Seven Homework Steps to Take Before Buying Real Estate

Selecting valuable and profitable properties is an art. This art can be learned easily. It’s necessary to do homework before buying real estate. You want to buy profitable property. Just like before an exam, you study hard. Similarly, you need to do homework before buying property.

When selecting good and valuable properties, keep these seven points in mind. This will give you mental peace and a sense of achievement. Covering all these points helps you buy a property that provides many future benefits. It lets you plan finances and control the entire transaction, from buying to selling.

Here are the seven homework steps to take before buying real estate properties. Follow them rigorously. Comment below if you think anything needs attention.

1) Select the Area for Real Estate Investment –

While selecting the area for real estate investment, please consider the following points –

1. Promising Area: Consider the most promising area for investment. Most promising means, it should certainly give minimum of 20-25% returns in two to three years.
2. Job Proximity: Location should be near to job locations. Because most people buy property which is near to their job location.
3. Travel Time: Property should be easily reachable. Meaning if you want to travel to-and-fro office, it should not take more than an hour. This includes any mode of transport.
4. Accessibility: Property should be walking distance away from Railway station, Metro station, Bus depot, bus stop (if you will travel only by bus to office. If it includes other transportation mode then it should be near to that station). For example, In Mumbai, if your house is not near Railway station or metro, then you will struggle traveling. Struggle includes, consumption of lot of time, inconvenience, high expenditure, crowd, multiple modes of transportation, via-via journey etc. Traveling expense in Mumbai can be high if you have to take private mode of transportation. I stay out side of Mumbai and I end up traveling 2.5hours one way to my job and incur an expense of Rs.500/- daily. Thankfully I am traveling only twice a week but soon will be starting thrice a week.
5. Amenities: Property should be near to market place, banks, schools, hospitals as well. Thankfully in metro cities you generally don’t find these issues, but in tier two or three cities this can be a problem. You may require few vegetables may be worth Rs.300, but you may spend Rs. 100 and an hour to reach there and come back.
6. Village Property: If you have a house in your native village, these requirements may not apply. Staying in your village can maintain community ties. Simply because, just to gain above advantage you cannot (rather should not) leave that house and go elsewhere. That may prove costliest as well. However, investing in another property as per above requirements is advisable.
7. Safe Area: Avoid buying house in scary area where you may feel negative energy, there are street dogs, known haunted places, houses with possible paranormal activities, multi-community area where riots, clashes, religious clashes, are with hooliganism etc. Some may feel paranormal activities are myth, believe me they do exists and it is proven fact even in developed countries. Take experts advise.
8. Resale Property: My personal opinion is avoid buying re-sale property with an age over 10 years. Avoid buying such house, where suicide had happened or even suicide attempts were made. Many people purposely buy such property because they get it at heavy discount. But I believe, let that discount rest in peace.
9. First Owner: Again, my personal opinion is, buy such property where you are the first owner. Your property should be good if it is virgin property. This will avoid unnecessary issues mentioned in point number vii and viii above.
10. Commercial Property: Buying commercial property can be profitable, but it requires a large initial investment. Banks charge higher interest rates (12-15%) for commercial loans compared to housing loans (8-9%). The loan amount is usually only up to 50% of the property cost. However, commercial properties offer higher yields and long-term leases, providing assured rent and saving on sales costs like brokerage and legal fees. Residential property rentals in India involve high costs and short lease durations (11 months), leading to recurring expenses.
11. Parking: Purchase parking even if it requires an extra loan. Property with parking not only safeguards your vehicle but also generates revenue through rent and profit upon sale.

2) Study the rental yield –

To determine if a real estate investment is worthwhile, study the rental income and interest cost. If any of the criteria below are met, it can be a good investment:

1. Aligned Income and Cost: If rental income matches the interest cost, it’s a good investment. For instance, if rent is Rs. 30,000 and interest cost is also Rs. 30,000, the rental yield compensates for the interest cost.
2. Partial Coverage: If rent covers most of the interest, it’s still decent. While you may lose money due to maintenance, you gain from property appreciation and reduced interest costs by prepaying debts. Invest rental income in mutual funds. At the end of the year, use this to repay the loan. For example, if rent is Rs. 30,000 and interest is Rs. 50,000, you pay Rs. 20,000 extra as interest. Invest Rs. 30,000 for a year at 12% interest. It will grow to Rs. 3,84,000. Add Rs. 16,000 to repay Rs. 4,00,000 of the loan. This can reduce the loan tenure by 5 to 8 years, depending on the outstanding loan and tenure. If your loan is Rs. 50,00,000, you might repay it in less than 8 years.
3. Higher Interest Rate: If your interest rate is much higher than the rental yield, check the appreciation value. Contact experts, local people, or brokers to check the appreciation value. Review the last 10 years’ value appreciation graph. If the future looks promising, go for the property. Otherwise, avoid it. An expert’s opinion is essential here, as they can identify niche areas you might overlook.

3) Commercial Properties –

Commercial properties should be the first choice of an investor. All the below mentioned types of properties are commercial properties.

1. Small/medium shop
2. Large shops like super market
3. Office spaces/floors in the commercial buildings/plazas
4. The whole commercial building
5. Hotel property
6. Co-working spaces or shared working spaces
7. Land in special economic zones
8. Land for construction of factory, offices, residential property. Remember, now you are the builder of residential property not the owner of it.
9. Land for plotting and selling with or without house properties/offices/shops constructed on it.
10. Land on rent. This is mostly for people having businesses and they need such land for their commercial activities. Example, Marble tiles shop, Car sale and service centre, Wedding lawn/hall etc.
11. Fractional ownership in large commercial properties is a new concept. Investors can own a small part of a big commercial property, like a hotel or bungalow. Your ownership is limited to your investment amount, but you get good commercial returns. This allows small investors to own commercial properties in prime locations at a lower price, earning handsome rent. For example, a villa in Goa, India, a tourist spot for people worldwide, can cost over 2 million dollars. Such a high amount is difficult for a common individual investor. Fractional ownership lets investors own part of this property legally. The cost can range from Rs. 50,00,000 to Rs. 2,00,00,000, depending on the fraction size. This makes it affordable for many people. Investors can earn an average rent of Rs. 1,00,000 per month. This concept is like an invisible person earning a full salary without significant costs like food or travel. It’s an amazing concept, but remember the main reason why common people can’t easily buy commercial property.

However, please read first point above (sub point number ‘X’). This is the main reason a common man cannot easily buy commercial property.

4) Debt for commercial Properties –

Buying property with your own funds is rarely possible. Most individuals need to take on debt. I’ve discussed debt calculation and profitability above in point number two (Study the Rental Yield). Don’t view debt as a burden; think of it as a blessing. Imagine a world without loans. Real estate and entire economies would collapse. Industries relying on house construction would fail. Banks couldn’t offer interest on savings, and they would shut down.

5) Debt helps you in following ways

1. Immediate Ownership: Debt lets you own high-ticket properties as soon as the loan is disbursed.
2. Fixed Cost: It fixes the house cost. If property prices rise, your price remains unchanged.
3. Appreciation: You earn from property appreciation (current market price minus property cost).
4. Investment Protection: Saving and investing in mutual funds or other avenues might not keep pace with rising property costs. Debt ensures you lock in current prices.
5. Tax Benefits: There are tax advantages to taking on debt.
6. Fraud Prevention: Banks and financial institutions verify property details, registrations, necessary approvals, and compliance with government policies. They assess the investor’s repayment ability and the real property value. If the loan is rejected for any reason, you can withdraw from the property purchase without loss, provided it hasn’t been registered in your name yet.
7.  Construction Quality Checks: Some banks in India inspect construction quality. If unsatisfactory, they can sue the developer and take necessary action. This offers additional security.
8. Multiple Properties: Debt lets you own multiple properties simultaneously, if eligible.
9. Passive Income: Owning rental properties can start your passive income, helping repay principal and save on interest. Refer to point number two (sub-point ‘ii’).

6) Negotiations –

Negotiating on property cost is utmost important. For that please have your loan sanction letter ready, check your own contribution, consider your requirement and plan; then select the property by considering point number 1 above. This will help you negotiate strongly. Needless to say, that negotiation will help you in following ways –

1. Control over cost
2. Control over loan; thereby control over interest cost
3. High profitability at the time of selling the property
4. Higher rental yield
5. Increase in savings
6. Lower taxes burden while purchasing the flat
7. Lower requirement of initial funding
8. Well financial planning

7) Monitor the development of property –

If the property is being developed and is not ready yet, monitor its progress. Question builder about progress, if it is not satisfactory. Now you are the owner; client of the developer. You have paid cost so you have right to ask any question regarding construction. If needed be prepared to sue the builder, he is not your relative, be a professional businessman.

Please follow these guidelines to avoid unnecessary headache and last-minute rush to accumulate funding. These are proven techniques to buy prime properties. Remember prime properties also can be available at reasonable cost. It is on us how well we negotiate to keep the cost in control.

Let me know in comment section, if you feel any significant point to remember before buying the property. Please like and share the blog, if you like it.