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7 common mistakes to avoid

7 common mistakes to avoid
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First Published: Tue, Jan 06 2009. 10 10 PM IST

Updated: Tue, Jan 06 2009. 10 10 PM IST
The wheels of fortune for real estate, especially the residential property market, have turned since the stock market crash in January. The sector—which was already battling 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 its 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.
Whether you’re a homebuyer or an investor, the present scenario is the perfect setting for inducing wrong calls. We list the commonest ones—and ways to avoid them.
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. 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% 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 those 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; and minimizing the tax impact on sale proceeds.
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 with 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.
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 prepayment 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.
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% were a common sight till very recently. Don’t fall for such gimmicks: This is 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%. So, if you have funds, park them in safer instruments such as bank fixed deposits—which are anyway giving returns of around 10%.
5. The developer is giving a car free with 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.
Earlier, developers promised waivers of stamp duty or parking charges to woo customers. But with most homebuyers not taking up 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 loans), 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.
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 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.
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 work done on the house as prices are falling
Most investors see situations such as the present one as 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 a slightly lower rent than a bad one at a higher rent.
So far as home improvements go, basic additional work such as kitchen woodwork, a coat of paint and checking of electricity connections will increase your rental income by more than 10%.
Since the Mumbai attacks, the demand for terrorism cover has increased. Since there is no particular policy to protect you from any financial loss due to terrorism, you could adopt a do-it-yourself approach. You can take separate covers for life, health, accident, house and car. You can buy a life insurance policy, preferably a term plan as it is the cheapest and the simplest. Your health policy will reimburse your medical expenses and a personal accident cover will provide a buffer in case an attack cripples your ability to earn. Cover your assets under the householder’s policy.
The National Housing Bank has directed housing finance companies to readjust the risk weightage to housing loans granted by them to individuals based on the loan-to-value (LTV) ratio of the advances.
With loans having an LTV ratio of less than or equal to 75% and loan value up to Rs30 lakh, the risk weight given will be 50. For loans above Rs30 lakh, the weight will be 75. However, the weight will be 100 for loans with LTV above 75%, irrespective of the value of the loan granted. Kumar Gautam
You need to keep certain things in mind while using cash-back credit cards:
• Check out the annual fees. It’s not worth getting a 5% cash-back discount if you have to cough up a large annual card fee.
• Check if the card has any minimum and maximum spend requirement to avail the benefit.
• Check if the offer is valid throughout the year.
• Check out the list of outlets where you may earn more cash back compared with others.
• Always ensure that you clear your card dues on time every month.Bindisha Sarang
If you want to make a claim in a life insurance policy, you need to submit a claim form issued by the insurer. You also need to submit documents such as the original policy papers, the death certificate of the insured and his death summary in case he died due to an illness. If death was accidental, the documents need to be supported by an FIR and a post-mortem report. In addition to the documents, the claimant also needs to provide an identity proof to establish that he is the nominee of the policy. The process of claim settlement begins once the insurer verifies these documents.
The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.
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First Published: Tue, Jan 06 2009. 10 10 PM IST