REAL ESTATE AS INVESTMENT TOOL : Like any other investment real estate has its own set of advantages as well as disadvantages. Before taking any decision to invest or not to invest in real estate is very important according to one’s own risk appetite, objectives of investment and time horizon for investment.

Advantages :

Self-occupation: House properties are bought more for self-occupation than for reasons of investment – at the point of self-occupation these are not investments – but at the time of retirement people may shift to smaller towns or villages  in which case the ownership houses in cities can be sold at substantially higher prices and this shall provide retirement capital as well.

Real Estate investment minimizes the risk through Diversification: Returns generated from real estate investments have very little correlation with the returns generated from other investments like bonds and stocks, and thus, helps in the diversification of your portfolio.

Hedge Against Inflation: Owning real estate and using leverage  is a great way to hedge against coming inflation. If prices rise, so will the cost of housing … owning an asset that rises with the tied is a great way to protect your wealth.

Tax Benefits: a number of deductions can be claimed on your tax return, such as interest paid on the loan, repairs and maintenance, rates and taxes. A deduction can be claimed under section 24 of income tax act for the interest paid on home loan taken for purchase/construction of a house. While the limit for this deduction was R1.5 lakh, Budget 2014 has proposed an increase in this limit to up to Rs.2 lakh for financial year 2014-15. One of the conditions to claim the tax benefit is that the purchase/construction of house must be completed within three years from the end of the financial year in which the loan was taken. 

The principal repayment on home loan is also allowed as a deduction from the gross total income under Section 80C of the Income Tax Act, 1961 (subject to an overall cap of R1.5 lakh proposed in Budget 2014 for financial year2014-15. The limit of Rs. 2 lakh is only applicable for a self-occupied house.

Reverse Mortgage: Self  occupied  house can be used as a type of mortgage in which a home owner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.(Reverse Mortgage Loan (RML) enables a Senior Citizen i.e. above the age of 60 years to avail of periodical payments from a lender against the mortgage of his/her house while remaining the owner and occupying the house.

The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender. The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or  cease to use the property as permanent primary residence.

The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate.

The maximum period of the loan is 20 years. (Maximum period over which the payment can be made to the reverse mortgage borrower.

The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.

Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once every five years. The quantum of loan may undergo  revisions based on such re-valuation of property at the discretion of the lender.

The borrower(s) or his/her heirs also have the option of prepaying the loan at any time during the loan tenor or later, without any prepayment levy.

A new clause (xvi) in section 47 of the Income-tax Act, 1961 has been inserted to provide that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government  shall not be regarded as a transfer. Moreover the money received by the owner of the property under reverse  mortgage shall not be treated as income and a specific exemption has been provided under Section 10 (43) of the  Income Tax Act. A borrower, under a reverse mortgage scheme, shall, however, be liable to income tax (in the  nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the  purposes of recovering the loan.

Appreciation : The longer one holds on to properties, it has been observed, higher the capital appreciation – demand for houses has been on the rise thanks to increasing income levels. By adding real estate in a portfolio, you can maintain a portfolio return while minimizing your risk to a lower level. Therefore, as a part of your portfolio, it enhances yield for a given level of risk.

Income Stream : Where the property can be rented out – property rentals have been going up because of large scale employment generation in the cities or town where people from smaller places move in to rental accommodation as ownership is beyond them at least in the initial years of employment.

Sense of Pride: It gives a sense of pride to the individual that he stays in a house owned by him and this cannot be measured in monetary terms. Every people want to live with some pride.

Disadvantages:

Transparency : Real Estate market is most ambiguous. There are lot of example in every city of the country where real estate developers or dealers have failed to comply with terms and conditions of sale agreement. People had given advances and even 90 percentage of buying price but still they are waiting for the flat.

Liquidity : It's true, you can sell the property if you want to or situation arises to do so. However this can take many months unless you're willing to accept a price less than the property is worth. Unlike the stock market, you will have to wait for suitable buyer to match your demand.

Vacancies : There will be times when mortgage payments will need to be covered out of your own pocket due to your property being untenanted. This could just be a result of a gap between tenants or because of maintenance issues.

Bad tenants : It's every investment property owner's worst nightmare: problem tenants. They can significantly damage your property, refuse to pay rent and refuse to leave. Disputes can sometimes take years to resolve.

Rising interest rates: If your investment loan has a variable interest rate, there is always the risk of economic conditions causing interest rates to rise, either your payment time will be extended or your or EMI amount will be increased.

Property oversupply : In recent years, city builders around the country have created a glut of high-rise apartment blocks, resulting in fierce competition and many units being increasingly difficult to rent out or sell.

Ongoing costs : Urban house property owners are required to pay maintenance charges to cooperative housing societies for common facilities –like lifts, security, water, common lighting, etc. These are essential costs of maintenance and these costs are rising at alarming rates. If one holds house properties for just capital appreciation and not for self-use or renting out then the costs become all the more heavy and can impact the overall returns on this property investment. In addition to the standard costs associated with a property, ongoing maintenance costs, especially with an older building, can be substantial.

Putting all your eggs in one basket: If you have tied up all your money in property, overexposure to one particular type of investment can be a dangerous. If the property market crashes you can stand to lose significantly.

Municipal and Other Levies: An owner of land or house property is required to pay the local authority certain taxes on a regular basis. These are essentially charges for the services such as drainage, water supply, etc. that are provided by the local bodies. These costs have also risen substantially over time. If a house property is of high value then it may attract very high municipal property tax. This means that holding costs in respect of high value house properties can go up astronomically making it uneconomical to hold them as long term investments.

Capital Gains Tax: If the property is sold before three years of purchase, the short term capital gain tax is applicable at the marginal rate. If the property is sold after three years of purchase, long-term gains are applicable at a fixed rate of 20%. When it comes to long-term capital gains, the acquisition cost of the asset is recalculated based on indexation, which factors in inflation in its calculation by using the Cost-Inflation Index. The benefit is that tax on a long-term capital gain is taxed only at 20% after indexation.

No benchmark is available to measure its performance : Risks and rewards associated with the stock and bond investments are easily determinable because of the established stock market with exchanges and related regulatory bodies but no standard benchmarks or regulatory body is available to measure the performance of real estate companies or investments.