This article is modified by Nishka Kamath, a graduate of Nalanda Law College, University of Mumbai. It describes the benefits of investing in real estate. Further, the steps and general norms an investor must follow for investing in real estate are also discussed in brief. Moreover, it also throws light on the primary laws that govern real estate in India.
It has been published by Rachit Garg.
India’s enormous land area has, from time immemorial, lured large-scale real estate developers into investing in India. In fact, India was also declared to be the next popular destination for real estate development by one of the leading magazines. Additionally, the opening of the real estate market to Foreign Direct Investment (FDI) in 2005 has caused an upsurge in the interest of investors in the real estate industry.
However, the rules, regulations, and laws play a pivotal role in shaping the actions of the investors who invest or are willing to invest in the real estate market, and hence, this article is aimed at providing an outline of the benefits of investing in real estate along with the general norms to be followed for such investments. It also briefly covers the steps for an investor to follow while investing, along with the fundamental laws that govern real estate in India.
What is real estate
Real estate is always related to immovable property and is defined under the Property Act with the aid of the General Clauses Act, 1897, and can be summarized as a property that is not a movable property and includes land or the benefit arising out of it, things affixed to the earth or permanently tied to anything that is attached to the earth. Here, attached to the earth means ingrained in the earth or something that is entrenched/embedded in the earth, like, for instance, the walls of a building.
In other words, real estate can be anything relating to land or building, that can be for commercial or residential purposes and can include any housing unit, commercial spaces for offices, schools, shopping centres, inter alia.
Why real estate is a good investment
Investing in real estate is the best option one can consider. There are several benefits that it offers to investors with well-chosen assets. Investors can even predict the cash flow, tax advantages, excellent returns, and even diversification, which will help them build wealth.
Owning real estate is associated with wealth, status, and credibility. Like gold, it is the safest option you can have through which you can secure wealth. In this modern era, a person can find several options for investment, such as stocks, bonds, mutual funds, fixed deposits, and more. There are multiple options to park the money, and real estate is one of the beneficiaries to earn more profits.
Investment in real estate will solve your problem and secure the future. While investing, the person can collect data about the right real estate agent from a reliable database provider such as Joz Data, which will help the investors provide a high-quality email list of agents so they can make an excellent investment. In this guide, you will learn everything about how investing in real estate benefits you.
Less risky as compared to stocks
When you compare a real estate investment with stock investment, it is less risky. Stocks are pretty uncertain, and when you trade in stock, then that can be a risky game. It is a highly specialised field that does require excellent skills through which an investor can make some money out of leverage trades and equities.
But when it comes to real estate, anyone can invest in it. You do not require any particular, and a first-timer can do that. So it is not just safe but also helps you better returns in the long run.
High yield in the long term
Many people have become billionaires and millionaires just from investing in real estate. Everyone knows that the population is growing with time and the supply of land is still. There is limited land supply, and the demand is growing, which increases the return from real estate in the long term.
For a person who wants to invest their money for the long term and get better returns, then real estate can be the best option that they have.
When a person invests in real estate, then that will offer a plethora of tax breaks and deductions which help them in saving a lot of money at the time of paying taxes. Generally, the user can reduce the cost of operating, owning, and even managing the property.
Everyone knows that buying and investing money in the property will be depreciated over time. The user will even get benefits from decades of deductions that will lower the taxable income. There can be several other benefits too which you can experience from the tax.
Cash Flow is the net income that comes from the real estate investment after the mortgage payment and other operating expenses. The main benefit of this investment is that it has the ability through which you can generate more cash flow.
There are several cases where cash flow will strengthen with the time when you will pay the mortgage and get the chance to build up the equity.
Everyone knows that real estate investors will make money with the help of rental income. The value of the real estate may increase over time, and that will help them in making a good investment, and you can even make profits when you have to sell it.
Moreover, when someone gives their property for rent, then that will even rise over time and lead to better cash flow. This is because real estate value increases over time, and when you make a good investment, that can provide massive profits when it is time to sell the property.
Even when you invest in real estate then that will offer increased control and numerous revenue streams and enjoy the capital appreciation.
Property is a tangible asset that you can leverage to capitalize on revenue and even enjoy the appreciation of capital. Moreover, when the value of the tangible asset is high, then that will ensure eternal security, which will be there for a long time, unlike other investment such as stocks that comes with low or no tangible value.
Moreover, real estate is easier to purchase, and when it comes to financing, it gives the tax advantage and even improves the lifestyle. Hence, Real Estate remains the most advantageous option for investment.
Get regular rental income
The most significant benefit of having a home or property is that a person can use that for regular rental income. In addition, the investor can generate a higher income with almost 100% uncertainty. There is nothing like stocks; if a person owns the house, then they will not be at the mercy of volatility, which means the prices will not change just overnight.
The person can be sure of that as it is the most stable market and when they have the house, then rent out the house. You can earn money from there, which will even offer you several excellent benefits.
Diversification of portfolio
Another benefit an investment can experience from investing in real estate is that it will diversify the portfolio. However, real estate will have a low value and, in some cases, will have a negative correlation with the major asset classes.
When someone invests in a real estate portfolio, they will lower the volatility portfolio, providing you a return per unit of risk. But Investors need to be careful about it, which is why they should hire the right real estate agent.
Steps an investor must follow while investing in real estate
There are certain steps an investor who wishes to invest in land, building, or plot must follow certain steps, they are as under:
Step 1: Check the competency to contract
The first and foremost thing an individual must do while investing in a piece of land is to ensure that he is competent to enter into a valid contract. The Indian Contract Act, 1872, mentions the content that makes a contract valid. It is stated under Section 11 and requires an individual to:
- Be a major i.e., he should be above 18 years of age.
- Have a sound mind i.e., he should not be insane.
- Not be restricted under the law of the country to contract.
A point should be noted before entering into such contracts that there are certain restrictions imposed on non-resident Indians or people of Indian origin (PIO) who are residents of India. For instance, such residents do not have the authority to acquire agricultural, farm, or any plantation property (excluding tea plantations). All these regulations are governed by the FEMA Regulations and FDI Policy, which are discussed in detail below.
Step 2: Get the title inspected and know the conditions for investment
The Registration Act, 1908, makes it mandatory for all the written documents that create an interest or transfer an interest in immovable property of a value that is above ₹100 to be registered in the land registry. All these documents, or deeds, signify the title to the immovable property.
An investor, before investing, may get a title check after making the payment of the prescribed fee for the property in which he is willing to invest. He/she may seek an ‘encumbrance certificate’ that certifies that there are no legal dues against that property. Moreover, an individual investing in a flat in a society or office space may check whether its registration under the respective Society Act has been made or not.
For a foreign investor, an investment can be made subject to certain conditions enlisted under the FDI policy. The foreign investor can invest in townships, housing, built-up infrastructure and construction development projects, however, these investments shall include but not be restricted to schools, housing, commercial premises, theatres, etc. The conditions for foreign investors to obey can be accessed here.
Step 3: Execution of the agreement
All the transactions (sale, lease, mortgage, etc.) that the investor dealing with real estate wishes to affect are governed by the Transfer of Property Act, 1882 (discussed below). Such a transaction can be affected by a written document that can transfer an interest or whole interest, i.e., the property in whole to the transferee. Such documents must be valid in the eyes of the law, and the conditions for their validity are discussed in the Indian Contract Act, 1872, which is discussed later.
For an agreement to be enforced as a contract, the following conditions between the parties competent to contract must be met:
Meeting of minds
While executing the agreement, there must be a meeting of the minds of both parties. They should be aware of the agreement’s contents and see eye to eye on the same.
The seller must disclose defects, if any
The seller is mandated to disclose any defects in the immovable property. In the case of misrepresentation, the sale can be set aside at the discretion of the buyer. Also, the buyer can claim damages from the seller. This is governed by Section 14 of the Indian Contract Act and Section 55 of the Transfer of Property Act.
There has to be a valuable consideration. i.e., consideration must be of reasonable value. Absence of consideration makes the agreement void in the eyes of the law and will have no legal value, except in the case of a gift.
If all the requisite conditions are met, an investor may choose to enforce an agreement of sale, mortgage, or lease as per the transaction, and the same comes under the purview of Sections 54, 58, and 107 of the Transfer of Property Act, respectively.
Step 4: Payment of stamp duty and registration charges
It is mandatory that the stamp duty charges for the documents in the transaction be paid. Some states have double stamp incidence wherein the first stamp duty is paid for transactions to acquire the land, whereas the second is for its development.
Additionally, these documents must also be registered with the Registrar of land registry. The documents, if not registered, are restricted from being admitted in court as evidence. Such unregistered documents, as stated above, will have no value in the eyes of the law.
General norms an investor must follow
While carrying out development on a particular piece of land, it is crucial that an investor follows certain norms. Some of those regulations are mentioned below.
Get requisite permissions from the authorities
The investor has to get the necessary permission from the local authorities before commencing the work of constructing a building or developing any piece of land.
Take approval for operating industrial units, if any
Further, he/she has to take approval for other clearances like fire safety and sewage layout and also ask the local bodies for authorization for the operation of an industrial unit. For instance, an industrialist must not set up his industry near a human habitat as per the environmental laws. Moreover, the construction of industrial units and disposal of the same must be sanctioned by the state pollution control boards, which are appointed under the environmental protection acts, the prevention of air pollution acts, and the water acts, respectively.
Be aware of the local laws
The investor, while making developments in the local lands, is mandated to be aware of the local laws and the bye-laws that preside over the construction activities in that locality/state.
Comply with the labour codes for payment of workers
The activity of developing land usually requires the engagement of a huge number of labourers, which is why an investor is needed to comply with the labour codes passed for the welfare of the labourers.
Primary laws that govern real estate in India
In India, real estate is governed by numerous laws, which vary from state to state. The reasons behind the variation are as follows:
- Firstly, Article 246 of the Constitution of India states that ‘land’ is the subject matter of List 2 or State List of the Seventh Schedule. Thus, it covers subject matters on which states have legislation.
- Secondly, the ‘transfer of property other than agricultural land, registration of documents and deeds’ and ‘contracts other than for agricultural land’ come under List 3 or the Concurrent List of the Seventh Schedule to the Indian Constitution. These are the subjects on which both the Centre and the state can legislate.
Over the years, with numerous judgements and precedents deduced via codified laws along with distinct practices and customs followed by the states, several real estate aspects have evolved. Amongst those, the most important ones are mentioned below.
Indian Stamp Act, 1899 and Registration Act, 1908
Different types of deeds, instruments, and documents relating to the transfer of an interest in immovable property and the payment of stamp duty on such documents come under the purview of the Indian Stamp Act, 1899, and Registration Act, 1908.
Real Estate (Regulation and Development) Act, 2016 (RERA)
The Real Estate (Regulation and Development) Act, 2016, commonly known as the RERA Act, governs the development, marketing, and sale of real estate projects to safeguard the interests of consumers in the real estate sector. The RERA Act has created an adjudicating mechanism for the quick resolution of issues through the Real Estate Regulatory Authority and the Appellate Tribunal. Moreover, under this Act, it is mandatory to register specific real estate projects. Consequently, states have adopted corresponding RERA rules and regulations for effective implementation of the Central Act at local levels.
Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, governs the acquisition of private lands by the government for certain public purposes or for a company and the remuneration and rehabilitative steps to be implemented by the government.
Transfer of Property Act, 1882
The Transfer of Property Act, 1882, has general provisions related to movable and immovable property. It covers subjects such as sales, exchange, mortgage, part performance, lis pendens, etc., for both movable and immovable property.
Indian Easement Act, 1882
The Indian Easement Act, 1882, covers ordinances relating to the easement rights of immovable property.
Indian Contract Act, 1872
The Indian Contract Act, 1872, contains several laws relating to contracts in India, including the capacity to enter into a contract, its execution, implementation, infringement, or breach, and remedies available to the parties.
Foreign Exchange Management Act, 1999 (FEMA) and Foreign Direct Investment Policy (FDI Policy)
The Foreign Exchange Management Act (FEMA), 1999, and the Foreign Direct Investment Policy (FDI Policy) both cover provisions relating to the sale and purchase of immovable property in India by foreigners and individuals who reside outside India.
Land Revenue Codes
In India, every state has created its own land revenue rules and has provisions relating to land revenue, tenancy types, agricultural land holding, and other related matters. Such codes consist of the division and classes of immovable property in a state, constraints on transfers, the obligation, responsibility, and authority of revenue officers, and the rules and punishments for violation of such codes.
In addition to the codes mentioned above, the Indian real estate sector also has several provisions relating to urban development, slum rehabilitation/improvement, rent control, apartment ownership, building codes/bye-laws, property tax, Special Economic Zones (SEZs), Benami transactions, environmental protection, land pooling policies, land ceiling, land use and zoning norms, Real Estate Investment Trust regulations, and dispute resolution legislation such as the Consumer Protection Act, 1986, the Arbitration & Conciliation Act, 1996, etc., which are on a state or local or municipal levels.
Investing in real estate can be advantageous but not easy, and the person needs to be careful while investing. If they do not make the right decision, then things may go wrong, and that will also reduce the profits which you can earn from here.
To conclude, it can be stated that the real estate sector is governed by several laws and regulations, and it is important that investors have, at least, a general overview of the laws in the state where they are willing to invest.
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