Does it make sense to hold more than one residential property? Does the investment really give very high returns as we Indians tend to presume? Anil Rego takes you through the ups and downs of investing in residential properties
Investing in real estate, especially residential property (one or more) is most often the only major investment that an Indian family aspires, plans, and makes through its lifetime! The security that owning residential properties provide has always been valued much in India and hence Indians tend to invest more in real estate and residential properties than in any other investment option.
But does this make sense? Let us take a quick look!
Why do we invest in residential properties?
Typically, security and a notion that real estate investments give very high returns are two major reasons for buying a residential property. Also income tax benefits are an additional lure towards buying a residential property by taking a housing loan.
The housing loan principal up to a limit of Rs 150,000 (clubbed with other benefits) is exempt from Income Tax (under section 80C) and similarly the interest paid on housing loan up to a limit of Rs 200,000 (under section 24b) is also exempt from Income Tax.
By buying multiple properties and leaving them out for rent brings in additional income and some income tax rebates (this is discussed in more detail later in the article). These benefits are juicy, and prompt us to take a loan and invest in a residential property.
What are the income tax and wealth tax implications of owning more than one residential property?
When a person owns multiple residential properties with multiple home loans the principal payment of only the property which is self occupied is eligible for exemption under Section 80C.
This is something not all of us are aware of! If the other properties are rented then the rental property has to be included with the income. So not much of additional tax benefit for just owning more than one residential property!
Only in the case of repayment of the interest on home loans, all the interest payments can be shown against the rent received and gain tax exemption under section 24B.
Every property, apart from the one which is self occupied, comes under the purview of Wealth Tax. Wealth Tax exemptions can be claimed for non self occupied residential properties only when each of the property has been let out for rent for a minimum period of 300 days in a year.
As can be seen, many a time the caveats are left unread.
What are the other downsides of holding more than one residential property?
When one purchases multiple residential properties by taking a home loan, a huge chunk of the income is consumed towards the payment of the home loan. This definitely eats into the amount available for other forms of investments.
With a mid-term investment time period in perspective, an investment in multiple residential properties affects liquidity.
Furthermore, the annualised return from investment in real estate is around 14-15 per cent which is on par or lower than other investments such as the stock market or metals. However, there exists a notion that the returns from investment in property are spectacular.
In fact, in some places which have gotten afflicted due to some natural calamity such as the IT highway in Chennai during the floods, the property values have fallen down steeply. So the higher returns are notional and are not backed by solid data points.
Additionally, tax and property laws keep changing. Wealth Tax and Long Term Property Gains Laws are oriented towards incentivising only single residential property owners. The laws are fraught with loop holes and end up leveraging more tax from multiple residential property owners than otherwise.
So what should you do?
Ideally, you should invest in just one residential property. However, if it is tough to over-ride your upbringing and the resultant mentality, ensure that the legal ownership of the residential properties is distributed amongst your family members so that you can leverage the tax benefits to the maximum extent possible.
If you must hold multiple residential properties, then ensure that you let them out for rent and use this income for making other forms of investments. This way your investment portfolio will get diversified.
The other real estate investment option available is to own only one residential property while investing in multiple commercial properties because commercial properties enjoy a host of tax benefits.
Understand all the tax and land laws before investing in multiple residential properties. It always is better to err on the side of caution!
Photograph: See-ming Lee/Wikimedia Commons
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.