To Buy Land for Real Estate Investment sounds very logical decision. Land is a scarce resource, no one can generate parcel of Land. The supply of land is very limited with many buyers vying to buy Land. For Vertical Expansion, builders can increase the no of floors in apartment but for Horizontal Expansion, Land is required. Delhi is typical example wherein due to scarcity of Land, Last year Govt allowed to increase no of floors in certain areas for vertical expansion of city. Another example is Mumbai, currently no land is available for horizontal expansion.
In India, people buy land to meet long term financial commitments. One of my acquaintance bought 3 plots of 40X60 each. Two plots for son’s higher Education & one plot for his Marriage. It sounds very exciting but decision to buy land comes with its own merits and de-merits. In this post, we will discuss 10 points which every buyer should consider before he buy land
In North India, there is famous saying that there are only 3 core reasons for any dispute in this world i.e. Zar (Money), Zoru (Woman) or Zameen (Land). Its a matter of fact that most no of legal cases in India are related to Land Dispute. Before you buy land, it is very very critical to ascertain that Land is free from any legal dispute. Some of the common legal disputes related to land are Land is Pledged or Pledged multiple times, Marking of Land Boundary, Agricultural Land, Adivasi land, Land notified for Govt Projects or Special purpose, Claim of legal Heirs etc.
It is absolutely necessary to hire local competent lawyer who knows all the local laws and help to buy land without legal trouble.
Buy Land for Faster Appreciation
Its a known fact that value of Land appreciate faster compared to flat or a house. This is most compelling factor to buy land. The depreciation due to ageing factor in flats/house is not applicable in land. At the same time some of the factors which can wrong are Location of Plot, Shape of Plot, Direction of Plot, Neighborhood, Accessibility etc. If all these factors are not considered before you buy land, your biggest asset can easily become biggest liability.
The basic difference between flat and land is that in case something goes wrong legally in apartment, you have other owners along with you to fight jointly. Whereas in case of Land, you are the only stakeholder. It is critical to understand local laws related to land transfer. At the time of land purchase, please ensure that documentation related to land transfer is complete to avoid future hassle. All the legal heirs of the land owner should be party to transfer of title deed. Following documents are must for land transfer
1. 7/12 document: Title and proof of right
2. 6/12 document: Past transactions i.e. record of change in ownership of land
3. 8/A booklet: It contain details of tax, land revenue tax etc
4. Encumbrance Certificate: Normally EC is of 13 years but to buy Land, you should ask for 30 years EC
5. Release Certificate: It certify that land is not pledged and if the land is owned by joint holders than ask for release certificate from each owner. It may be the case than 1 owner might have pledged his share in land.
6. Survey Sketch: Land grabbing is common problem. Hire a certified surveyor to certify the boundary of land. He will match the actual dimension with approved sketch from survey department.
7. DC Certificate: If the land is agricultural and you are buying for residential purpose than ask for DC certificate
Surveillance of Land
Most critical factor, Before you buy land kindly ensure that you have bandwidth or resources (friends or family members) for more surveillance. Land is more prone to trespassing and illegal occupation as it is quite easy to grab a land compared to flat or house. Land mafia is very active specially in upcoming areas. A very popular movie “Khosla Ka Ghosla” was all about Land Grabbing. In real life it is not that easy to get the land back from clutches of Land Mafia. If your job is transferable or you are not staying city than its advisable to avoid land purchase. Land Mafia only target the plots where owner is away or there is inadequate surveillance. As we know legal cases related to land can go on for decades.
Land is Non Productive Asset
Though land will appreciate at faster rate but it does not generate any income. A flat or House can generate regular rental income but Land is dead asset during holding period. If a land has potential to appreciate @ 20% & flat / house can appreciate @ 15% with annual yield of 4% from rent than rather to buy land its better to go with flat / house
Though land is Non Productive Asset but you need to pay Wealth Tax if you have more than one House / Flat / Plot. If you have 1 house and 1 urban plot / land (more than 500 meters) than house can be shown as self-occupied. For the urban plot / land, you need to pay wealth tax equal to 1% of net worth if the net worth (after adjusting debts) exceeds 30 lacs.
Income Tax Benefits
A bad news on this front, unlike flat or house there are no tax benefits available on Plot Loan i.e. Land Loan to buy Land without any plan to construct the house. Composite loans i.e. loan to buy land and build a house for self occupation enjoy income tax benefits. We should not get confused between these 2 types of loan. In composite loan, construction should be completed within 3 years from the end of financial year of availing loan. To summarize Plot Loan availed for vacant plot without any plan to construct the house, there are no income tax benefits available.
Only exception to above rule is if the plot is rented out. In this case, interest paid on Loan can be availed as deduction whereas No deduction is available on principal component.
Rate of Interest
The rate of interest of Land Loan is normally higher compared to Home Loan. Usually for Plot Loan banks charge 0.25% to 1% over and above Home Loan interest rate.
Loan to value Ratio
The LTV (Loan to value ratio) for Land / Plot Loan is normally 70% against 80% for House / Flat. In short, you need more funds from your end to buy land. If the allotment is from Govt development authority than the LTV can go upto 80%.
Word of Caution
If you are a migrant workforce than i will not suggest you to buy land. In short, if you are not a native of state & don’t know local language than it is not advisable to buy land. I am not advocating or criticizing regionalism but its a matter of fact that you will face more problems if you are not a native of state.
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