Investment in real estate is a big financial decision: Pushpamitra Das, Justo Realfintech

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Every investor expects that his investments should deliver high returns over the years, and this belief stands more challenging as any investment in real estate, either for self-use or rental, requires a high initial outlay and long-term investment appetite.

Speaking to Money9, Pushpamitra Das, Founder & Director of Justo Realfintech and real estate industry veteran said “Investments in real estate can offer growing returns in the form of rental income and capital appreciation over the years. Seasoned investors usually buy property units for rental incomes and long-term capital gain, while retail investors can invest through REIT platforms for small and continuous investments”

 Is real estate a good investment instrument, would you suggest residential or commercial real estate for higher ROI?

High population, rapid urbanization, attractive interest rates, and a strong growth of the economy as well as the purchasing power (Macro+Micro) are the main factors for the growth of real estate in India. This has also been supported by rapid overall growth in infrastructure not only in Tier 1 but generally across India, thereby boosting development, connectivity, and growth. The RE segments offer lucrative investment potential for capital appreciation and rental income for investors. Both segments, residential and commercial, can turn out to be profitable investment instruments depending on factors like location, market trend, investment period, and risk appetite. Though commercial properties will always yield higher returns compared to residential units, one also has to factor in the initial investment cost and disposable income needed which is higher for commercial properties than residential properties.

How can one invest in real estate through REIT?

Historically, we have been investing in real estate by buying properties, and waiting for market trends for capital appreciation and higher rental yields. REIT is an investment instrument, wherein, an investor can participate in the RE sector as per investment appetite for proportionate ownership. REIT was introduced to ease the investment avenues for foreign investors in the Indian real estate sector. Local developers benefitted from the introduction of REIT, as it created a larger funding avenue.

In India, investors need to open a Demat account with registered stockbrokers for REIT trading and are issued units in proportion to their investments, that can be bought and sold on the stock exchange. Over the years, REITs have turned out to a strong and stable alternative RE investment platform.

The 6 main types of REITs in India are Equity REIT, Mortgage REIT, Retail REIT, Residential REIT, Healthcare REIT, and Office REIT.

In addition to REIT, we also have a relatively new and growing concept in India called fractional ownership where a pool of investors, invest in a single property as an SPV.

Fractional Ownership (FOPs) involves buying a share of a specific property through a special purpose vehicle, providing direct ownership benefits. While REITs let you invest in real estate without the hassle. Think of them as mutual funds for buildings, spreading your risk across hotels, apartments, or warehouses.

What are the top things to consider while investing in real estate through AIM’s?

Investment instruments should provide decent ROI for investors and, more so, in real estate as the minimum investment in this sector is in millions. Any property bought, either for investment or self-use, should provide strong rentals and garner higher capital appreciation over the years. It is advisable that first-time investors in real estate set an investment budget and then consider the following factors:

Investment House: The track record and AUM are important aspects to consider while looking at AIM as an investor. The experience of the fund house will dictate the quality of the asset, the proper financial closures, the legal aspects, investor protection, and other key compliance issues.

Exit Strategy & Tax implication: Like any other investment, have an exit strategy in place for selling the property for capital appreciation or renting the place for regular income. Please seek advice on tax implications for RE investments like Capital Gains, property tax, and GST. It is important to note that while investing through REITs or Fractional ownership a lot of due diligence is already done by the fund house as they are governed by SEBI and other bodies thus making them accountable. That said, there is an ongoing discussion and review within SEBI on the operating structure, rules, compliances, and other such framework-related challenges.

What are the top things to consider while investing in real estate?

Investment instruments should provide decent ROI for investors and, more so, in real estate as the minimum investment in this sector is in millions. Any property bought, either for investment or self-use, should provide strong rentals and garner higher capital appreciation over the years. It is advisable that first-time investors in real estate set an investment budget and then consider the following factors:

Location: It is important to assess the location demand based on its proximity to commercial zones, educational and medical centres, malls, and its connectivity ease with road, rail, and/or metro.

Market trend: Understand demand-supply dynamics, planned projects, planned infrastructure development, present connectivity to important retail & commercial hubs (for residential investments), and price movement over the last few years before investment.

Developer Reputation & Due Diligence: To safeguard your investment, it is prudent to invest in properties that are developed by reputed brands with strong market reputations, and legacy. It is also advisable to take legal advice and check for clear property titles, approvals, and compliances to avoid any future legal hassles.

Exit Strategy & Tax implication: Like any other investment, have an exit strategy in place for selling the property for capital appreciation or renting the place for regular income. Please seek advice on tax implications for RE investments like Capital Gains, property tax, and GST.

Do second homes provide taxation benefits?

Investing in a second home can provide various taxation benefits like deductions on rental income, home loan interest, and capital gains, depending upon the property’s usage and financing. The benefits of investing in a second home are:

Rental Income: If the second home is rented out, one can avail of deductions such as standard deduction (30% of the annual value), municipal taxes paid, and interest on the home loan (upto INR. 2 lakhs per year)

Self-Occupied Property: If the second home is self-occupied, one can still claim deductions for interest on the home loan (upto INR 2 lakhs per year) and on municipal taxes paid.

Home Loan Interest Deduction: Interest paid on the home loan for the second property is also eligible for tax deduction under Section 24 of the Income Tax Act. However, the overall limit for deduction on home loan interest is INR 2 lakhs per year for self-occupied properties.

Capital Gains Tax: If you sell your second home after holding it for more than two years, the profit is considered a long-term capital gain. You can avail of tax exemptions (under Section 54) if you reinvest the capital gains in another property or for investments in specified bonds (under Section 54EC).

Wealth Tax: Second homes are subject to wealth tax if the net wealth of an individual exceeds INR 30 lakh. However, the value of one house or a part of a house is exempt from wealth tax.

Joint Ownership: For jointly-owned second homes, each co-owner can claim tax benefits in proportion to their ownership share.

With rising interest rates, should one buy or rent a property, your views? 

Property investments depend on important factors like the financial stability of the purchaser, long-term goals, ability to furnish monthly home loan installments, paying annual property taxes, and monthly property maintenance charges over the years. Though property ownership allows total control of the property, one should be patient as capital appreciation can take a couple of years depending upon external factors like demand and infrastructure development of the surrounding area. Renting a property, on the other hand, allows flexibility on upfront acquisition cost and use, lower monthly payouts, and zero maintenance charges for the user. Though there is a considerable payout in the form of rent over the years, the user gets no advantage of property appreciation or any control over the property during the lease period. Investments in real estate, either for rental or self-use, require a long-term approach for properties to gain considerable ROI.

What are the top 3 locations that will reap high returns for investors?

Mumbai, Pune, Hyderabad, Bangalore, and Chennai are great investment destinations, for both residential and commercial investments. Mumbai and Pune command nearly 50% of the demand, but over the coming years, Hyderabad and Chennai will deliver high ROI for investors. New emerging locations due to infrastructure development across the country, especially those, that are connected with leading metro cities and economic corridors will garner higher returns on investments. In addition to the markets listed above, we are also seeing a surge in demand and growth from second-home markets like Goa amongst others which are offering highly lucrative returns to investors as these are hubs for tourism. We foresee the growth of similar markets in the long term with the resurgence of tourism in India post pandemic due to better connectivity and the government boosting tourism packages across the world to attract foreign exchange.