It was a long time since Om Prakash Todi (name changed on request) felt confused. Generally, he always was brimming with supreme confidence.
In his air-conditioned office, he was thinking about how times changed. The cup of tea on his table was getting cold.
All of his 55 years, he was always conservative with money. Never chased stocks in the share market, never invested in mutual funds which promised good returns by the smartness of a fund manager.
Money must be made by hard work and conservative investment, was his rock-solid belief.
Four generations in Kolkata, the Todi family prospered quite well. It was a long time ago when his grandfather set foot in the city with not much money to boast about and started a trading business with the moderate capital that he had. Kolkata was then the hub of commerce and industry in entire India.
Hardworking and gritty, his grandfather toiled on and in due time his father inherited a decent business and the business acumen of the old man.
Traditionally, they looked at two major investments — land and gold.
He believed in the saying of Mark Twain (although I am sure whether he bothered to read him), “Buy land, they are not making it anymore”.
He also knew that gold will always in short supply in India compared to people’s demand for the yellow metal.
But that day, Om Prakash’s 26-year-old son Ankur posed a question which made him rethink his age-old investment philosophy.
“Why take the trouble of buying a land which gives no income, and not buy a flat which starts giving rental income almost immediately?”
No doubt land has an advantage of assured returns, but it usually needs investment in full and there is no choice of taking leverage on the fund.
Mr. Todi picked up his phone and called our office.
He wanted an independent opinion to resolve the dilemma.
A meeting was scheduled on the next day.
We discussed the pros and cons of investing in land or flat in good locality threadbare.
Let’s see the arguments on both sides.
Pros of Investing in Land
With the availability of land decreasing at a fast pace in Kolkata as well as in adjoining areas, land price is expected to appreciate quickly. As one has the flexibility to develop the land as per future requirement, land prices increase quite fast.
The value of land generally appreciates faster than that of flat because of zero depreciation.
Possession of a land is easier especially compared to under-construction residential projects.
The flexibility of option to build as per future requirement helps the cost of land to increases very fast.
The requirement of regular maintenance in case of vacant land is lower compared to a flat.
Risks Involved in Investing in Land
It is very difficult to get the land purchase financed in comparison to financing an apartment buy. Banks usually do not provide mortgage finance for land.
The empty plot of land offers no tax benefits. Land is mostly purchased from own resources and unlike home loans, you cannot claim any tax benefit on payment of interest and principal.
Apart from direct financial issues and implications, there are risks involved at indirect levels as well. There is higher risk involved in land as most of the scams happen with land. There is the risk of an encroachment of vacant lands and many times the same piece of land is sold to several people. Most of the court litigations are about taking possession of the land.
Land generates very low income even if it is possible, sometimes with great difficulty, to rent out. Many times it is very difficult to reoccupy the land if the tenant pushes the property into litigation.
Advantages of Investing in a Flat
It is much easier to finance a flat purchase than buying a plot of land, as banks and housing finance companies offer mortgage finance.
And when it comes to claiming tax deductions, benefits are allowed for the payment of principal as well as the interest.. Thus a flat is far more tax efficient.
Flats can start generating rental income almost immediately after taking possession.
Flats can be sold over relatively easily and generally in a shorter period compared to land with handsome gain.
There is no fear of encroachment in the case of flats in a gated community. Moreover, such complexes offer a variety of amenities which offer superior chances of appreciation.
The owner can stay in a flat if not rented out.
Cons of Investing in a Flat
The appreciation of flat also depends upon the demand of residential flats in any location.
Flat price determinants are more complex as there are considerations of community, amenities, design and developer’s brand equity.
It has little flexibility of use, modification, and expansion in future.
The delay in possession is one of the most common problems. Quality is often compromised by many unscrupulous developers to control the cost and meet the deadline so the life of flats gets reduced.
The depreciation on construction reduces the growth rate; therefore its value grows with a diminishing rate.
Demand for flats depends on market conditions which are influenced by interest rates. During high-interest rate periods, it is relatively difficult to sell a flat.
Get the Best of Both Worlds by Buying Plots in a Fenced Cluster
There are options of buying plots of land in a fenced cluster promoted by reputed developers. Such plots are often approved by renowned banks and home finance companies after a comprehensive due diligence process. It is also possible to get financial support from such companies or banks. Such plots reduce the risk of the buyers from purchasing legally untenable pieces of land and at the same time offers protection against encroachment. These fenced plot clusters offer benefits of basic infrastructure development like internal roads, drainage lines, etc.
When we finished the meeting, Mr. Todi and his son realized there are many pros and cons to consider before a wise decision is taken to buy a plot or a flat.
One of the major determinants is the time horizon of investment, as land prices appreciate relatively much better in the longer term as there is no depreciation and other factors like infrastructural development kicks in.
Now, what do you think is a better investment option?
What is right for you?