Real estate: 7 common mistakes to avoid

[Sukumar.N]

The wheels of fortune for the real estate, especially the residential
property market, have turned since the stockmarket crash in January
this year.

The sector, which was already battling with high interest rates and
high cost of property that were, to an extent, keeping homebuyers away
from the market, received a death blow in terms of the negative
sentiment. The global economic turmoil in the later months only
increased the intensity.

While homebuyers are deferring purchases to catch the bottom, real
estate speculators, who invested in property purely for gain, are
finding it hard to pull out at their desired price points.

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Whether you're a home-buyer or an investor, the present scenario is
the perfect setting for inducing wrong calls. We list the commonest
ones - and ways to avoid them.

Money Mistake 1

With prices likely to cool off in the short-term, there is no point in
holding on. I should pull out of the investment.

This is the first thing most of us do when we get bad news about any
asset class. When it comes to real estate, the worry is aggravated if
there's a home loan involved.

With home loan interest rates climbing steadily since 2004, your
tenure is now longer (or EMIs heftier). Capital values, too, are down,
especially since January this year.

As a result, you are paying more (in terms of interest payout) for an
asset whose value is decreasing. Experts believe that the prices of
residential units will go down by another 15-20 per cent in the short
term.

But is that reason enough to pull out? No. If you can hold on to your
investment, do so.

The reason is simple: In the long run, returns from real estate are
second only to that from equities. Further, with the large gap between
demand and supply for residential units in the country, long-term
prospects still look good.

Pull out of your investment only if you find it difficult to hold on.
But be ready for three major hurdles - finding a buyer when most of
them are trying to catch the bottom; clearing paperwork if there's a
mortgage; minimising the tax impact on sale proceeds.

Money Mistake 2

While selling the property, I should stick to the price at which the
neighbouring flat was sold six months ago.

While real estate as an asset delivers good returns in the long run,
exits are not easy, compared to some other asset classes. In the
present scenario, your problems will be further compounded because,
even if you find a buyer, he will know fully well that you are making
a distress sale and, hence, will drive a hard bargain. To get an idea
of the price you may realistically expect, investigate the sale of
similar properties in the area over the past month or so. Property
portals will also give a fair idea of the going rates.

Money Mistake 3

I have surplus funds. I should go ahead and increase the EMI on my
existing home loan.

The home loan is the cost of acquiring the house while the interest on
it is an expense you incur to get the asset. An ideal situation would
be to get the loan at the cheapest cost.

However, rising interest rates increase your cost of acquisition. If
you have surplus funds, instead of increasing the EMI you should part-
prepay the principal.

This way your principal outstanding will go down, which will, in turn,
reduce your tenure. In other words, your interest outgo will reduce.

Also, most lending institutions do not levy any pre-payment penalties
if the part-prepayment is made through one's own resources. For those
who don't have extra funds, use this time to arrange for it.

Money Mistake 4

Real estate developers are promising returns on investments in their
advertisements. I think I should invest in them.

Most developers have been looking at individual investors to bail them
out of the cash crunch. Advertisements portraying real estate as an
investment with assured returns of around 11-12 per cent were a common
sight till very recently.

Don't fall for such gimmicks: these are merely evidence of their
efforts to get cheap funds for ongoing projects. When private equity
funds invest with real estate developers, they typically expect rates
of return above 20 per cent.

So, if you have funds, park them in safer instruments like bank fixed
deposits - which are anyway giving returns of around 10 per cent.

Money Mistake 5

The developer is giving a car free with the every booking. Good idea
to book with them.

This is again an attempt by developers to maintain their cash flow.
With banks reducing their exposure to real estate, negative sentiment
at the bourses and private equity coming at a high cost, giving
freebies is a way to boost sales, which will, in turn, keep the cash
registers ringing.

Earlier, developers promised waivers of stamp duty or parking charges
to woo customers.

But, with most homebuyers not getting lured by such offers, developers
have become more desperate. Rather than reducing their basic sale
price, they are introducing ever more attractive freebies, such as a
car free with a home booking, or even buy-one-get-one-free deals.

If you are seriously tempted, be very clear about what's on offer. For
example, if it's a buy-one-get-one-free deal, find out who will pay
the stamp duty, parking, maintenance and other related charges of the
second house.

Apart from high costs (both of real estate and home loan), genuine
homebuyers are discouraged by the prevailing negative sentiment. So,
if volumes do not increase in the short term, developers will have no
option but to reduce rates.

Money Mistake 6

Prices are expected to cool further. I should wait to enter the market
when prices hit a new low.

A slump in the fortunes of any asset class provides an opportunity for
rich pickings. However, don't try to time the market. Remember that
the real estate arena is not homogeneous and price falls/corrections
will vary across markets and properties. So, if you find a good
property that suits you by way of location, amenities, construction
and other factors within your budget, go ahead and invest.

However, under the present circumstances, buy only in ready-to-move-in
properties. If you plan for the long-term, you'll never go wrong with
real estate investments based on informed decisions.

Money Mistake 7

Since my EMIs have moved up, I should increase the rent to set off my
EMI burden. Also, there is no point in getting any work done on the
house as prices are falling.

Most investors see situations like the present one opportune to
increase rentals. Your property broker will be happy to know that you
expect higher rentals as it will increase his commission. However, it
is best to be reasonable while increasing the rent; it shouldn't be so
high that it scares away a good tenant.

It makes more sense to have a good tenant at slightly lower rent than
a bad one at a higher rent.

So far as home improvements go, basic additional work like kitchen
woodwork, a coat of paint and checking of electricity connections will
increase your rental income by more than 10 per cent.


Source : Rediff