Reserve Bank?
Yes, Reserve Bank has granted general permission for sale of such property. However, where another foreign citizen of Indian origin purchases the property, funds towards the purchase consideration should either be remitted to India or paid out of balances in non-resident accounts maintained with banks in India.

Can sale proceeds of such property if and when sold be remitted out of India?
In the event of a sale of immovable property other than agricultural land/farm house/plantation property in India by an NRI or PIO, the authorized dealer may allow repatriation of the sale proceeds outside India, provided all the following conditions are satisfied: –

The immovable property was acquired by the seller in accordance with the provisions of the Exchange Control Rules/Regulations/Law in force at the time of acquisition, or the provisions of the Regulations framed under the Foreign Exchange Management Act, 1999;

The amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in foreign currency non-resident account or (b) the foreign currency equivalent, as on the date of payment, of the amount paid where such payment was made from the funds held in non-resident external account for acquisition of the property; and

In case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

Can PIO’s acquire or dispose of immovable property by way of gift?
Yes, Reserve Bank has granted general permission to foreign citizens of Indian origin to acquire or dispose of immovable properties other than agricultural land/farm house/plantation property by way of gift from or to an Indian citizen, NRI or PIO.

Can NRIs obtain loans for acquisition of a house/flat from financial institutions?
Reserve Bank has granted general permission to certain financial institutions providing housing finance e.g. HDFC, LIC Housing Finance Ltd., etc., to grant housing loans to NRI’s for the acquisition of a house/flat for self-occupation subject to certain conditions. The purpose of loan margin money and the quantum of loan will be at par with those applicable to housing loans to residents. Repayment of loan should be made within a period not exceeding 15 years out of inward remittances or out of funds held in the investor’s NRE/FCNR/NRO Accounts.

Can NRI’s/PIO’s rent out the properties (residential/commercial) if not required for immediate use?
Yes, Reserve Bank has granted general permission for letting out any immovable property in India. The rental income or proceeds of any investment of such income is eligible for repatriation.

Can be authorized dealer grant loans to NRIs for the acquisition of a flat/house for residential purposes?
Authorised dealers have been granted permission to grant loans to NRI’s for acquisition of house/flat for self-occupation on their return to India subject to certain conditions Repayment of the loan should be made within a period not exceeding 15 years out of inward remittance through banking channels or out of funds held in the investors’ NRE/FCNR/NRO accounts.

What are the charges to be paid while gifting property?
A gift of immovable property does not involve monetary consideration, it needs to be registered and taxes should be paid in certain cases. In other words, Gifting is an act, through which a person voluntarily transfers certain rights in an asset to another person, without any consideration. Gifting of a house property has a certain income tax and stamp duty implications.

The registrar shall ensure that proper stamp duty has been affixed on the gift deed/document when it is presented for registration.

The amount of stamp duty and registration charges payable, with respect to a gift deed in terms of percentage on valuation like 3% on stamp value.

The value of all the gifts received by a person during a year is fully exempt, as long as the total of such gifts does not exceed Rs 50,000 in a year.

If the value of all the gifts taken together exceeds Rs 50,000, then, the aggregate of the gifts received become taxable without any threshold exemption.

Why do Co-operative Housing Societies collect a Sinking Fund?
Co-operative Housing Societies have a statutory obligation to collect a Sinking Fund. This is done so that in case the building needs to be repaired or reconstructed in the future, the society has sufficient funds to carry out the work. The amount to be contributed is decided by the General Body of the society; it should be at least ¼ percent per annum of the cost of each apartment, excluding the cost of the land. This fund may be used after a resolution is passed at the General Body meeting with the prior permission of the Registering Authority. This could be to carry out reconstruction, repairs, structural additions or alterations to the building as the architect thinks is required and certifies.

What aspects should be considered before purchasing property, owned by a company?
Before purchasing a property from a company, it is necessary to verify with the Registrar of Companies that the property is not mortgaged or is not being used as a security against a loan, otherwise, it is not considered a freehold property.

How to categorize and prioritize among REIT?
Risk categories are providing a means to review them according to their source, taxonomy, or project component. Related or equivalent risks can be grouped for efficient handling. The cause-and-effect relationships between related risks are documented.

Risk prioritization helps to determine the most effective areas to which resources for risks mitigation can be applied with the greatest positive impact on the project. A relative priority is determined for each risk based on assigned risk parameters. Clear criteria should be used to determine risk priority.

How much money can make the realtor?
Depends on the value of the project, agreed ratio, included with escalation clause or not, currency rate fluctuations if payer paid in foreign currency, etc.,

What are real estate limited partnerships?
Ability to invest funds and let the general partner manage the everyday tasks associated with the operation and responsibility is to invest for a specific period of time and anticipate returns.

In addition, to limited liability and duties, added tax benefits including passing through tax losses, which investors can use to offset taxable gains on other passive investments, make limited partnerships an appealing choice. Because limited partnerships are flow-through entities, any profit distributed to the limited partners is untaxed, as opposed to dividends received by corporation stockholders, in which case are double-taxed.

Real estate agent means?
Real estate agents are licensed professionals who represent buyers and sellers in real estate transactions. Most agents work for a real estate broker or realtor who has additional training and extra certifications. Agents usually work completely on commission, so their income depends on their ability to assist clients and close transactions.

What is negative gearing?
When an investor borrows money to buy a property, if the combination of the interest on the loan and associated holding costs add up to more than the income derived from rent, the investor can deduct the shortfall in interest payments from his or her income for tax purposes.

The principle behind negative gearing is that the money paid towards interest on a loan and expenses incurred in maintaining the investment (e.g. rates, insurance etc.) is money spent to earn tax assessable income.

What is BT Act – Benami Transactions Act?
The act came into force on 5 September 1988. Although benami transactions are now illegal, the act had limited success in curbing them. Benami literally means ‘without a name’. Therefore, an asset without a legal owner or a fictitious owner is called benami. It can be a property of any kind, whether movable or immovable, acquired by way of benami transaction. The original Benami Act was introduced in 1988 for prevention of black money but due to some inherent limitations of the Act it could not be implemented with full force, and therefore, an amendment was introduced in 2016 to ensure the successful enforcement of the Act.

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