Last updated on September 23rd, 2021 at 05:00 pm
Real estate properties are one of the better investment options available to any investor. The only reason they are not as popular as stocks is – they require a lot of investment, which many people cannot afford. Real estate prices increase annually, and this annual increase in price gets compounded. Effectively, the price of a Real Estate property would increase manifold in 20 years.
Real Estate Investment
In comparison, the price of stocks, or bonds, or even gold, would not show that much return. While returns from stock markets, and bonds are taxed regularly, real estate property happily enjoys tax holiday till the day it is sold. Even then, the purchase price is adjusted for inflation to arrive at the indexed cost of acquisition, and this is what is set off against the sale price to determine capital gains, and tax thereon. You can even use delaware statutory trusts for real estate investment to ensure that it is recognised as a business transaction. Unlike gold, real estate properties cannot be stolen easily, and therefore no extra measures need to be taken to secure such investments.
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Investment in Land
Investment in land is also a type of real estate investment. Investment in land can be agricultural land investment, or commercial land investment, or forestland investment, etc. Why is land good investment? Vacant land investment can be more easily converted into some other real estate property, such as a residential building, commercial complex, malls, cinema halls, stadium, etc, making use of empty lots for sale. Such construction may prove to be expensive if an existing building was bought and had to be demolished. Because of this advantage, vacant land prices double faster than prices in other types of properties. Since investment is larger, more amounts are doubled.
Investment Land Loan
In this context, it is pertinent to note the investor can opt for investment land loan! This means, the effective profit on the sale of land investment is the sale proceeds less investment price, including any interest paid to the bank. Note that a substantial amount of this profit is earned on the lender’s monies! This is not possible in stock markets, or even with gold.
Because of this advantage, many people opt for land banking investment, i.e., they acquire vacant lands in far off places that have no infrastructure or facilities, and hold such properties till the area develops due to various possibilities like some industries coming up in the vicinity, or conversion of land use to housing, or discovery of some valuable minerals in the surroundings, and so on. Effectively, investors acquire the property cheaply and are able to earn several times over. There are investment land tax deductions applicable on such loans.
Buying land investment is slightly more complicated. The investor needs to determine whether the seller has the right to sell the land or is merely in possession of the property as an employee, or an agent, or even a tenant.
In addition, the investor needs to determine to whom the land belongs, and who are entitled to any rights on this land. If the investor is borrowing money from banks for purchase of land, then the bank’s panel of advocates inspects most of the title related issues, and therefore, the investor may not have to study relevant documents.
So how does one profit from investments in lands? Two factors are obvious. One is – these are large investments, and the other is – these are long-term investments. In the short-term, the compounding effect is not really quantifiable unless the investment is in the right location. Moreover, land prices move spasmodically. Therefore, the investors adopt land investment strategies
For starters, a location for investment is selected based on growth potential, and historic trends of land price movement in a place. Growth potential improves when infrastructure shows improvement, or when some new industry comes up in the vicinity. Having identified the location where it is desirable to invest in some land, the next step is to check whether the type of land suits the intended purpose.
For example, if the investor wants to build a house there, he needs to check whether zoning regulations permit that and whether the soil is all right for building the kind of home he desires. Price determination is another tricky aspect. People can go terribly wrong with this. They might decide to try and build their house cheaply, which can result in problems. However, if they chose to use a company, like these Perth 2 storey home builders for example, they can ensure that their new-build will be built professionally. It’s understandable that taxes and holding costs can also affect the land investment holding decisions too.
Since vacant land does not fetch income, any such outflow will be from investor’s pocket, and therefore, be strain on regular income. In the final stages, i.e., when the price of the land starts moving more rapidly, the investor may choose to divide the vacant land in his possession into smaller lots after obtaining required approvals, and sell a few of these lots to others.
Alternately, the investor may choose to build a house on the investment land, and sell this house instead. This is only possible if the investor is a builder. The third alternative is to look out for a builder and have some apartments constructed on the investment land at the builder’s cost. Based on the rates prevalent in the region, the investor can get a few apartments for himself.