In the case of double-income couples, not more than 40 per cent of the net income of one partner should be the EMI for the property.
Housing prices saw an average year-on-year increase of 19 per cent by the end of March 2024 across the country's top seven cities, according to data from real estate consultancy Anarock.
With prices expected to remain on the upward trajectory, experts say this is a good time to invest in the housing market.
Cyclical upswing
Real estate cycles tend to be protracted. "Between 2015 and 2021, the housing market was sluggish, with low sales volumes and minimal price appreciation," says Ravi Shankar Singh, managing director, residential transaction services, Colliers India.
Now the cycle has turned. The upswing is also likely to last for several years.
While prices remained stagnant (2015 to 2021), incomes rose, enhancing affordability. This bodes well for the housing sector in a country facing a shortage of 20 million houses.
The macroeconomic environment is also conducive.
"India's steady economic expansion, a young population, rising earnings, and ongoing infrastructure projects are supporting the real estate sector's growth," says Prashant Thakur, regional director and head-research, Anarock Group.
With the Real Estate Regulatory Authority (Rera) functional across states, buyer confidence has received a boost. The rapid pace of urbanisation is also expected to support housing demand.
Although home loan rates (starting from 8.35 per cent) are higher than earlier, they have not hindered housing demand yet.
Zero in on right micro market
To invest successfully in real estate, one needs to zero in on a micro market with high potential.
One of the key criteria in selecting the micro market, according to Thakur, should be proximity or easy accessibility to job hubs. This should be complemented with limited housing supply in that area.
Singh suggests investors pay heed to the proposed infrastructure -- how the area will be connected to the central business districts through transportation networks.
The presence of green zones and of social infrastructure, such as educational institutions and medical facilities, also enhances an area's appeal.
Investors should also consider vacancy levels -- excessive vacancies could indicate oversupply.
Rental yield is another crucial indicator: If rental yields range from 3 to 3.5 per cent, it suggests that prices still have the potential to grow.
Conversely, if the yield drops to 1 to 2 per cent, it typically indicates that prices are already high.
Go for the right configuration
Next, concentrate on choosing the right project. According to Thakur, one should opt for a property whose size, configuration, and price match local demand.
If in an area, the demand is predominantly for two-bedroom apartments, selecting a three-bedroom flat may not yield the desired returns.
Singh stresses the importance of selecting a reputable developer known for timely delivery and whose occupants (in completed projects) commend the quality of the development.
The project should also be equipped with all modern amenities.
Avoid over-leveraging
Investors must have an investment horizon of at least four to five years. Singh warns against over-leveraging on future cash flows (from the apartment).
"In the case of double-income couples, not more than 40 per cent of the net income of one partner should be the EMI for the property," says Vishal Dhawan, board member, the Association of Registered Investment Advisors.
"If they exceed this limit, they could face problems in case one of the partners wants to take a sabbatical or is laid off."
According to Thakur, investors also need to take into account underlying expenditure like property tax, insurance, maintenance, and the possibility of the property lying vacant (in the case of a rental property).
Lay investors could end up overpaying. "Discovering the real price of each apartment may prove difficult for a lay investor as each apartment has its nuances. Professional help may be required," says Dhawan.
He adds that investors must get a title search and proper documentation done to ensure complete ownership rights.
Taxation: Key things to know
If a taxpayer holds a property as an investment, and records it as a capital asset in their books, the gains upon sale are treated as capital gains.
"If held for two years or less, it's short-term capital gain, calculated as sale consideration minus cost of acquisition. It is taxed at the investor's ordinary tax rate," says S R Patnaik, partner, Cyril Amarchand Mangaldas.
"If held for over two years, it's long-term capital gains. This is calculated as sale consideration minus the indexed cost of acquisition. It is taxed at 20 per cent (plus surcharge and cess in both cases)."
If the property's stamp duty value exceeds the sale consideration (more than 110 per cent of the sale consideration), capital gains are computed using the stamp duty value.
Rental income falls under the head 'Income from house property'. Gross annual value (GAV) equals actual or expected rent (whichever is higher).
Net annual value (NAV) is GAV minus municipal taxes. Taxable value under house property is NAV minus 30 per cent of NAV (deduction).
From this, one may further reduce the interest paid on a loan for the acquisition or repair of the property.
Vacant properties are taxed based on reasonably expected rent.
Under Section 23 (4) of the Income-Tax Act, up to two self-occupied properties have a nil NAV if not rented out during any part of the year.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
