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Investing in real estate? Be cautious!

Last updated on: December 20, 2013 14:23 IST

Investing in real estate? Be cautious!

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Priya Nair in Mumbai

In recent times, a number of high net worth individuals have received calls or mailers from builders or websites to encourage them to invest in property.

The deals sound lucrative, with annual returns of 12 per cent and other benefits. 

For instance, a project by Rustomjee Builders in Thane offers rent for two years to buyers who book flats.

The rent is Rs 18,000 a month for a 2-bedroom-hall-kitchen flat and Rs 25,000 a month for a 3-BHK one.

Similarly, an advertisement for a commercial project in Noida offers assured annual return of 12 per cent on the invested amount.

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Image: A project under construction near Chennai.
Photographs: Babu/Reuters
Tags: BHK , Noida

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Why are builders offering to pay money to buyers to invest in property? 

According to Boman Irani, chairman and managing director of Rustomjee Group: “We are offering the buyer rental income for the time it takes to complete the project.

“This way, we are giving them confidence that the project will be completed in that much time.

“It is similar to the warranty in case of electronic goods or the delayed repayment in case of luxury cars,'' he says.

With most end-users, as well as retail investors, now being cautious about the 20:80 schemes and its variants, developers are now offering such innovative schemes to attract buyers, says Anuj Nangpal, managing director, Investor Services.

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Photographs: Punit Paranjpe/Reuters

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“From the developer’s perspective, such rentals or assured return schemes result in lower outflow or interest burden, as compared to the interest subvention schemes used earlier. “But buyers must invest in such schemes after a detailed due-diligence on financial cost and the project,'' he says.

On the face of it, such an offer could look attractive. Yet, buyers should keep in mind that these are largely silent on cash flows after expiry of the period that is promised.

It is also possible that the time for completion stretches beyond what is promised, and the developer not increase the rental for the extended period.

Such schemes might appeal to someone looking to upgrade to a larger flat or someone staying on rent and looking to buy an apartment for self-use.

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Photographs: Reuters
Tags: 1

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In such cases, the buyer must only look at projects with a delivery timeline of two to three years.

Anything more could be risky. In any case, buying a house in an under-construction property is always riskier than buying a ready property.

“From an investment perspective, such rental schemes provide a buyer with a return of less than two per cent per annum.

“While this does not look attractive when compared to other traditional investment options, capital appreciation during the project life cycle will be a key determinant for financial return.

“Therefore, a buyer must also evaluate the potential for real estate appreciation during the investment time frame to assess the return,” says Nangpal.   


Photographs: Reuters
Tags: Nangpal

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