Making a property deal requires considerable introspection in contemporary times

The safety & transparency aspect has to be considered not only while buying the property but also while holding it. One must give utmost importance to factors like a clear title, regulatory sanctions, construction as per approved plan & various other related factors. Another important aspect is the quality of construction, as it can have significant future cash flow implications due to the high maintenance costs involved.

If you are buying a property in an emerging area based on some story like a new airport or a highway etc, keep in mind that you might be paying a premium for something which may never happen. Risks associated with holding a property are not limited to encroachment or acquisition, especially in case of land. If you intend to let out your property on rent, there is the risk of the tenant not vacating it when you want to sell or occupy it.

Most municipalities charge higher taxes on rented premises and they can be as high as 50% of the rental yield.

Unfortunately, real estate is pretty perplexing & there is an element of uncertainty involved when it comes to factors like liquidity. Selling real estate is problematic as the rates are non-transparent and also the sector is riddled with characters that you would never want to deal with otherwise. Transaction costs are also high, ranging between 5-7%.

Stamp duty alone accounts for 10%. Most buyers will try to offer you some part of the price in cash (black), entailing the associated problems of holding it, converting it and often investing it in sub-par options. There is also counter-party risk as it is possible that once the buyer has hooked you in the deal, he may delay paying the balance consideration almost indefinitely, with or without ulterior motives.

Normally, any investment is evaluated in terms of the rate of return which it has generated over the holding period, i.e. the compounded annual growth rate (CAGR). But normally, real estate is measured in terms of absolute numbers. For example, say you bought the property at Rs 2,000 psf and sold it at 4,000 psf. These numbers tend to exaggerate the rate of return actually earned as they ignore the time frame over which they were earned.

When calculated, say over a 7-year period, the same return would look much sober at 10% p.a. If you are investing in real estate in anticipation of steady returns, rental yield is the indicator one should look at. It varies depending on the type of property (commercial/house). Typically, yields average between 1-3% of the capital value of the property.

While calculating the rate of return, the maintenance costs and municipality taxes are often ignored. These are a drain on your resources today as against a potential gain tomorrow. So, you end up paying your more valuable money today.

One must understand that apartments tend to depreciate over time with change in styles and tastes and it is the value of the land which appreciates. You might not get the rate at which your immediate neighbour sold his property as his apartment was more vastu-compliant, east-facing or sea-facing and so on. The rate is very buyer-dependent and discriminative. Any good investment option should not discriminate for or against the investor. Does an NSC or an equity fund offer higher rate just because I am a ‘somebody’? No, but we take it for granted in a real estate deal.