According to Andrew Carnegie, 90 percent of millionaires acquire their wealth through real estate investing. When it comes to real estate investment, cities across India have seen a spike in interest as NRI investment builds in the sector. Investing in real estate can be a great way to create revenue for real estate developers and investors alike, especially since a recent Knight Frank Report estimates that 30 percent of people live in rented houses across the country.
Financing Considerations For Prospective Real Estate Moguls
However, like any other investment opportunity there are certain considerations you need to take into account before proceeding with real estate financing, including the tax implications and regulatory compliance requirements.
Your Ability To Service Any Loans
If you are thinking of using a home loan to finance your real estate financing, you will need to do some research on what your monthly repayment obligations will look like. Investing in real estate can provide a stable and relatively passive income but it can also take some time to begin generating returns. For instance, if you will be renting it out it will take time to find the right tenant, conduct background checks, and a time-lapse between tenancies for deep cleaning.
Your repayment will also be dependent on your personal financial circumstances including your credit score. If you are purchasing a fixer-upper, remember to factor in the costs of renovation alongside any processing and maintenance fees when calculating your true financing costs. So when contemplating any refurbishments to your property have a look at the current home loan rates on the market.
Regulatory Compliance Requirements
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Before you invest in real estate, you will need to know what regulatory compliance you will need to meet as a real estate investor. Implemented in 2017, the Real Estate Regulation and Development Act 2016 (RERA) stipulates that all properties under construction need to be registered. You will also need to conduct a title search and verify their right to sale by checking details on stamp duty shortfalls, or the completion certificate for the property.
Tax Deductions
As someone investing in real estate, you may be able to obtain tax deductions on your housing loan and loan repayment. According to Section 24 of the Income Tax Act, you are allowed to deduct the interest component for your home loan. Additionally, the deduction of the principal repayment is allowed under Section 80 C of the Income Tax Act.
However, there are caveats to this, which you need to be aware of. For instance, while there is a limit of INR 2,000,000 annually for interest deductions, this is only applicable to self occupied properties. If you are investing in a buy to let property, there is no limit. Similarly, those purchasing real estate are required to deduct tax at source (of approximately 1 percent) where the transfer is immovable property amounts to INR 50 lakh or more. However, if the seller is a non resident of India, you will need to use the rates as listed in Section 195 of the Income Tax Act 1961 and use Form 15CB.
Finally, be clear on your tax obligations according to your method of investment and sale. If you are planning to reinvest the proceeds from the sale of your real estate, you may not be required to pay long term capital gains tax if you choose to reinvest it in a residential house, according to Section 54F of the Income Tax Act.
Investing in real estate comes with its risks, like all other investment decisions. Taking the time to research the landscape, market regulations and true cost to yourself as a real estate investor is the best way to approach it- prepared and knowledgeable.