INVESTING IN REAL ESTATE: AN INTRODUCTION ~ By KBS Sidhu Introduction: Down the ages, man has sought to make investments which, he has hoped, would multiply many-fold. Even as we have entered the new millennium, man‘s quest for that ‗ten- bagger‘ investment remains as elusive as ever, notwithstanding the increasing number of investment avenues and decision-support systams that are available today. Apart from the traditional bank deposits and Government securities, investment in equity shares, either directly or through the mutual fund route, allure us with many a ‗rags-to-riches‘ fables/ story. The introduction of ―Futures and Options (F & O)‖ trading in major stocks and indices, a person can hope to leverage his position in the stock market many times vis-à-vis the capital employed. With the precious metal Gold again in the middle of a bull run, many people are turning their attention to this traditional safe haven. It is in this increasing complex investment scenario, that we have to see ‗real estate‘ investment as another option. However, before we plunge into this seemingly simple but actually a pretty complicated field, we need to recapitulate the basic principles of investments. It is common knowledge that any investment is a trade-off between three variables: risk, returns and liquidity. In addition, individual factors like time-horizon of investment, risk appetite and amount of money to be invested also become relevant factors. Transaction and holding costs and tax implications are also some of the factors that cannot be ignored. All these parameters have to be considered, in varying degrees, when one plans to make any investment in general and more particularly in the ‗real estate‘. Bank deposits are ―safe‖ and ―liquid‖, but the returns offered are barely enough to beat inflation. Equity shares can, in theory, offer multiple returns and are exceedingly liquid, but there is always a probability of the even the original capital being eroded, if caught in a bearish market trend. Historically, Gold has been the most favourite investment in uncertain and war-like conditions but apart from the problems associated with its safety/ custody, long- term trends indicate that its appreciation has barely beaten inflation. It is in this scenario, that investment in ‗real estate‘ emerges as an option that cannot be brushed aside in a casual manner. ―Real estate‖ is investment in land, buildings or other immovable properties and the basic objective is to achieve appreciation in the capital employed. If there is any additional accretion of incremental income like rent or agricultural produce, the same is to be regarded essentially as a bonus. An added attraction of ‗real estate‘ is that it is ―real‖ and palpable, unlike equity shares which are either paper certificates or reflected merely in the statements issued by the respective depositories. There is also a certain amount of pride and snob-value attached with the ownership of ―real estate‖. It was perhaps Mark Twain who remarked: ―I think it is always going to go up; they stopped manufacturing it a long, long time ago‖. While this may not be true in strict terms, for new urban development is effected on a progressive basis, the fact remains that the total land stock is not unlimited and cannot be ―produced‖ like other goods and services. This is more so in respect of the preferentially located properties. Disadvantageous of Real Estate Investing: Before we delve deep into the finer examination of the various facets of the investment in ―real estate‖, we need to highlight some of the disadvantages of this investment. The objective of this enumeration is not merely to highlight the limitations and drawbacks of this mode of investment but to also alert the investor against the pitfalls that he should avoid. 1. Illiquid: Real estate is, in general, an illiquid investment. Even if you could snap up a property with a great deal of expeditiousness in a ―cash up-front‖ deal, when it comes to selling, it could take you weeks and even months before the property can actually be sold. In many cases, high value properties can take up to a year to sell-off, and the sale consideration is often received in different instalments, spread over many months. In summary, you may NOT be able to get the money that you invested in a property, in a jiffy, in an emergent case immediately. 2. High threshold of Investment: In other modes of investment, you could enter the action for as little as perhaps Rs. 100/-. However, in the case of real estate, I firmly believe that you cannot be a meaningful player with any amount less than Rs. ten lacs. In the very least, one would need to have at least Rs. five lac budget to enter into this fascinating world. In theory, one could borrow and invest, but this option is available to a small-medium investor only to purchase a residential house/ flat, and the real estate sector is generally not a hot favourite with the lending institutions, including the banks. Thus debt lead leveraging opportunity is virtually non- existent. At present, real estate mutual funds are not permitted in India but proposals to introduce them are under active consideration of the Central Government. If and when these are introduced, one could perhaps see action in the real estate sector with any investment as little as Rs. 1000/-, but till then, the high threshold limit remains a constraining factor. 3. Depreciation and maintenance of built-up properties: Unbuilt property cannot ―depreciate‖ in the sense of a movable property depreciating. However, the superstructure, whether it is a built-up house or apartment, can depreciate with time. Every construction has a limited life, which may be long, but it is always finite. Even the cost of construction generally increases from year to year, a built-up property will depreciate over years unless it is property maintained, and even then there are limits in this regard. Depreciation may also occur on account of a particular style of building or architecture going out of style, or on account of new and better building materials being introduced. When a built-up property is proposed to be held over a long-term horizon, the question of depreciation and maintenance must be carefully considered. 4. Security and Watch & Ward: Immovable property, by definition, cannot melt away. However, in an urban scenario characterised more by chaos than by order, one has to be particularly careful in securing one‘s property. Illegal encroachments and unauthorised possession is a problem that can eat into your valuable investment. The legal system is such that it is very difficult to retrieve any property once it has fallen into the control of unscrupulous elements. Insurance, especially on account of fire, is also in important expense that must be incurred to safeguard one‘s built-up property. Similarly, the problems of tenants, both for commercial and residential premises and even for agricultural land, are factors that must constantly be borne in mind. Eternal vigilance and payment of watch and ward charges is but a small price for securing one‘s valuable property. 5. High Stamp Duty/ Transaction Costs: Transaction costs are the costs that one bears at the time of buying as well as selling property. In India, Stamp Duty and Registration fees constitute the bulk of these costs, although brokerages payable, on either side (i.e. sale and purchase) cannot be totally ignored. In most states, the stamp duty is around 6%, while the registration fee is 1%, subject to the maximum of Rs. 10,000/-. The brokerage rates can vary from 0.5% to 2% depending on the size of the deal. As compared with bank deposits (virtually nil transaction costs) and equity shares (around 0.25% to 0.5% brokerage rates for ―delivery‖ based business), these costs are pretty high and must be carefully considered and factored in by the investor, while making real estate investment decisions. 6. Holding Costs of Urban Properties: Rural and sub-urban agricultural land does not have much of a holding cost. The land revenue has been abolished in most of the states, and even where it is still levied the quantum is quite negligible. However, in case of urban properties, especially the commercial ones, property taxes are generally imposed by the municipal body concerned. While vacancy relief can be given in some cases, in most cases one has the statutory liability to pay property taxes irrespective of whether the premises are let out or not. Although the applicability of the Wealth Tax is quite limited, and even where it is applicable the rate is quite meagre, yet this is a one factor that must also be considered in making an investment decision. As a matter of fact, the quantum of the assessed property taxes is one of the important factors in assessing the viability and suitability of any purchase of an urban property. 7. Due diligence in scrutiny of title: In the rural as well as urban areas of the country, every bit of the land is supposed to be carefully mapped out and the title of the land is supposed to be carefully reflected in the statutory record being maintained by government officials. For instance, the patwari, maintains the record-of-rights, which is supposed to reflect the title of the land. This record is being constantly up-dated. Similarly, in the municipal areas, the appropriate municipal body is supposed to keep a record of the title, even though this is done, in most cases, merely from the angle of collection of property taxes. However, there are a number of factors, like unregistered ‗agreements to sell‘, sales on ‗power of attorney‘ and pending litigation, to name a few, that may not find any mention in the official documents ordinarily associated with the title of the property. It is in these circumstances, that a very serious due diligence is necessary to satisfy oneself about the title of the property one is going to buy remember the age-old dictum of caveat emptor (―buyer beware‖) still hold good. A modest investment in terms of time, effort and money can go a long way in avoiding veritable death traps associated with real estate investing. 8. Black Money/ Cash Component: It is a hard fact, which even the officials actively associated with the land revenue administration and income taxation, will openly admit, that more often than not, about half of the consideration money is generally in form of ―cash‖. This cash component is generally not reflected in the sale instrument/ deed being registered. There are basically, in my opinion, two causes for the same: first, to evade stamp duty, which is generally charged on ad valerom basis, and secondly, because the vendee does not have enough ―white‖ money (i.e. money in his ―official‖ books of account). More often than not, this also suits the vendor, who gets to avoid the income tax on account of ―capital gains‖, arising out of the transaction. It is not the objective of this book to get into the morality or the legality of this issue–the practice being totally reprehensible–but to underscore the presence of a widespread trade practice, which an individual investor trying to get into real estate investing cannot afford to altogether ignore. Advantages of Real Estate Investing: In spite of all these disadvantages or drawbacks, there must be some compelling advantages that far outweigh the former and beckon an investor to put his hard earned money into real estate. Indeed, there are many such advantages, which we shall enumerate one by one. 1. Potentially Fabulous Returns: Real Estate investing can lead to fabulous returns and there are many anecdotal instances that the dealers and the brokers will narrate to a prospective buyer, about the ―killing‖ made by so and so in buying such and such property. The point being made is not that these narrated instances are generally incorrect, but rather to accentuate that: 1) we need to take a number of pre-cautions to, hopefully, get such returns, and 2) also to strike a note of caution that such multiple returns do not accrue in every single real estate deal. Nevertheless, having said that, it cannot be denied that real estate investment—wisely made–provides potentially exponential returns, which the bank deposits cannot ever hope to match. It is the lure of such phenomenal returns that not only attracts an investor into the realm of real estate investing, but also provides that intellectual challenge to clinch that spectacular deal, at the right time and the right price, that would stun and astound his fellow men. 2. Limited Down Side: Real estate, going by the historical trends has generally appreciated, but there are phases, especially after the market has over-heated, that one can get caught in a bearish slump. However, I am firmly of the opinion that even the worst slumps in the real estate are nowhere near as bad as the crashes in the equity share prices. In real estate one‘s capital may be eroded by 15% to 25%, in worst slumps, or at worst be reduced to half its purchase value, but such instances are rare, and a little patience can see the prices recover. However, in case of stock markets, practically entire capital can be eroded, if one has invested into a company at the peak of the boom, and God forbid, the company fails. This limited down side is can also be stated to be the safety and security of the capital invested, and is one of the comforting features of the real estate investing. 3. Cash Income as you hold the property: Real estate yields cash returns like rents, if let out. In a later chapter we shall dwell upon the risks associated with unscrupulous tenants, but the selection of a good and reputed company tenant can minimise the probability of default as also of the property being ― permanently encroached‖. Although this rental income is subject to income tax, there are a number of tax breaks that reduce the actual incidence of taxation to lower effective rates, as compared with other streams of income. Incidentally, agricultural income, whether out of renting out or through self-cultivation is totally free from income tax. 4. Cannot vanish into thin air: Investments in the equity shares can literally vanish into thin air, if the company fails. On the other hand, the real estate is tangible, physical and palpable and cannot wither away, in literal sense of the term. No doubt litigation and illegal encroachment can make it whittle down, in figurative terms, but the fact remains that immovable property cannot be stolen like one‘s stock of gold. It is this factor of permanence and immutability that makes this investment ―real‖ in more senses than one. 5. No Income tax while holding: One‘s immovable property may be appreciating by leaps and bounds but there is no incidence of the income tax, as long as one simply holds on the property. The question of taxation arises only when the property is sold, at a price higher than the purchase value, and even here the tax rates are far lower than the normal ones, especially when the property has been held for more than three years. Even then, there are benefits on account of inflation and there are legal devices and actions which can help the investor save his capital gains completely. Interestingly, agricultural land is not regarded as a capital asset for the purposes of the income tax, and hence is free from the capital gains tax, except in a very limited class of cases. This effortless appreciation, without taxation on accrual basis, is one of the most attractive features of real estate investment. In Summary: Real Estate investing is both an art and a science. The skill of the deft investor lies in mitigating or overcoming the disadvantages and piggy-riding the advantages to reap handsome returns, that no other avenue can perhaps match consistently over medium to long term horizons. While there are no golden rules, so to say, the subsequent chapters endeavour to provide the reader with a reasonable repertoire of skills that should enable him to hit the bull‘s eye more often than not. THREE GOLDEN RULES OF SELECTING A DREAM PROPERTY The key to successful real estate investing is the finding a dream property, to begin with. Unless the property you select is a ―dream‖ property, your dreams to fabulous riches may well remain mere wishful thinking, or even turn into a nightmare. Dream properties, or ―cream‖ properties as they are sometimes called are rare and never come cheap. If you are looking for ―cheap‖, ―economical‖ and ―reasonable‖ bargains, you could get many of them at less rates, but then the percentage appreciation that you would get, down the years, would also be less than in the case of dream properties. Not only this, when it comes to finally disposing of the property that you have invested in, a dream property would sell like a hot cake, whereas, the also-ran category would require a lot of time and effort to sell. Even then, the rates realised may not make you all that happy. Impediments to locating and buying a Dream Property: Dream Properties are, by definition scare, and thus the probability of your locating them is also correspondingly lower. However, a dream property is not difficult to identify, when you look at it. Thus the problem is not one of reaching a conclusion whether a particular property is or is not a dream property, but convincing one to buy one when you see it. There are many of these factors that often contribute to a dream property slipping out of your hands, to much regret later on. Let us identify these factors and weed then out. 1. Absolute and per unit Price: A dream property is rarely available at a cheap rice tag, in relative or absolute terms. In fact, it seems over-priced. Even your broker would probably say that the seller is demanding beyond the fair market value that is prevailing in the open market. Where would be the scope of appreciation when you are already paying beyond the fair market price, you question. 2. Could get more for the same money: Often you calculate that you could be getting more area or a bigger property, if you settled for the next best. Why buy an acre of land at an outrageous price, when you could get perhaps two acres for the same sum of money a little farther away, or on a link road rather than on the highway? 3. This very property was quoted at 50% of its value a little while ago: Chances are that you would be told that this property was being offered to be sold for less than 50% of the price being asked today, by the same seller, barely six months ago. You feel short-changed/ cheated and refuse to submit this veritable blackmail. ―I will not buy this one at this price‖, you stoutly state. However, what we need to consider is the price today, and the previous prices should only convince you about the further potential of appreciation in future rather than to reach a conclusion that the property is being over-charged. 4. Let me consider; I’ll get back to you: When you begin to negotiate to buy a dream property, it is best to conclude the deal in the same very sitting. If you adjourn the same, for another session, or for thinking about it, the chances are that the property shall be sold off to someone else, or you shall come back to pay a higher price. The dictum is, as Nike says: ―Just Do It!‖ 5. The Owner is haughty: The owner of a dream property generally seems to be haughty. He is unwilling to negotiate. He seems unreasonable. He is not willing to make any concession. He appears to act almost as if he is not willing to sell his property. You could feel uncomfortable in dealing with him and could jump to an emotional decision: ―I shall have nothing to with this arrogant man!‖ Avoid this temptation. You are not about to enter into a long-term business association with him. It is a one-off deal. He knows that he has a dream property in his bag, and he will, like any rational human being, extract the best price. Thus never allow your emotions to come between you and your master stroke to acquire a dream property. Any sound and seasoned investor in real estate market should not allow himself to walk into these traps and miss netting the goose that lays the golden eggs. The big tip is: ―Go for the kill, when you see a dream property!‖ Three Golden Rules to locate a dream property: We have stated in the preceding paragraphs that a prospective buyer should not allow a dream property to slip out of his hand, when he sees it. We have also stated that a ream property id seldom in the market with a cheap rice tag. But we have still not answered the 64 million dollar question: How to identify a dream property? Let us not a make a secret of this any longer. Let us reveal the three golden rules of locating a dream property. The story is told of a small boy who left his small, native town in USA and travelled to New York. Over years, he amassed a fabulous fortune, all attributable to his real estate deals. He had it all but within him there remained a strange desire to return to his roots, before he rode in to the sunset. He returned, decades later, as an old man, knowing that his end was near. Deep within him was his desire to share the secret of his success with the denizens of the same dusty, little down. In a small and almost bewildered gathering that was seeing the famous billionaire for the practically the first time, he stated. There are three factors in locating a dream property. ―The first‖, he said, ―issituation‖. ―The second, my dear friends, is situation‖, he revealed. ―And the third and the most important, is again situation‖, he concluded. The moral of this story, which has much more than mere anecdotal value, is that the importance of situation cannot be under-estimated. But why the three ―situations‖? If the first decision is to be made, for instance, whether to buy property in Chandigarh or say Budhladha, in the backward Mansa district of Punjab, choose Chandigarh—that is the situation No 1. In Chandigarh, if the choice is between the elite single digit northern sectors and the new development in the multi-storey southern sectors, choose the former—that is situation No. 2. And finally, if in Sector 8, one is to choose between a reasonably priced one kanal ordinary house and preferential corner house, facing park, choose the later—that is situation No. 3. These three hierarchies of ―situations” lead you to the dream property. Needless to say, now that you have located it, clinch the deal! The word situation has many connotations. The example in the preceding paragraph was merely illustrative one. To salient features, indeed hallmarks, of a good situation is its location—as far as possible, it should be abutting the main road, especially in case of sub-urban properties. The access is equally important. The road from the main city, or the city centre, as the case may be should be in good shape, and preferably it should be the main artery, if not the main highway. If the road is broken, or remains choked with traffic, no property, even if it is located on the main road, can be qualified to be called a dream property. In case of built-up properties, in particular the independent houses, the concept of facing ―north‖ or facing ―east‖ or ―north-east‖ is being increasingly seen a preferred orientation. Living as we do, in the Northern Hemisphere, this leads the Sun rays in the early morning, peeping in to the house and illuminating the entire dwelling unit with positive energy. The so-called wind direction also rightly corresponds with this orientation. As one develops the skills of locating a dream property, it almost comes to a person naturally. If you have selected and bought a dream property, you have already won half of the battle, in complex dynamics of real estate investing. OBJECTIVES IN MAKING INVESTMENT In this book, we are assuming that the over-riding objective is to seek the maximum possible capital appreciation in the minimum period of time. There are, however, circumstances when other factors may emerge as relevant ones. Thus, while making an investment decision in relation to the real estate one must be thoroughly conscious of one‘s objectives, so that the property being purchased actually serves to fulfill those objectives. It is also important to prioritise these objectives, because in many cases these objectives may be mutually opposing if not entirely contradictory. However, even if the other objectives are to be given substantial weightage in some cases, one should never fully ignore the basic factor of capital appreciation, because although one may be assuming that a particular property is being purchased for self-use, to be possessed for a life-time, it may also be required to be sold off, with changing or unforeseen circumstances. Regular Income Expected or not? In many cases, one may be looking exclusively at capital appreciation. This is always so in the case of plots, unless one is purchasing a plot to eventually build on it for one‘s self-occupation or for rental purposes. If rental income is expected, ones decisions would be moulded accordingly. For instances, a house with three independent portions is likely to aggregate more rent than a single big house, which cannot be segregated for renting to different families. Similarly, if getting a higher agricultural income, proportionate to the investment made, is the dominant criteria, then one could buy land in the interior and not necessarily on the main road or the link road and a longer distance from the major cities. This would also be in the case where one wants a weekend retreat, ―far from the madding crowd‖. Ability to Supervise: Any immovable property must, I firmly believe, be within the capacity of the owner to supervise from his place of residence. Properties at far-flung places cannot be looked after and can be encroached upon or cannot be managed optimally. This acts as a major constraining factor in limiting the possible location of the property that one wants to buy. Tailor-made for personal needs: Quite often, when one buys a property, particularly in cases of residential houses/ flats for one‘s personal use, one is guided by one‘s present requirements. This may be reflected in terms of number of bed rooms etc. or their location on the various floors. In such circumstances, on goes by one‘s preferences, scarcely realising that should the property be ever put to sale, some of the peculiar characteristics may actually depress the realisable value of the property in question. Thus one needs to be very particular in getting quaint features into a building, which might not find favour with a normal person/ buyer. Tax breaks: Quite often a property may be purchased to save on income tax on account of capital gains. Or, one may choose to loan finance a property to claim a tax rebate on account of the interest being paid. Although these objectives may be important in themselves, there is no reason to buy a second best property to settle for what is not giving us a the value for money. Time horizon of Investment: The time horizon of the investment is also a very relevant factor that can shape into one of the factors that shape your decision to buy a particular property. For stance, if one is expecting it to be a long term proposition, one can buy a property in relatively less developed areas, or at relatively longer distances from the city in case of the sub-urban land. On the other hand, if one wants to start living soon, one cannot choose a place in wilderness. Planning for division among children: Often one plans to purchase a property, which he hopes one day his children would be able to take the benefit of. Although it might look as one happy family, when one purchases it, it is always advisable to buy a property that can be easily divided amongst children. It can also be worth while considering buying identical but independent properties in the same locality for the benefit of one‘s children in such cases. It is not possible to make an exhaustive list of all the other objectives that an investor might have while purchasing a particular property. Moreover, objectives and priorities can change over time. Nevertheless, when one is about to make an investment in real estate, it is well worth introspecting oneself as to what other objectives are there, apart from the expectation of capital appreciation. This soul-searching can lead to an optimal selection of the property that can facilitate in the fulfilment of these objectives. IN WHOSE NAME TO BUY? One of the most important decisions involved in buying property is: ―On whose name to buy?‖ This seems apparently a simple proposition but has many dimensions which are best addressed before entering into any transaction to purchase property. More importantly, the decisions taken with proper application of mind are difficult to rectify at a later stage and even if these can, in theory, be reversed, a hefty transaction cost is generally involved. The questions which need to be answered at this stage are numerous. We give below a small list, which is merely illustrative and by no means exhaustive. i. Should I buy the property in my own name? ii. Should I buy it in the name of my spouse? iii. Should I buy it jointly in my name and that of my spouse? iv. Can property be purchased in the name of minor children, and what are the tax implications? What is the status when the children attain majority? v. Can property be purchased in the name of one‘s parents? If so, how does one plan for their succession? vi. What is an HUF (Hindu Undivided family) and what are the advantages, if any, of holding immovable property in the name of an HUF? How does HUF property devolve upon the death of the karta? vii. What is the legal implication if I property, using my precious funds, in the name of a ―trusted person‖? viii. In case of joint ownership, should the respective shares be explicit and determinate, or there should be no reference to any specific ratio or percentage? ix. What is the status of legal ownership in the case of joint ownership, without pre-determined shares? x. Can one hold immovable property, on ―either or survivor‖ basis, as in the case of bank deposits? xi. Can one name a nomination in case of immovable property, as in case of bank deposits etc.? xii. At what stage can a person make a will in respect of the property that one holds? What precautions need to be taken will executing a will? xiii. Do I become a complete owner when I buy immovable property through the power of attorney mode? These are a few questions that must be consciously raised and answered, before entering into any transaction involving immovable property. What is given in the following few pages is merely a small summary and the reader is strongly advised to take enlightened legal advice before finally making up his mind. Let us now try and answer these hypothetical questions, ad seriatum: Unless there are compelling reasons to the contrary, one should generally buy the property in one‘s own name or in joint ownership with the spouse. Law assumes that the property belongs to and absolutely vests in the person whose name is reflected in the title deed, which generally a registered sale instrument. This being the case, there should be no reason why one‘s hard-earned money is to be invested to create an asset that does not stand in one‘s own name! Normally, there can be no compelling reasons or circumstances for any such decision to be taken and it is suggested that this dictum ―One‘s property in one‘s own name‖ should be taken as the ‗golden rule‘ and the deviation, if any, should be allowed only after much thought and consideration. There are, in my opinion, two broad set of circumstances under which a person may prefer to purchase an immovable property in name of a person, other than he himself. In the first set are ‗sentimental‘ reasons, where one would like to create an asset in the name of his spouse, children or parents or other loved ones. The second set comprises essentially income tax considerations— within it the first sub-category is where one is purchasing property in the name of his HUF or some other member of his family, primarily to get some income tax benefits; the second category is where the property is being purchased totally out of unaccounted (―black‖) money and as such he cannot risk the property standing in his own name. In the Name of Spouse: There is no legal bar that precludes a person from purchasing immovable property in the name of his wife. However, it must be understood that if the property is purchased, in the name of wife, using the capital belonging to a the husband, the income, if any, arising out of the said property shall be clubbed with the income of the husband for Income Tax purposes. In other words, if the objective is merely to create a second unit of income tax, the purpose would not at all be served. However, if the decision is based on ‗sentimental‘ reasons, out of natural love and affection, or to create psychological comfort for the spouse, the decision is very logical. Needless to say, where the wife has her own independent source of income and if she acquires property out of her own, declared income, she would continue to be a separate and distinct tax unit and there would be no occasion for her income to be clubbed with at of the husband. Marriages, they say, are made in heaven, but it must be realised that they are lived on the Earth. Normally, when one marries, the underlying belief, trust and presumption is that a bond for the whole of the life is created, ―till death does us part.‖ However, in the rapidly changing socio- economic scenario, divorces and broken marriages have become far more common than ever before in the Indian society. Without in any way meaning to degrade the importance of the institution of marriage, it is humbly suggested that in the first few years of one‘s marriage, such ‗sentimental‘ decisions should be avoided. However, in case of young couples, where both the husband and wife are income-earning professionals, immovable properties like flats and houses are frequently purchased, raising institutional loans. These loans are usually sanctioned in the joint name of both the partners and the re-payment thereof is also expected to be made by the husband and wife together. In such cases, the lending banks ordinarily demand that the property should be in the joint name of the man and wife. In such cases, there is absolutely no harm in going in for the purchase of the property jointly in the name of the husband and wife, but it is suggested that the share of each partner should be specifically recited in the deed, in proportion to the respective capital contributed. By the same token, the re-payment of instalments should also be made by each partner separately, in proportion to the share of the loan raised. This is also imperative to obtain the income tax benefits on account of the repayment of the principle as well as interest portion of the housing loan, which together constitute one of the most attractive reasons why young couples should borrow and buy a residential unit, rather than pay rent in perpetuity. These elementary precautions can have a lot of heart-burning and legal hassles, should a marriage break down irretrievably. In the name of Minor Children: Our children are always dear to us. There are frequently instances where the parents like to purchase properties in the name of their children, especially minor children. There are, however, a number of factors that need to be understood. We have already touched the aspect of the clubbing of income derived from a property standing in the name of a minor child, with the income of his parent, where the said asset is created out of the income/ accumulated income of the parent. This provision applies equally when the asset in the name of the minor is created, say out of a gift made by the paternal grand-parents. Even in this case, the income of the minor is clubbed with that of his parent. Fortunately, this is not the case where the maternal grand-parents purchase a property in the name of the minor. It is important to understand that the clubbing is not merely confined to regular income flows from the property, like rental income, but also extent to income tax on account of ―Capital Gains‖, where the property standing in the name of the minor is sold at a profit. There are other aspects of purchasing a property in the name of the minor. The minor, a person under 18 years of age, cannot execute any contract, including a sale deed or a purchase deed, under his own signatures. These must necessarily be signed by the guardian. Under the normal Hindu law, the father, when alive, is the natural guardian of a minor child. Upon his death, the mother continues to the natural guardian, during the minority of the child. In the other cases, the guardian has to be appointed by a competent court. While it is relatively easy, in procedural terms, to purchaser an immovable property in the name of a minor child, there can be legal problems when: i. a property standing in the name of a minor child is sought to be sold by the guardian; and ii. correspondingly, when one is purchasing a property standing in the name of a minor, his guardian being the vendor, on behalf of the child. In the first case, it must be demonstrated that the property is being sold out of a ―legal necessity‖ and ― for the benefit of the minor‖. Normally, the sub-registrar, while registering the sale deed, is not supposed to into the finer details, as long as a specific recital of the legal necessity etc. is made in the instrument. Funding the education of a minor, or purchasing another property in the name of the minor are recognised as good and sufficient reasons for the sale of the property of a minor by his guardian. However, in some cases, one is asked to get authorisation from a competent civil court. There may even be cases, where the sub-registrar insists that the sale consideration be invested in a fixed deposit in the name of the minor, till be gains majority. The second point becomes relevant, in case on is purchasing a property standing in the name of a minor, the vendor being the lawful guardian of such minor. In such cases, it must be remembered that all the sales made on behalf of the minor and voidable transactions, within three years of the minor attaining majority. In other words, the minor, within three years of turning 18 years old, can sue his erstwhile guardian and the vendee in a civil court, the plea being that the sale was not in his best interest. Depending on the facts and circumstances of the case, the Court can declare the transaction to be void qua the minor (now turned adult). Usually, under-valuation of the property is taken as a plea in such cases. Lack of evidence that the sale consideration was actually used for the benefit of the minor by the guardian can also be another ground. Law being what it is, property purchased from a minor can lead to legal complications many years down the line, and are best avoided. By the same token, when a person tries to sell the property standing in the name of his minor child, as the lawful guardian, the prospective vendee may foresee similar problems and the property be may difficult to sell. Usually, the properties standing in the name of the minors are thus quoted at a discount in the open market, over and above any element of under-valuation. More often than not, parents purchase property in the name of their minor children, out of natural love and affection. Children are seen as support for the ageing parents and doting parents often invest in the name of the minors in hope that they would be well looked after by the children in their old age. However, times are changing and with the nuclear families being more or less the norm these days, it may be too much to expect that the parents would indeed be looked after by the children, when they grow old. There can be circumstances, where the son or the daughter is genuinely interested in looking after his parents in their old age, but his or her professional commitments may preclude him from doing so. In other cases, the grown-up child may have his own investment plans qua the property that his parents bought in his name. Without meaning to sound cynical, one would like to conclude by suggesting that investment in the name of the minor children should not be seen as an old-age pension by the parents. There are various other pension schemes, or a rent-yielding property can safely be bought in one‘s own name, to be devolved to the heirs upon the death of both the life partners. Sometimes, parents buy different properties in the name of different children and more often than not, these appreciate at different rates. Thus the property in the name of particular child may turn out to be much more valuable when he grows up, as compared to the other child. This not infrequently leads to tension and family squabbles, apart from heart burning amongst the parents and the children alike. It is this suggested that as far as possible the parents should buy identical properties in the name of the children, unless the objective is to reward an outstanding child or to make a special allowance for a hand-capped child or under-privileged daughter. In summary, while one may generally avoid purchasing a property which is standing in the name of a minor, as far as purchasing property in the name of one‘s own minor child is concerned, the aforementioned factors must be carefully considered, before taking a final decision. Hindu Undivided Family (HUF): Hindu Undivided Family, often referred to as an HUF is a legal concept, which recognises the joint Hindu family as a distinct unit, in contradistinction to its members. The HUF is capable of holding property in its own right and is regarded as a kind of artificial juridical person. More importantly, it is regarded as a separate unit for the purposes of income tax assessment. The term ‗Hindu‘ as used in an HUF also applies to Buddhists, Jains and Sikhs, by virtue of article 25 of the Constitution of India. An HUF comprise the man, his wife, sons and unmarried daughters. The eldest male member of the HUF is designated as the karta of the HUF and he is practically empowered to take all the decisions on behalf of the HUF. When the sale of an HUF property is involved, it is the karta of the HUF that must sign the sale deed. HUF is also capable of having its own bank account, which is also generally operated by the karta. The male members are referred to as the coparceners of the HUF and each of them have a share in indivisible HUF corpus. The wife is a member of the HUF, but not its coparcener. In the event the HUF is divided amongst the father and his sons, the wife gets an equal share; else she is merely entitled to maintenance by the HUF. The unmarried daughters have the right to their marriage expenses being met by the HUF and also a reasonable amount of ―stree-dhan‖. The married daughters have no interest whatsoever in the HUF of their father. It is not the objective of this section to delve into the HUF law, which is a complicated branch of customary Hindu law, but to highlight features that through up interesting option for an individual, while making investments in immovable property. These are particularly useful when dealing with rent-yielding properties, since considerable income tax efficiencies can be achieved, if the property is purchased in the name of the HUF. Ancestral property vesting in a Hindu male, by virtue of lineal devolution, can easily be regarded as HUF property. However, it is a common misunderstanding that a married man must have a male child, for him to constitute his own HUF. This is an incorrect notion. A Hindu male acquires his own HUF the moment he marries, and automatically becomes the karta thereof. At the same time, he continues to the coparcener in the HUF of his father, until the same is formally divided. A Hindu male can be the karta of more than one HUFs, the bigger HUF, that his father once headed, and his own, smaller HUF. Both are different units for the purpose of income tax. HUF is an excellent income tax saving unit, when it comes to families where both the husband and the wife are in the highest tax bracket. Suppose, a person is desirous of purchasing a property, which he intends to rent out. In case he purchases that in his ‗individual‘ capacity, the income from the same will be clubbed with his salary income/ professional earnings. Since the wife is also in the highest tax bracket, no tax efficiencies shall be achieved by purchasing the property in her name. It is here that the HUF provides a useful avenue to save taxes. If this property if purchased in the name of the HUF, the rental income shall be entitled to the basic exemption permissible under the law, and all other exemptions/ deductions pertaining to rental income. The HUF can also make deposits in the PPF and claim further tax rebate. The HUF can also borrow and set of the interest paid against the rental income. Interestingly, the HUF property also provides an excellent tax saving tool, where the husband and the wife are in occupation of the said property. This is particularly so in the case where they are getting House Rent Allowance (HRA) from their employer(s). A person who occupies a house standing in his name, in ‗individual‘ capacity, cannot claim any rebate on account of the HRA received by him, and the same is added in toto to his salary income. However, if the house occupied is in the name of his HUF, of which he himself, is the karta, he can pay sufficient monthly rent to the HUF and claim almost total tax exemption qua the HRA. The wife can make similar payments of rent to the HUF and get similar deduction. It may be noted that the incidence of the income in the hands of the HUF would be much smaller on account of: i. the basic exemptions being available to it, as regards the basic tax slab; ii. deduction in respect of the rental income, which is 25% of the rental income; and iii. further deduction/ tax rebate on account of deposits like PPF, that qualify under section 88 of the Income Tax Act, 1961. In summary, it can be suggested with a great deal of confidence that the first property that a person acquires should be in the name of his HUF, especially where both the husband and wife are earning handsome salaries. It is also useful to start building the HUF capital, for instance by opening an HUF PPF account, long before one intends to buy any immovable property. This should be done immediately after the marriage. BUILT-UP PROPERTY VERSUS PLOTS Many a time, the basic decision which an investor, seeking to invest in urban property, has to make is whether to invest in a built-up property or an open, un-built plot. There are many factors that must be borne in mind before making this decision. As a matter of fact, many individuals rush in to take a hasty decision without fully appreciating or realising the full financial and administrative implications of their action, and the full impact thereof dawns only subsequently, when scarcely any corrective action is possible. We cannot argue that it is, in general, better to purchase an un-built plot or a constructed property, but we do intend to enumerate the various relevant factors that will hopefully facilitate the reader to make an informed decision, keeping in view his own unique set of circumstances. Rental Income Expected? Needless to say, an open plot, whether residential or commercial does not yield any regular, cash income to the owner. On the other hand, a built-up property of either description can be rented out and can yield a regular but modest return, weighed against the capital cost of the property. It must be, of course, mentioned here as a note of caution that the tenancy and rent matters have their own complications. The rent control laws vary tremendously from state to state and any generalisation would amount to an over-simplification. However, it can be confidently stated that unless expert legal advice is taken in drafting the rent deeds or lease deeds, it is, in general, quite difficult to either increase the rent appreciably in the future, or to be able to evict the tenants through a simple legal procedure. The former holds good even when there is a persistent default on part of the tenant in the payment of the monthly rent. Properties encumbered with contumacious tenants go abegging in the market at a fraction of their unencumbered price. Be that as it may, but there can be circumstances where the investor would prefer to have a regular source of monthly income and under these circumstances, he has no option but to go in for a built-up property. However, utmost caution must be exercised not merely in the legal drafting of the documents but also in terms of the selection of the tenant in the first place. Value of Property Taxes Assessed. In general, barring some exceptions, urban properties are subject to a local municipal tax, variously described as House Tax or Property Tax. These are usually higher for commercial properties and there can be lower threshold limits, in terms of the area, below which a property, especially residential property, may be totally exempt. A single, self-occupied residential house is also generally exempt, although one has to verify the exact status from the municipal body. Although the assessed value of the property, and hence the tax, can be increased after a fixed tenure, it is useful from an investor‘s perspective to purchase a property that has been assessed to lower quantum of property tax. There is nothing in law that bars the open plots from the aforesaid taxation, but in most of the municipal laws, the valuation of the property taxes is related to the ―annual expectancy to let‖. Since it is generally assumed that an open plot would fetch a zero rental income (which indeed is the case, most of the time), the property tax liability is usually nil. Nevertheless, a little due diligence can help the prospective buyer in ascertaining the actual position. Sometimes, the recurring liability in respect of the property taxes assessed can be so different between two or three properties that one is considering to buy, that it can well emerge as the over-riding factor in the decision-making process. Property taxes also emerge as an important factor in the rent deeds. In absence of any recital to the contrary in the rent deed, it is generally the liability of the ―owner‖ and not the ―occupier‖ to pay these taxes. Thus, it is very important, while negotiating a tenancy agreement, for a landlord to insist that all the commercial taxes/ property taxes etc. would be payable by the tenant. However, where an owner is saddled with this liability, it is important to remember that the local taxes paid are usually allowed to be deducted, while determining the rental income under the Income Tax Act, 1961. The local municipal bodies regularly initiate legal processes to fix afresh or to re-assess the property taxes. These are quasi-judicial processes and the owner gets an opportunity to put forth his views, before the statutory authorities. Whenever a notice of such proceedings is received, the case should be contested, because leaving it uncontested might lead to unrealistic and high- pitched assessments, which are usually very difficult to reverse. However, where such an eventuality does arise, the owner is strongly advise to file the statutory appeals, which are allowed with a fixed period ranging from 30 to 60 days. A little effort at the initial stage or the appellate stage can save a person from long-term recurring liability on account of the property taxes. Sanction of Building Plans. While the building by-laws may vary from state to state or city to city, it can be confidently remarked that no construction in any urban centre is permissible without a building plan having been duly sanctioned by the competent municipal/ urban development authority, in accordance with its building by-laws. This has implication both for the built-up properties but more so for open plots. In case of a built-up property, the buyer is strongly urged to insist on the original building plan, duly sanctioned by the municipal body. In case any unauthorised construction has been regularised, by the charging of a ―composition fee‖ or other charges, or as a result of any ―amnesty scheme‖, it is useful for the buyer to get hold of the same. If these are documents are not readily available, which is quite often the case in respect of old properties in the city interior, one need not leave a good bargain in panic, but it is suggested that some inquiries may be made in the municipal body to ascertain whether or not any demolition proceedings have been initiate or are intended, on account of the violation of the building by-laws. In absence of these, the prospective buyer can at least use these as bargaining tools to drive down the property price.