Points to ponder before buying a property as investment

You may have seen that someone you know had invested in an apartment few years back and the price of that apartment has now almost doubled/tripled and he or she is sitting on a gold mine! Or someone you know had invested in some piece of land on the outskirts of a town and the prices there have gone to the roof!

In these situations it’s quite common to think have I missed the bus? Am I making mistake by investing in FDs, Stocks and MF? How easy it was to double the money alas! Don’t worry, its quite normal to think in this fashion. The feeling is more so in property dealings as we all have mental bias towards feel-and-touch properties like land, apartment or commercial building. This behavior is quite ingrained into us and we are emotional about any property holding and that too the one that can potentially give handsome profits.

But remember that investment in properties like any other investment should be made after doing thorough analysis. Especially so for property dealings because it has longer development period, relatively lesser liquidity compared to stocks / FDs and full of untrustworthy dealers/builders.

To help you in doing this analysis I have written few Points to ponder which are listed as follows. Please do consider them before buying a property as investment:

1. Buy only if you already own an unencumbered house to live in (remember that the house you live in is not considered as investment).

2. Buy if you have already closed all your loans (housing loan, personal loans etc.)

3. Buy land / property if you are sure that you will not loose sleep over it after buying it! (Try to prefer peace of mind over profits)

4. Buy if you think (or rather sure of!) that property price appreciation can easily beat the 15% y-o-y growth rate can be achieved in stocks / MFs. Believe me this rate is quite difficult to beat through property investment. You may refer the National Housing Board’s Residex to see for yourself.

• Remember at 15% y-o-y income a comparable asset would appreciate 100% in 5 years, 200% in 7.8 years, and 300% in 10 years.

5. Buy only if you have understood the liquidity aspects of property. Remember that real estate property have lesser liquidity compared to stocks / FDs.

6. Buy property when you have reached your targeted investments in other asset class based on asset diversification principle.

7. Buy free hold land rather than built up property, if you can, and that too in good locality and that too if you can hold it without hassle (or have guts to hold it anyhow). Remember, buying land (especially in India) comes with lot of baggage and problems. The problems with land buy, hold and develop are too numerous. This should only be done if it is a part of a developed plots society by a reputed builder.

8. Buy properties (apartment, commercial property etc) if you can’t buy land. But remember to buy it cheap. Don’t think that you will get an excellent sale price. Sale price can’t be controlled but buy price can be so control it to your advantage. In my opinion one will get fair prices in situations / times when:

• There is apparently negative sentiments about the state of economy
• Seller is doing a distress sale
• You can bargain well
• You are an early buyer in a developing locality (that has potential scope)
• You don’t see many advertisements about real estate property on road in hoardings or in news paper
• You don’t read too many articles in magazine about properties, land or economic boom etc.
• You observe that not many people are talking about buying property

9. Buy the property in the best location in the city of your choice. But never buy in the locality which is not so popular or do not have chances of becoming popular in the years to come. Also don’t buy property in the locality which is having high crime rate.

10. Buy property from reputed builder if it is a under construction property.

11. Buy property only after seeing it with own your eyes and doing thorough due diligence about property records etc. More so for land as the title may not be clear.

12. Buy if you can maintain the property well and that too regularly.

13. Buy if you can deal with hassles of finding tenant, letting it out and collecting cash. Though letting out is optional but recommended as otherwise also you are liable to pay income tax even without letting it.

14. Buy only if you want to earn capital returns out of it as pure rental will never give you good returns. Remember pure rental returns in India are around 4 to 6% which is lower than Govt’s National Savings Certificates.

15. Buy if your spouse / family member is earning and thus it would become their 1st house (need not pay income tax). But always remember rule 8 to buy it cheap.

16. Buy when you have clear idea about what to do with the money when you sell the property – tag your investment against your goals.

17. Buy only after doing research on taxability of income, capital gains and other expenditure associated with properties such as registration costs, property tax, interest costs & processing charges (if you are taking loan for buying) and maintenance costs.

18. Buy only for long term.

19. Buy only if you are convinced yourself about investment decision and not because your brother in law has bought one.

20. Buy insurance policy after buying the property.

Some thoughts on life cover

Last few weeks I was doing some study/research on life insurance cover for myself. I was faced with questions such as why to cover life, how much to cover for, with whom to cover and other such related questions. So I embarked on journey to find the answers.

I did some research, talked to few people (including insurance agents), did some soul searching and now have found answers to few of these questions. I thought that it may be worthwhile to share this with few more.

So here we go….

Some basics

Before I talk about life insurance I would like to list best things that you can leave behind for your family/ dependents. These are as follows:

• A good legacy i.e. provide good education to your wards/dependents and encourage them acquire life support skills
• Assets that earn income on their own which is sufficient to take care of basic necessity of your dependents e.g. commercial property on rent, dividends paying shares, stake in some venture, royalty rights etc
• A business / employment opportunity so that your family members can earn on their own and do not rely on insurance money alone
• An un-encumbered house to live in
• A good medical heath policy
• A will

Having said this, I would like to qualify that my opinion may differ from various experts’ advice and you are well advised to use your judgment. Extending the logic as listed above, if you feel that you have fulfilled your duty by implementing the items listed above then you need not worry about life insurance cover. You can read the following for information only.

however, if you are reading this after realizing that your financial plan so far does NOT cover items listed above then you may require a life insurance cover. So please read on and if possible implement as well.

Views on Life Insurance

(1) Start with a pure term cover as soon as you start earning for others or you know that in next 1 or 2 years who will have dependents.

(2) Don’t consider the premium you are paying for pure term policy as investments. Assume that you are building a trust for your family’s future and you will not be able to utilize the receipts from this trust. Exactly same as planting a tree knowing fully that the fruits can’t be enjoyed by you.

(3) Take cover for each earning member in the family.

(4) Split the insurance covered required into (a) bare minimum cover and (b) good to have cover. Start with 1 or 2 policies covering the bare minimum amount. The good to have cover can be taken care later once you have good balance of savings / assets vs. insurance cover.

(5) Calculate what is your life worth for deciding the exact amount of cover. (You may refer various articles on the internet for this. Try to search internet using key words Income Replacement method, Human Value method etc).

(6) Make sure that the amount which you have calculated accounts for following:

• Money which can give your family a regular monthly income (assuming that insurance amount is invested in safe fixed deposits).
• Some scope to cover future debts / expenses.
• Some money for emergency.
  

(7) Build inflation into your calculation while calculating how much insurance cover is required. (Read as increase cover requirement to account for inflation).

(8) Factor in your family members’ income and income from assets before deciding the insurance cover. (Read as decrease cover requirement to account for this income).

(9) Don’t under insure once you are convinced about the need and amount of insurance cover required. Under insurance is similar to taking no insurance at all.

(10) Take separate / earmarked policy when you take loans for essential assets (e.g. house in which you live, first car / vehicle / essential house hold assets). You may stop paying the premiums / or cancel the policy once the loan is fully paid.

(11) While taking insurance disclose everything truthfully to the insurance company including your habits and medical history etc.

(12) Split your cover with 2 - 3 insurance companies. Just like you bank with 2 -3 banks to spread the risk.

(13) Do share the details of insurance policies with family members. Ideally include this information in your will.

(14) Pay premiums regularly.

(15) Relax.