Indian real estate guide

Decoding Real Estate – A Complete Guide for NRIs and RIs

Table of Contents

You would have heard time and time again that real estate is a great investment and should be a part of your investment portfolio (which is definitely true), however, you probably wouldn’t have heard too much about the nuances of investing in a real estate property. 

When you start thinking about investing in real-estate property, you need to think about where you want to invest (which country or city), what type of property and also take into consideration the legal documentation followed by the actual leasing or renting of the property. 

It probably sounds overwhelming and complicated when listed in a single paragraph, in this article you will find some of that information broken down into digestible chunks that will help you understand the basics of understanding real-estate to give you some insight into what it looks like. 

What is real-estate?

When we hear the word real-estate we generally image a building or a home, but real estate can be defined more accurately by: 

“Real estate is the land along with any permanent improvements attached to the land, whether natural or man-made—including water, trees, minerals, buildings, homes, fences, and bridges. Real estate is a form of real property. It differs from personal property, which are things not permanently attached to the land, such as vehicles, boats, jewellery, furniture, and farm equipment.” 

Very often people use the terms land, real estate, and real property interchangeably, but there are some subtle distinctions.

  • Land refers to the earth’s surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water.
  • Real estate is the land, plus any permanent man-made additions, such as houses and other buildings.
  • Real property – one of the two main classifications of property, it is the interests, benefits and rights inherent in the ownership of real estate.

‘Real estate’ is made up of 2 components: Land, such as a lot in a subdivision; and Improvements, examples of improvements include adding or renovating a part of the property, adding new built-in appliances, wall-to-wall carpeting or flooring, or improvements to a properties exterior, such as replacing the roof, siding, or storm windows. 

There are also specific physical and economic characteristics that make real estate investments different from any other assets: 

  • Unique: each piece of real estate (land) is never exactly the same as another
  • Scarcity: land is in fixed supply, and only so many structures can be erected on a single plot of land
  • Improvements: made to the land can increase value, such as generating more income or changing to a higher and better use (or can sometimes decrease value if done incorrectly)
  • Permanent: once infrastructure such as water and sewer systems, and sidewalks and streets are constructed, they are difficult to replace and can’t be relocated
  • Immobile: real estate can not be moved from one place to another
  • Indestructible: land is permanent and forever (except in cases of erosion)
  • Location: supply and demand for real estate is affected by user preferences such as good neighborhoods and school districts, population and job growth, and business-friendly governments

Types of real estate

1. Residential Real Estate

Residential real estate is governed by laws stipulated by the Central and State Governments of India. These regulations define the heights of buildings and liveable space that can be built in a specific area and may also control things such as whether it is a purely residential area or a mix use of residential and commercial. 

Under the umbrella of residential real estate, real estate is bifurcated into divisions such as existing homes and new constructions. 

Other types of residential real estate in India include:

  • Condominiums or Condos: privately owned units that are part of a larger structure that is collectively owned
  • Cooperatives: Individual residents own shares of the building and obtain the right to live in their own units
  • Multi-living / Co-living: a concept where the developer / investor creates shared accommodation for bachelors / couples / college students

2. Commercial Real Estate

Commercial Real Estate includes a lot of different types of properties such as:

  • Malls & Shopping Centers
  • Hospitals & Medical Buildings
  • Office Parks / IT Parks
  • Hotels and Multiplexes
  • Educational Centers

From a strict investment point of view, commercial real estate has a few immediate benefits over residential real estate:

  • More stable income
  • Longer leases ( usually 5 – 10 years)
  • More opportunity for cash flow (more rental units available for the investor in a building to buy)
  • Economies of scale (lower per-cost unit when buying in bulk)

3. Industrial Real Estate

Industrial real estate includes manufacturing plants, warehouses, distribution centres, cold storage and self-storage facilities. 

Though not the most appealing for many real estate investors, this type of real estate investment has been growing in popularity for real estate investors in India and NRI’s because of the skyrocketing business of e-commerce firms like Amazon and Big Basket. 

As more and more people shop online and demand same day or next day delivery, warehouses are being constructed all over the place to help facilitate e-commerce businesses. 

With the Make in India initiative by the Indian government, central government and state governments in states such as UP, Maharashtra, Andhra Pradesh are encouraging large scale manufacturing in India thus holding great promise for investors and NRIs who want to hold industrial real estate in their portfolio.

Industrial Real Estate is usually cheaper to operate because it costs much less to buy and maintain as compared to properties such as hotels and commercial office buildings.

Why industrial real estate costs less to maintain:

  • Less cleanup and fix-up between tenants
  • Cheaper vacancy costs (insurance, property taxes, heat)
  • Less turnover
  • These lower costs add up and translate into higher profits for investors.

4. Land

Vacant or raw land is purchased for future development, and for natural resources rights such as mineral, water, or air rights in urban areas.

Investing in land is a popular long-term strategy, because taxes and maintenance costs are usually very minimal, compared to developed properties with buildings and tenants.

Land includes:

  • Undeveloped raw land
  • Farms and agricultural land
  • Planned urban development (PUD) for residential or commercial development
  • Lots in a subdivision

Real-estate terms you must know

Here are a few terms you must know as a property owner:

1. Carpet Area

The carpet area is the net usable area of the house. It includes the thickness of the internal wall but excludes the balcony or terrace. The larger the carpet area, the better space you get.

As a beginner property investor, this term is important to know because, according to the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA), it is now mandatory for the developers to make buyers aware of the carpet area. The price of the property must be quoted based on the Carpet area. 

2. Built-up Area

Built-up area refers to the total area that is measured on the outer line of the property including, the balcony, terrace, etc. 

This is the area that includes both the carpet area and the walls and doors. As a property investor, you must know this term because the built-up area is the carpet area plus the areas covered by inside and outside walls. This plays a major role in determining the size and price of the property.

3. Title Deed

A Title deed is a legal deed or document that constitutes evidence of ownership of a particular property. 

This is an important term you need to know because, when you are buying a property from a seller, you need to make sure that the name in the title deed is of the buyer. This helps to avoid legal issues and complexities in times of registration.

4. Stamp Duty

Real estate stamp duty is a type of tax collected by the government when a property is sold and registered to another owner. 

You need to be aware of this because whenever any movable or immovable asset changes hands, the buyer of the property has to pay a certain amount of tax to the state government to get it stamped. The stamp duty varies from state to state, depending upon the property location and type of deed. 

The stamp duty is usually charged on the transaction value or circle rate (Circle rate is the government-determined price for a property below which it cannot be registered in the government records) whichever is higher. For instance, if the value of the property is INR 1 crore, and the stamp duty is 3%, the buyer has to pay an amount of INR 3 lakhs as tax.

5. Proof of funds

Proof of funds is a statement from a financial institution like a bank to confirm that the buyer has enough funds to proceed with an offer to the seller.

This is a crucial term you need to know as a beginner real estate investor as proof of funds reduces the risk of investment.

6. Clear title

A clear title in real estate is when there is no claim or legal right against the property from others that put into question the legal ownership of an asset.

In short, a property with a clear title is a property that has no disputes from other parties. The buyer purchasing the property with a clear title can claim full legal

7. Net Operating Income (NOI)

Net operating income is income that is generated annually from an investment property after deduction of property expenses. Such expenses may include property tax, property management fees, and utilities.

8. RERA

The Real Estate (Regulation and Development) Act, 2016 (RERA) is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. The bill was passed by the Rajya Sabha on 10 March 2016 and by the Lok Sabha on 15 March 2016.

9. Freehold Property

Freehold property is one that gives complete ownership to the owner of the house. In other words, it is free from the hold of any entity besides the owner. The owner of such properties enjoys free ownership and can use the land for any purpose but in consonance with the local laws. The owner is free to pass on the property of successes without any prior approval from anyone else.

10. Capital Expenditure

Capital Expenditure or CapEx is the amount spent on the investment property in an attempt to increase the lifespan and value of the property. 

Capital expenditure includes the cost of renovations such as replacing a roof, adding an extension, or doing a new paint job. These are one-time, major expenses that a buyer needs to incur to ultimately improve the value of the property.

Documents required when investing in property, in India

1. Khata Certificate

A Khata is essentially a revenue document that contains details of the property, such as size, location, area that it is built upon etc. to pay property taxes. It is also a form of identification and is required when taking a home loan. It is vital to make sure that the Khata Certificate is a part of the home buying process because it is needed to apply for the electricity and water supply.

2. Mutation Register Extract

This document is for Gram Panchayat properties and provides the details of previous ownership. Though not required in original, this is mandatory to produce if the property you are buying is in Gram Panchayat jurisdiction.

3. General Power Of Attorney

This is required to prove whether the sale or purchase of a particular property is being done by an authorized person on behalf of the owner of the property. This has to be produced in original for getting a home loan.

4. Building Plan Copy

A buyer must acquire a copy of the building plan approved by the statutory body to establish that the construction of the property is legal and is done according to set rules and regulations.

5. No-Objection Certificates (NOC)

There are as many as 19 NOCs that have to be acquired by a developer from different authorities while building a housing project. However, the number may vary according to specific state rules. 

6. Allotment Letter

An allotment letter is one of the most important documents required for getting a home loan. It is issued by a developer or the housing authority, stating the description of the property and details of the amount paid by the buyer to the developer.

Keep in mind that an allotment letter is not the same as an agreement of sale. An allotment letter is issued on the letterhead of the authority while a sale agreement is documented on a stamp paper. Moreover, an allotment letter is issued to the first owner and other owners can ask for the copy of the original letter from the seller.

7. Sale Agreement

The sale agreement lists all kinds of information about the property ― the terms and conditions, the possession date, the payment plan, the specifications, the details about the common areas and facilities, etc. 

The agreement also holds the developer responsible for the construction of the property. This document has to be produced in original for property purchase and acquiring a home loan.

8. Possession Letter

This document is provided to the buyer by the developer and sets a date on which the latter would grant the former the possession of the property. The original copy of this document has to be produced for getting a home loan.

All you need to know about property tax

Taxes are a government’s principal source of revenue, with the amount of money collected dictating the resources accessible to residents. Every property is a taxable asset, and the property tax is an annual sum paid to the government by the property/landowner. 

Depending on government policy, this tax could be paid to the local state government or the Municipal Corporation.

In this sense, “property” refers to any physical real estate under an individual’s possession, which includes houses, office buildings, and premises rented to third parties. Property tax as a concept has been around for centuries and is recognized all across the world, with records dating back to the Middle Ages of farmers and peasants paying tax on their land.

In India, property tax is levied on “real property,” which includes land and improvements on it, with the government valuing each property and charging the tax in proportion to its monetary value. 

The municipality of a certain area is responsible for this assessment and determining the property tax, which can be paid annually or semi-annually. This tax revenue is utilized to improve local amenities such as road repairs, park and school maintenance, and so on. 

Property taxes range from one location to the next, as well as between cities and municipalities.

1. Calculation of Property Tax

Property tax = base value × built-up area × Age factor × type of building × category of use × floor factor 

Property tax in India depends on the location of a property, with taxes varying from state to state. Different civic corporations use different methods to calculate tax, but the general overview of such calculations remains the same. 

An assessment of the property is first carried out by determining the area it is in, occupancy status (whether it is self-occupied or rented out), type of property (residential, commercial or land), amenities provided (car park, rainwater harvesting, store, etc.), year of construction, type of construction (multi-storied/ single floor/ pukka or kutcha structure, etc.), Floor space index and carpeted square area of the property.

Once these parameters are determined the civic agency can use a formula it deems fit to calculate tax. 

2. Different Methods of Calculating Property Tax

In general, the municipal authorities use one of the following 3 methods for the purpose of calculation of property tax:

1. Capital Value System (CVS)

Under the Capital Value System (CVS), the property tax is calculated as a percentage of the market value of the property. The market value of the property is decided by the government on the basis of the locality of the property. This valuation system is followed in the city of Mumbai.

2. Unit Area Value System (UAS)

The tax valuation as per the Unit Area Value System or UAS is calculated on the basis of the per unit price of the built-up area of the property. This price is decided on the basis of the expected returns of the property as per its location, usage and land price. 

This value is further multiplied with the built-up area of the property to derive the tax valuation. A number of municipal authorities such as Patna, Bengaluru, Delhi, Hyderabad, and Kolkata follow this method.

3. Annual Rental Value System or Ratable Value System (RVS)

As per the RVS or the Annual Rental Value System, the tax is calculated on the rental value which is derived from the property in a year. This need not be the actual rent amount which is collected from the property. 

However, it is the valuation of the rent which is determined by the municipal authority and is derived on the basis of the location, size, and condition of the property. The proximity of the property to landmarks and other relevant amenities is also taken under consideration at the time of valuation. Chennai and parts of Hyderabad follow this method of tax calculation.

NRIs Investing in Real Estate 

For NRIs with a steady income abroad who have decided to settle overseas till they are ready to retire, investing in property in India is a great way to build their assets and investment. 

Property investments can be great for the long run when you return to India to settle down and want to establish a steady retirement income if done right. 

What Does An NRI Need to Invest in India?

You must have a Passport and/or OCI card. If you are a foreign passport holder, you can buy property in India provided you have a PIO (Persons of Indian Origin) card or an OCI (Overseas Citizen of India) card.

In addition to this, an NRI MUST have a PAN Card, which is mandatory for property transactions.

Furthermore,  NRIs must provide a power of attorney in case they’re not in India for executing the purchase transaction. 

As an NRI you have to consider the following when thinking about investing in property in India: 

  1. Registration of your property
  2. Tax compliance 
  3. Regulations 
  4. Renting or leasing the property

It is clear by now that investing in property is a great avenue to build a good portfolio for NRIs. However, when you live overseas and you want to start investing in property the overall process can be broken down essentially into 4 large tasks: buying the desired property, ensuring you are legally compliant, all taxes are paid and finally you rent out and lease out the property to make your ROI. 

For a good ROI, you need to ensure you are investing in a property that is built by trustworthy builders who have a good reputation for quality infrastructure, your property is occupied for the most part and finally, you keep a check on its upkeep and maintenance. 

Quick checklist for you to keep in mind before you invest in property

1. Verifications to be done before Investment

  • Request for the building plan sanctioned by a competent authority and construction commencement certificate granted by Corporation / Nagar Palika
  • Ask for a copy of the original agreement with the builder and a copy of the title report for the last few years.
  • Verify the original documents of the property where the title of the Vendor is clearly stated. 
  • Trust reputed builders who have made a name for themselves over the years.
  • Verify the track record of the builder, check social media, online forums for real estate to see if your builder has been accused of any mal-practices in the past. 
  • Connect online or by word of mouth with existing customers or tenants to know how satisfied they are with their investment, if possible.
  • If a property is ready to move in – ask for the building completion certificate available.
  • Try and consider construction link payment instead of full payment

2. Locality 

The locality is something that is essential to keep in mind when investing in a real estate property. 

As with any investment, if you invest in the wrong place – you will get a certain kind of return. The area and locality you choose to invest in will be one of the factors that determine your ROI. 

As an investor, you have to try and understand the market conditions overall and also the market trends of certain parts of the city you are investing in to get the best possible ROI.

3. Commitment to project completion times

Though it may seem like a minor set-up, setbacks in project timelines mean a setback in your ROI for your property. 

You want to make sure the builders you are investing with do not delay project completion for long periods of time. 

4. Ambiguous process of investing, paperwork and authorizations

Maintaining proper paperwork from the start and ensuring the right authorizations are taken by the builder is extremely important. If a builder fails to have the right paperwork and authorizations – it could mean that you invest in a property that one day may be subject to legalities. When a property gets stuck in legal malpractice, it then becomes a challenge for you to lease, rent or sell the property. 

5. Proper handover 

Once you are through with the investment and have reviewed all the necessary paperwork and legal compliances of the building, you need to ensure you get a proper handover with all the legal documents you need as a property owner. 

Missing paperwork, unsigned documents and missing legal paperwork can again lead to unnecessary setbacks in the investment process. 

6. Upkeep and Maintenance 

Once you have found the right builder and also the optimum locality to give you the best ROI on your investment and you have made the investment – it does not end there. 

As with any kind of investment – you need to keep an eye on the market and the investment. 

You have to consider the following once the property is yours and you are ready to rent or lease it out: 

  • Getting your property occupied: A property is a great investment only when occupied by a tenant. Once you’ve checked the previous parts of the checklists mentioned above – you need to find a good tenant to occupy your property. 
  • Renting and leasing: Renting and leasing out a property have different pros and cons, you have to pick what suits your situation the best and draft out a good agreement that covers all your bases. 
  • Ongoing maintenance of the property: It is ideal to maintain the upkeep of your property and not wait for many years to tend to maintenance issues as a small leak in the pipe that has not been attended to may lead to a pipe breakage and larger than would need a larger investment to get it fixed. You should try and have ongoing maintenance and immediately fix anything that comes up. 
  • Routine inspections: It is suggested you carry out routine inspections and and keep an eye on the condition of the property when a tenant has occupied your property and each time the tenants leaves. 
  • Being a good landlord: Once your property is occupied and all the agreement is signed, you become a landlord and will have to address any issues or concerns your tenants raise. 

Property management 

By this point, if you are wondering how an individual can single-handedly carry out all the tasks associated with the investment in property – we understand. 

Being an NRI, living overseas where you have your own day to day tasks and routine to focus on then having to add the stress of a property investment can seem overwhelming – and probably is. 

However, with that said, you should not have to miss out on building your investment portfolio. 

A property management firm is a one-stop solution to help you invest in a property and create your passive income. 

A property manager carries out all essential tasks on behalf of a property owner; from marketing a vacant property, finding new tenants, doing background verification and continually checking the condition of the property. Furthermore, a property manager is also responsible for property maintenance, collecting rent, enforcing the lease, interacting with the tenants, handling evictions and agreement violations, paying owners rental income, property accounting, and more. 

Standard operating procedures which we cover at Proptech Solutions

2. Upkeep and maintenance to maintain the property for the longer run 

3. Marketing and advertising to ensure maximum occupancy 

5. Forming agreements and keeping documentation updated 

6. Tenant management

7.Communication about status of property to owners 

A property is a great investment in the long run and it’s essential to look after it to reap its benefits. However, to ensure maximum ROI for your property you have to also look after and maintain that investment. 

A property manager can act as your eyes and legs on ground. A property manager saves you as a property owner many hassles and creates time for you to invest in your daily life and other business affairs. 

At Proptech, we assign a dedicated property manager to look after your property end-to-end. 

With PropTech Solutions you can leave all the hassle to us and enjoy the ROI for your investment!

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