kbs sidhu principal secretary

INVESTING IN REAL ESTATE: AN INTRODUCTION ~
By KBS Sidhu
Introduction: Down the ages, man has sought to make investments which, he has hoped, would
multiply many-fold. Even as we have entered the new millennium, man`s quest for that ten-
bagger` investment remains as elusive as ever, notwithstanding the increasing number of
investment avenues and decision-support systems that are available today. Apart from the
traditional bank deposits and Government securities, investment in equity shares, either directly
or through the mutual fund route, allure us with many a rags-to-riches` fables/ story. The
introduction of Futures and Options (F & O) trading in major stocks and indices, a person can
hope to leverage his position in the stock market many times vis-a-vis the capital employed.
With the precious metal Gold again in the middle of a bull run, many people are turning their
attention to this traditional safe haven.
It is in this increasing complex investment scenario, that we have to see real estate` investment
as another option. However, before we plunge into this seemingly simple but actually a pretty
complicated field, we need to recapitulate the basic principles of investments. It is common
knowledge that any investment is a trade-off between three variables: risk, returns
and liquidity. In addition, individual factors like time-horizon of investment, risk appetite and
amount of money to be invested also become relevant factors. Transaction and holding costs and
tax implications are also some of the factors that cannot be ignored. All these parameters have to
be considered, in varying degrees, when one plans to make any investment in general and more
particularly in the real estate`.
Bank deposits are safe and liquid, but the returns offered are barely enough to beat inflation.
Equity shares can, in theory, offer multiple returns and are exceedingly liquid, but there is always
a probability of the even the original capital being eroded, if caught in a bearish market trend.
Historically, Gold has been the most favourite investment in uncertain and war-like conditions
but apart from the problems associated with its safety/ custody, long- term trends indicate that its
appreciation has barely beaten inflation.
It is in this scenario, that investment in real estate` emerges as an option that cannot be brushed
aside in a casual manner. Real estate is investment in land, buildings or other immovable
properties and the basic objective is to achieve appreciation in the capital employed. If there is
any additional accretion of incremental income like rent or agricultural produce, the same is to be
regarded essentially as a bonus. An added attraction of real estate` is that it is real and
palpable, unlike equity shares which are either paper certificates or reflected merely in the
statements issued by the respective depositories. There is also a certain amount of pride and
snob-value attached with the ownership of real estate. It was perhaps Mark Twain who
remarked: I think it is always going to go up; they stopped manufacturing it a long, long time
ago. While this may not be true in strict terms, for new urban development is effected on a
progressive basis, the fact remains that the total land stock is not unlimited and cannot be
produced like other goods and services. This is more so in respect of the preferentially located
properties.

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Disadvantageous of Real Estate Investing: Before we delve deep into the finer examination of
the various facets of the investment in real estate, we need to highlight some of the
disadvantages of this investment. The objective of this enumeration is not merely to highlight the
limitations and drawbacks of this mode of investment but to also alert the investor against the
pitfalls that he should avoid.
1. Illiquid: Real estate is, in general, an illiquid investment. Even if you could snap up a property
with a great deal of expeditiousness in a cash up-front deal, when it comes to selling, it could
take you weeks and even months before the property can actually be sold. In many cases, high
value properties can take up to a year to sell-off, and the sale consideration is often received in
different installments, spread over many months. In summary, you may NOT be able to get the
money that you invested in a property, in a jiffy, in an emergent case immediately.
2. High threshold of Investment: In other modes of investment, you could enter the action for
as little as perhaps Rs. 100/-. However, in the case of real estate, I firmly believe that you cannot
be a meaningful player with any amount less than Rs. ten lacs. In the very least, one would need
to have at least Rs. five lac budget to enter into this fascinating world. In theory, one could
borrow and invest, but this option is available to a small-medium investor only to purchase a
residential house/ flat[1], and the real estate sector is generally not a hot favourite with the
lending institutions, including the banks. Thus debt lead leveraging opportunity is virtually non-
existent. At present, real estate mutual funds are not permitted in India but proposals to introduce
them are under active consideration of the Central Government. If and when these are
introduced, one could perhaps see action in the real estate sector with any investment as little as
Rs. 1000/-, but till then, the high threshold limit remains a constraining factor.
3. Depreciation and maintenance of built-up properties: Unbuilt property cannot depreciate
in the sense of a movable property depreciating. However, the superstructure, whether it is a
built-up house or apartment, can depreciate with time. Every construction has a limited life,
which may be long, but it is always finite. Even the cost of construction generally increases from
year to year, a built-up property will depreciate over years unless it is property maintained, and
even then there are limits in this regard. Depreciation may also occur on account of a particular
style of building or architecture going out of style, or on account of new and better building
materials being introduced. When a built-up property is proposed to be held over a long-term
horizon, the question of depreciation and maintenance must be carefully considered.
4. Security and Watch & Ward: Immovable property, by definition, cannot melt away.
However, in an urban scenario characterised more by chaos than by order, one has to be
particularly careful in securing one`s property. Illegal encroachments and unauthorised
possession is a problem that can eat into your valuable investment. The legal system is such that
it is very difficult to retrieve any property once it has fallen into the control of unscrupulous
elements. Insurance, especially on account of fire, is also in important expense that must be
incurred to safeguard one`s built-up property. Similarly, the problems of tenants, both for
commercial and residential premises and even for agricultural land, are factors that must
constantly be borne in mind. Eternal vigilance and payment of watch and ward charges is but a
small price for securing one`s valuable property.

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5. High Stamp Duty/ Transaction Costs: Transaction costs are the costs that one bears at the
time of buying as well as selling property. In India, Stamp Duty and Registration fees constitute
the bulk of these costs, although brokerages payable, on either side (i.e. sale and purchase)
cannot be totally ignored. In most states, the stamp duty is around 6%, while the registration fee
is 1%, subject to the maximum of Rs. 10,000/-. The brokerage rates can vary from 0.5% to 2%
depending on the size of the deal. As compared with bank deposits (virtually nil transaction
costs) and equity shares (around 0.25% to 0.5% brokerage rates for delivery based business),
these costs are pretty high and must be carefully considered and factored in by the investor,
while making real estate investment decisions.
6. Holding Costs of Urban Properties: Rural and sub-urban agricultural land does not have
much of a holding cost. The land revenue has been abolished in most of the states, and even
where it is still levied the quantum is quite negligible. However, in case of urban properties,
especially the commercial ones, property taxes are generally imposed by the municipal body
concerned. While vacancy relief can be given in some cases, in most cases one has the statutory
liability to pay property taxes irrespective of whether the premises are let out or not. Although
the applicability of the Wealth Tax is quite limited, and even where it is applicable the rate is
quite meagre, yet this is a one factor that must also be considered in making an investment
decision. As a matter of fact, the quantum of the assessed property taxes is one of the important
factors in assessing the viability and suitability of any purchase of an urban property.
7. Due diligence in scrutiny of title: In the rural as well as urban areas of the country, every bit
of the land is supposed to be carefully mapped out and the title of the land is supposed to be
carefully reflected in the statutory record being maintained by government officials. For instance,
the patwari, maintains the record-of-rights, which is supposed to reflect the title of the land. This
record is being constantly up-dated. Similarly, in the municipal areas, the appropriate municipal
body is supposed to keep a record of the title, even though this is done, in most cases, merely
from the angle of collection of property taxes. However, there are a number of factors, like
unregistered agreements to sell`, sales on power of attorney` and pending litigation, to name a
few, that may not find any mention in the official documents ordinarily associated with the title
of the property. It is in these circumstances, that a very serious due diligence is necessary to
satisfy oneself about the title of the property one is going to buy remember the age-old dictum
of caveat emptor (buyer beware) still hold good. A modest investment in terms of time, effort
and money can go a long way in avoiding veritable death traps associated with real estate
investing.
8. Black Money/ Cash Component: It is a hard fact, which even the officials actively associated
with the land revenue administration and income taxation, will openly admit, that more often
than not, about half of the consideration money is generally in form of cash. This cash
component is generally not reflected in the sale instrument/ deed being registered. There are
basically, in my opinion, two causes for the same: first, to evade stamp duty, which is generally
charged on ad valerom basis, and secondly, because the vendee does not have enough white
money (i.e. money in his official books of account). More often than not, this also suits the
vendor, who gets to avoid the income tax on account of capital gains, arising out of the
transaction. It is not the objective of this book to get into the morality or the legality of this
issue-the practice being totally reprehensible-but to underscore the presence of a widespread

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trade practice, which an individual investor trying to get into real estate investing cannot afford
to altogether ignore.
Advantages of Real Estate Investing: In spite of all these disadvantages or drawbacks, there
must be some compelling advantages that far outweigh the former and beckon an investor to put
his hard earned money into real estate. Indeed, there are many such advantages, which we shall
enumerate one by one.
1. Potentially Fabulous Returns: Real Estate investing can lead to fabulous returns and there
are many anecdotal instances that the dealers and the brokers will narrate to a prospective buyer,
about the killing made by so and so in buying such and such property. The point being made is
not that these narrated instances are generally incorrect, but rather to accentuate that: 1) we need
to take a number of pre-cautions to, hopefully, get such returns, and 2) also to strike a note of
caution that such multiple returns do not accrue in every single real estate deal. Nevertheless,
having said that, it cannot be denied that real estate investment--wisely made-provides
potentially exponential returns, which the bank deposits cannot ever hope to match. It is the lure
of such phenomenal returns that not only attracts an investor into the realm of real estate
investing, but also provides that intellectual challenge to clinch that spectacular deal, at the right
time and the right price, that would stun and astound his fellow men.
2. Limited Down Side: Real estate, going by the historical trends has generally appreciated, but
there are phases, especially after the market has over-heated, that one can get caught in a bearish
slump. However, I am firmly of the opinion that even the worst slumps in the real estate are
nowhere near as bad as the crashes in the equity share prices. In real estate one`s capital may be
eroded by 15% to 25%, in worst slumps, or at worst be reduced to half its purchase value, but
such instances are rare, and a little patience can see the prices recover. However, in case of stock
markets, practically entire capital can be eroded, if one has invested into a company at the peak
of the boom, and God forbid, the company fails. This limited down side is can also be stated to
be the safety and security of the capital invested, and is one of the comforting features of the real
estate investing.
3. Cash Income as you hold the property: Real estate yields cash returns like rents, if let out.
In a later chapter we shall dwell upon the risks associated with unscrupulous tenants, but the
selection of a good and reputed company tenant can minimise the probability of default as also of
the property being permanently encroached. Although this rental income is subject to income
tax, there are a number of tax breaks that reduce the actual incidence of taxation to lower
effective rates, as compared with other streams of income. Incidentally, agricultural income,
whether out of renting out or through self-cultivation is totally free from income tax.
4. Cannot vanish into thin air: Investments in the equity shares can literally vanish into thin air,
if the company fails. On the other hand, the real estate is tangible, physical and palpable and
cannot wither away, in literal sense of the term. No doubt litigation and illegal encroachment can
make it whittle down, in figurative terms, but the fact remains that immovable property cannot
be stolen like one`s stock of gold. It is this factor of permanence and immutability that makes
this investment real in more senses than one.

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5. No Income tax while holding: One`s immovable property may be appreciating by leaps and
bounds but there is no incidence of the income tax, as long as one simply holds on the property.
The question of taxation arises only when the property is sold, at a price higher than the purchase
value, and even here the tax rates are far lower than the normal ones, especially when the
property has been held for more than three years. Even then, there are benefits on account of
inflation and there are legal devices and actions which can help the investor save his capital gains
completely. Interestingly, agricultural land is not regarded as a capital asset for the purposes of
the income tax, and hence is free from the capital gains tax, except in a very limited class of
cases. This effortless appreciation, without taxation on accrual basis, is one of the most attractive
features of real estate investment.
In Summary: Real Estate investing is both an art and a science. The skill of the deft investor lies
in mitigating or overcoming the disadvantages and piggy-riding the advantages to reap handsome
returns, that no other avenue can perhaps match consistently over medium to long term horizons.
While there are no golden rules, so to say, the subsequent chapters endeavour to provide the
reader with a reasonable repertoire of skills that should enable him to hit the bull`s eye more
often than not.

THREE GOLDEN RULES OF SELECTING A DREAM PROPERTY
The key to successful real estate investing is the finding a dream property, to begin with. Unless
the property you select is a dream property, your dreams to fabulous riches may well remain
mere wishful thinking, or even turn into a nightmare. Dream properties, or cream properties as
they are sometimes called are rare and never come cheap. If you are looking for cheap,
economical and reasonable bargains, you could get many of them at less rates, but then the
percentage appreciation that you would get, down the years, would also be less than in the case
of dream properties. Not only this, when it comes to finally disposing of the property that you
have invested in, a dream property would sell like a hot cake, whereas, the also-ran category
would require a lot of time and effort to sell. Even then, the rates realised may not make you all
that happy.
Impediments to locating and buying a Dream Property: Dream Properties are, by definition
scare, and thus the probability of your locating them is also correspondingly lower. However, a
dream property is not difficult to identify, when you look at it. Thus the problem is not one of
reaching a conclusion whether a particular property is or is not a dream property, but convincing
one to buy one when you see it. There are many of these factors that often contribute to a dream
property slipping out of your hands, to much regret later on. Let us identify these factors and
weed then out.
1. Absolute and per unit Price: A dream property is rarely available at a cheap rice tag, in
relative or absolute terms. In fact, it seems over-priced. Even your broker would probably say
that the seller is demanding beyond the fair market value that is prevailing in the open market.
Where would be the scope of appreciation when you are already paying beyond the fair market
price, you question.

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2. Could get more for the same money: Often you calculate that you could be getting more area
or a bigger property, if you settled for the next best. Why buy an acre of land at an outrageous
price, when you could get perhaps two acres for the same sum of money a little farther away, or
on a link road rather than on the highway?
3. This very property was quoted at 50% of its value a little while ago: Chances are that you
would be told that this property was being offered to be sold for less than 50% of the price being
asked today, by the same seller, barely six months ago. You feel short-changed/ cheated and
refuse to submit this veritable blackmail. I will not buy this one at this price, you stoutly state.
However, what we need to consider is the price today, and the previous prices should only
convince you about the further potential of appreciation in future rather than to reach a
conclusion that the property is being over-charged.
4. Let me consider; I'll get back to you: When you begin to negotiate to buy a dream property,
it is best to conclude the deal in the same very sitting. If you adjourn the same, for another
session, or for thinking about it, the chances are that the property shall be sold off to someone
else, or you shall come back to pay a higher price. The dictum is, as Nike says: Just Do It!
5. The Owner is haughty: The owner of a dream property generally seems to be haughty. He is
unwilling to negotiate. He seems unreasonable. He is not willing to make any concession. He
appears to act almost as if he is not willing to sell his property. You could feel uncomfortable in
dealing with him and could jump to an emotional decision: I shall have nothing to with this
arrogant man! Avoid this temptation. You are not about to enter into a long-term business
association with him. It is a one-off deal. He knows that he has a dream property in his bag, and
he will, like any rational human being, extract the best price. Thus never allow your emotions to
come between you and your master stroke to acquire a dream property.
Any sound and seasoned investor in real estate market should not allow himself to walk into
these traps and miss netting the goose that lays the golden eggs. The big tip is: Go for the kill,
when you see a dream property!
Three Golden Rules to locate a dream property: We have stated in the preceding paragraphs
that a prospective buyer should not allow a dream property to slip out of his hand, when he sees
it. We have also stated that a ream property id seldom in the market with a cheap rice tag. But we
have still not answered the 64 million dollar question: How to identify a dream property?
Let us not a make a secret of this any longer. Let us reveal the three golden rules of locating a
dream property. The story is told of a small boy who left his small, native town in USA and
travelled to New York. Over years, he amassed a fabulous fortune, all attributable to his real
estate deals. He had it all but within him there remained a strange desire to return to his roots,
before he rode in to the sunset. He returned, decades later, as an old man, knowing that his end
was near. Deep within him was his desire to share the secret of his success with the denizens of
the same dusty, little down.
In a small and almost bewildered gathering that was seeing the famous billionaire for the
practically the first time, he stated. There are three factors in locating a dream property. The

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first, he said, issituation. The second, my dear friends, is situation, he revealed. And the
third and the most important, is again situation, he concluded.
The moral of this story, which has much more than mere anecdotal value, is that the importance
of situation cannot be under-estimated. But why the three situations?
If the first decision is to be made, for instance, whether to buy property in Chandigarh or say
Budhladha, in the backward Mansa district of Punjab, choose Chandigarh--that is the situation
No 1. In Chandigarh, if the choice is between the elite single digit northern sectors and the new
development in the multi-storey southern sectors, choose the former--that is situation No.
2. And finally, if in Sector 8, one is to choose between a reasonably priced one kanal ordinary
house and preferential corner house, facing park, choose the later--that is situation No. 3. These
three hierarchies of situations" lead you to the dream property. Needless to say, now that you
have located it, clinch the deal!
The word situation has many connotations. The example in the preceding paragraph was merely
illustrative one. To salient features, indeed hallmarks, of a good situation is its location--as far
as possible, it should be abutting the main road, especially in case of sub-urban properties.
The access is equally important. The road from the main city, or the city centre, as the case may
be should be in good shape, and preferably it should be the main artery, if not the main highway.
If the road is broken, or remains choked with traffic, no property, even if it is located on the main
road, can be qualified to be called a dream property.
In case of built-up properties, in particular the independent houses, the concept of facing north
or facing east or north-east is being increasingly seen a preferred orientation. Living as we
do, in the Northern Hemisphere, this leads the Sun rays in the early morning, peeping in to the
house and illuminating the entire dwelling unit with positive energy. The so-called wind
direction also rightly corresponds with this orientation.
As one develops the skills of locating a dream property, it almost comes to a person naturally. If
you have selected and bought a dream property, you have already won half of the battle, in
complex dynamics of real estate investing.
OBJECTIVES IN MAKING INVESTMENT
In this book, we are assuming that the over-riding objective is to seek the maximum possible
capital appreciation in the minimum period of time. There are, however, circumstances when
other factors may emerge as relevant ones. Thus, while making an investment decision in
relation to the real estate one must be thoroughly conscious of one`s objectives, so that the
property being purchased actually serves to fulfill those objectives. It is also important to
prioritise these objectives, because in many cases these objectives may be mutually opposing if
not entirely contradictory. However, even if the other objectives are to be given substantial
weightage in some cases, one should never fully ignore the basic factor of capital appreciation,
because although one may be assuming that a particular property is being purchased for self-use,

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to be possessed for a life-time, it may also be required to be sold off, with changing or
unforeseen circumstances.
Regular Income Expected or not? In many cases, one may be looking exclusively at capital
appreciation. This is always so in the case of plots, unless one is purchasing a plot to eventually
build on it for one`s self-occupation or for rental purposes. If rental income is expected, ones
decisions would be moulded accordingly. For instances, a house with three independent portions
is likely to aggregate more rent than a single big house, which cannot be segregated for renting to
different families.
Similarly, if getting a higher agricultural income, proportionate to the investment made, is the
dominant criteria, then one could buy land in the interior and not necessarily on the main road or
the link road and a longer distance from the major cities. This would also be in the case where
one wants a weekend retreat, far from the madding crowd.
Ability to Supervise: Any immovable property must, I firmly believe, be within the capacity of
the owner to supervise from his place of residence. Properties at far-flung places cannot be
looked after and can be encroached upon or cannot be managed optimally. This acts as a major
constraining factor in limiting the possible location of the property that one wants to buy.
Tailor-made for personal needs: Quite often, when one buys a property, particularly in cases of
residential houses/ flats for one`s personal use, one is guided by one`s present requirements. This
may be reflected in terms of number of bed rooms etc. or their location on the various floors. In
such circumstances, on goes by one`s preferences, scarcely realising that should the property be
ever put to sale, some of the peculiar characteristics may actually depress the realisable value of
the property in question. Thus one needs to be very particular in getting quaint features into a
building, which might not find favour with a normal person/ buyer.
Tax breaks: Quite often a property may be purchased to save on income tax on account of
capital gains. Or, one may choose to loan finance a property to claim a tax rebate on account of
the interest being paid. Although these objectives may be important in themselves, there is no
reason to buy a second best property to settle for what is not giving us a the value for money.
Time horizon of Investment: The time horizon of the investment is also a very relevant factor
that can shape into one of the factors that shape your decision to buy a particular property. For
stance, if one is expecting it to be a long term proposition, one can buy a property in relatively
less developed areas, or at relatively longer distances from the city in case of the sub-urban land.
On the other hand, if one wants to start living soon, one cannot choose a place in wilderness.
Planning for division among children: Often one plans to purchase a property, which he hopes
one day his children would be able to take the benefit of. Although it might look as one happy
family, when one purchases it, it is always advisable to buy a property that can be easily divided
amongst children. It can also be worth while considering buying identical but independent
properties in the same locality for the benefit of one`s children in such cases.

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It is not possible to make an exhaustive list of all the other objectives that an investor might have
while purchasing a particular property. Moreover, objectives and priorities can change over time.
Nevertheless, when one is about to make an investment in real estate, it is well worth
introspecting oneself as to what other objectives are there, apart from the expectation of capital
appreciation. This soul-searching can lead to an optimal selection of the property that can
facilitate in the fulfilment of these objectives.
IN WHOSE NAME TO BUY?
One of the most important decisions involved in buying property is: On whose name to buy?
This seems apparently a simple proposition but has many dimensions which are best
addressed before entering into any transaction to purchase property. More importantly, the
decisions taken with proper application of mind are difficult to rectify at a later stage and even if
these can, in theory, be reversed, a hefty transaction cost is generally involved.
The questions which need to be answered at this stage are numerous. We give below a small list,
which is merely illustrative and by no means exhaustive.
i. Should I buy the property in my own name?
ii. Should I buy it in the name of my spouse?
iii. Should I buy it jointly in my name and that of my spouse?
iv. Can property be purchased in the name of minor children, and what are the tax implications?
What is the status when the children attain majority?
v. Can property be purchased in the name of one`s parents? If so, how does one plan for their
succession?
vi. What is an HUF (Hindu Undivided family) and what are the advantages, if any, of holding
immovable property in the name of an HUF? How does HUF property devolve upon the death of
the karta?
vii. What is the legal implication if I property, using my precious funds, in the name of a trusted
person?
viii. In case of joint ownership, should the respective shares be explicit and determinate, or there
should be no reference to any specific ratio or percentage?
ix. What is the status of legal ownership in the case of joint ownership, without pre-determined
shares?
x. Can one hold immovable property, on either or survivor basis, as in the case of bank
deposits?

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xi. Can one name a nomination in case of immovable property, as in case of bank deposits etc.?
xii. At what stage can a person make a will in respect of the property that one holds? What
precautions need to be taken will executing a will?
xiii. Do I become a complete owner when I buy immovable property through the power of
attorney mode?
These are a few questions that must be consciously raised and answered, before entering into any
transaction involving immovable property. What is given in the following few pages is merely a
small summary and the reader is strongly advised to take enlightened legal advice before finally
making up his mind.
Let us now try and answer these hypothetical questions, ad seriatum:
Unless there are compelling reasons to the contrary[2], one should generally buy the property in
one`s own name or in joint ownership with the spouse. Law assumes that the property belongs to
and absolutely vests in the person whose name is reflected in the title deed, which generally a
registered sale instrument. This being the case, there should be no reason why one`s hard-earned
money is to be invested to create an asset that does not stand in one`s own name! Normally, there
can be no compelling reasons or circumstances for any such decision to be taken and it is
suggested that this dictum One`s property in one`s own name should be taken as the golden
rule` and the deviation, if any, should be allowed only after much thought and consideration.
There are, in my opinion, two broad set of circumstances under which a person may prefer to
purchase an immovable property in name of a person, other than he himself. In the first set are
sentimental` reasons, where one would like to create an asset in the name of his spouse, children
or parents or other loved ones. The second set comprises essentially income tax considerations--
within it the first sub-category is where one is purchasing property in the name of his HUF or
some other member of his family, primarily to get some income tax benefits; the second category
is where the property is being purchased totally out of unaccounted (black) money and as such
he cannot risk the property standing in his own name.
In the Name of Spouse: There is no legal bar that precludes a person from purchasing
immovable property in the name of his wife. However, it must be understood that if the property
is purchased, in the name of wife, using the capital belonging to a the husband, the income, if
any, arising out of the said property shall be clubbed with the income of the husband for Income
Tax purposes. In other words, if the objective is merely to create a second unit of income tax, the
purpose would not at all be served. However, if the decision is based on sentimental` reasons,
out of natural love and affection, or to create psychological comfort for the spouse, the decision
is very logical. Needless to say, where the wife has her own independent source of income and if
she acquires property out of her own, declared income, she would continue to be a separate and
distinct tax unit and there would be no occasion for her income to be clubbed with at of the
husband.

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