Making your home a secure financial asset — investing in property
Buying a home is a top priority for everyone. Everyone desires and plans to buy a home sooner or later. You may want to have a rented apartment or house for now, but how about 5 to 10 years into the future?
You will want to have a property to call your own home by then. Buying a home or investing in property, especially your first property, is a very emotional experience. However, it is something you have worked for and now have attained that goal.
However, just taking possession of that goal is not enough. Since you’ll probably be here for the long haul, it is prudent to invest in the property to increase its asset value. Having a home to your name may give you peace of mind and a sense of pride, but developing your property gives you financial benefits in the long run.
Some say that having a rented apartment is enough and that there is no need to buy a home. They say that buying a property will not be a good idea financially. However, we beg to differ.
Here are some reasons why you definitely should own a home as it is a fantastic investment decision.
Price appreciation is the most obvious reason for buying and owning a home. Price appreciation lets you build property or home equity, which is the value of your ownership of the property. Loosely, it refers to the property’s market value. Market value is built over time as the value appreciates. However, know that the market value can decrease as well due to adverse situations.
A new ready-to-move property may seem expensive, but the good news is that you can get tax benefits from it almost immediately after taking possession. Compare this to an under-construction property. Here you get tax benefits only after giving the full payment. If the property in question is self-occupied, an interest deduction of Rs. 2 lakh is allowed under Section 24 of the Income Tax Act. This includes 1/5th of the accrued interest during the period of property construction. However, if the annual interest is less than Rs. 2 lakhs, the tax deduction is limited to the yearly interest.
How you can increase your home’s market value
The easiest and simplest thing you can do is to make valuable additions to the property. If the backyard has a large space, how about making a large heated swimming pool there? You can make modular kitchens and other improvements.
All of these increase the perceived and market value of the property, making your home a real financial asset.
Demand for making investments in real estate, which may include properties like land, housing complex, etc. rising day by day. For this very reason, securing a home loan is also becoming a priority.
Home loans are generally taken to purchase or construct or renovate a house/flat, bungalow etc.
Home loans are offered mainly by banks or by Non-Banking Financial Companies (NBFC).
Amount of loans granted usually depends on the income status and repayment capacity price. Additional clauses are the valuation of the property based on certain factors like present value in market, building materials say-in case of tiles and marbles applied the cost is higher, the total number of rooms available whether it is located in a central area (centrally located) or remote locations etc.
It can be a short term or long term loan. In the case of long term loans, Home loans are sanctioned for a maximum period of 30 years.
Repayment of the loan is usually made on EMI mode. As per the current guidelines issued by the Reserve Bank of India, banks cannot charge prepayment penalties on home loans taken on the floating home loan interest rate. Though there are fixed and floating rates of interest for home loans, the floating rate is mostly granted by banks as per RBI dictate, but in NBFCs, it can be either on floating or fixed rate systems.
While investing in property by taking secured loans from the banking or registered financing industry, it is advisable to have a stable source of income, and EMI should be approx. 30–40 percent of your gross annual income.
Buying or Invest in Property
It is one of the foremost requirements. Purchasing a house, land, or booking a flat becomes the couple’s priority, i.e. helps you create an asset for your life and for building the future of their children. For a working couple, availing of a home loan is an easier one since a joint home loan helps share the debt burden and facilitates getting a higher amount since the income of the spouse is also taken into consideration while going for a loan application. Real estate always yields good returns because with the growing rate of population, their demands and valuation increase day today.
If you want to go for Home Loan, you should keep in mind that banks cannot charge a prepayment penalty on Floating Rate Home Loans per the RBI rule.
Now, what is a Floating Interest rate in a Home Loan? Can a loan be granted at a fixed rate of interest or on a floating interest rate? In the case of a loan taken on a floating interest rate and variable home loan interest rate, the rate of interest fluctuates.
Compared with the fixed interest rate in a floating interest rate, the rate of interest (ROI) is subject to revision every quarter. The interest charged on the loan will be pegged to the base rate. It is determined by the RBI based on various economic factors. With changes in the base rate, the rate of interest charged on your loan amount also varies.
Home loans are generally long-term ones. Therefore, they are relatively cost-effective in the long run, and the receiver of the loan usually has to pay a base pay interest as an added element to his/her loan amount.
One of the most controversial points of the fix-rate loan is that, as the name suggests, the loan is not a fixed one. The general public from non-banking or financial experience may think the loan as the name denotes a so-called fixed one, but in reality, it varies from time to time.
Procedures for Home Loan calculation
Simple procedure is to divide your interest rate by the number of payments you have to make in one financial year. In the next step, multiply that number by your remaining loan balance to sort out the monthly interests you have to pay.
From the borrower’s perspective, how is it beneficial for loans on a floating interest rate: Interest charges in a fixed-rate loan are at a much higher rate than the floating rate one.
From the borrower’s perspective, it should be kept in mind that in the case of short-period loan taking (Say: –for a five-year term), a floating rate is always a preferable option since you are availing a lower interest rate to start with. The interest rate is variable, i.e. the rate may move up even then since the tenure is not too long. Within the given economic cycle, it is expected that you have to pay a lower interest rate than the interest rate in a fixed-rate one for a better part of your loan tenure.
And in the case of taking a loan for a long tenure going for a floating rate of interest, the interest rate cycle may reverse, and the loan receiver may end up paying as much amount as for a fixed loan rate. It is therefore advisable to avail of floating rate Interests while taking a loan for the short term.
Real estate is usually property that is fixed or long term tangible assets like a house, flat or land. Therefore, it is advisable to invest in acquiring a secondary property to get additional income from rent and lease.
Making your home a secure financial asset: Home can become a secondary source of earning extra income apart from being used simply for residential purposes. The primary question that comes to mind is “How?”
Like any object, a house under someone’s possession is classified as an asset. Therefore, it can be on sale, mortgage, taken for rent or leasable property apart from the owner or co-owners personally using the premise for commercial purposes.
A house or bungalow with adequate space can be renovated for modular kitchens or gymnasium purposes, fetching adequate monthly income to the proprietor and family.
Further re-sale of the property provides monetary benefits due to the price of real estate rising in city areas and sub-urban regions due to the rapid growth of population in our nation.
Tax benefits one may avail
Recently, the government proposed an additional Rs 50,000 deduction on interest on loans for first home buyers for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh and tax incentives on development of affordable housing, besides exempting Real Estate Investment Trusts (REIT) from dividend distribution tax.
The certain government made tax relaxations new home buyers can avail. While booking a house/flat which is still under construction, one can avail of tax benefits if paid the full amount during the booking period. In case of self-occupied property interest deduction of approximately Rs. 2 lakhs available under Section 24 of the Income-Tax Act, including 1/5th of the interest accrued during the construction period.
In case of the loan amount up to Rs. 35 lakhs sanctioned, the value of the property does not exceed above 50 lakhs. Moreover, the government recently proposed an additional deduction of Rs.50,000 on the loan’s interest for first-time home buyers. Apart from the clauses mentioned above, Real Estate Investment Trusts (REIT) exemption from dividend distribution tax.
How to earn money from your home?
Now that we are familiar with the basics, we are now ready to know how to earn money from your home, apart from by buying, selling and investing in property. Here are the other ways in which you can how to earn money from your home.
Add a rental suite
If you live in a neighborhood or area where having rental suites is legal, you should certainly go for it. If you do not have room within your main property for creating the rental suite, you can convert your garage or create a free-standing unit for this purpose. However, before doing this, you need to know the local legal rules and regulations. It is more common than you think, to require legal rental suites to get one’s own separate entrances for example, including bathrooms and full kitchens. Ensure that you have researched how much potential you can get. Find out how much rent you can get, how much renovations will cost, and how much your ROI will be.
Rent out accommodation
If the former option does not suit you, this one certainly can. You can rent out the whole or part of your property. You don’t have to be near a tourist destination to make this own. You can be near a university, a corporate area, the city centre, near a hospital, or generally where there is a lot of footfall.
Rent out for storage space
But what if you do not want to be the landlord? You have space you want to utilize. If the space is enough, you can rent that out. The space can be used to park vehicles, store items, and pretty much anything else. You can earn a good amount this way.
What to do before turning your home into an income generator property
There are a few things to consider before you do any of the above. Firstly, there is the matter of property insurance. It has to be protected against flood, fire and other things. Secondly, there is the cost of renovations to consider.
Once you have considered these two, you can certainly go ahead and start making money from your property.