There is no doubt that the favourite investment of the common man is real estate.
Apart from buying a house for self-dwelling, people try their best during their prime earning years to invest in a second house which seem to make them happy even if that investment may not be liquid, may not be tax-friendly, most of the time the return on investment remains notional, cannot be disposed-off in small pieces and even may lead to family feuds and disputes at a later stage in their lives.
The aspects one has to bear in mind before investing in real estate should be: (1) capital gains – to sell at a later stage to gain from the investment and create a big corpus to be utilised for any unspecified purpose; (2) bequeathing to children as a gift; (3) to generate rental income; (4) not aware of other investment opportunities.
If the purpose is the first one – to sell at a later stage - then one has to remember that the capital gains are taxed at 20% which could be a hefty cash outflow (if the capital gains would be Rs.50 lakh then at least Rs.10 lakh would have to paid as taxes) and if such tax payments are to be avoided, the gain amount has to be invested/blocked for three years in a capital gains bond.
Further, there could be issues such as accepting cash due to differences in the government notified rates and market rates.
Another problem with this investment is that one may not be able to track the returns on real time basis and if the investment has been made in localities where the prices have not gone up (beyond 12% to 15% on annualised basis) the net return on investment would not be worth it for the time spent after investing.
