“It takes considerable knowledge to understand the extent of one’s ignorance.” So goes an impactful saying that reflects human tendency to approach the unknown with doubt and trepidation. Today’s personal finance or investment scenario is a great example of how knowledge or rather the lack of knowledge can influence our decision-making process. The first thing that comes to your mind when you think about investment instruments like fixed deposits, provident funds, equities and stocks, mutual funds is an overriding principle. The principle is a product of continuous messages that come our way through ‘advisors’ be it family and friends, colleagues, financial media and the internet.
What are your thoughts when someone mentions land as an investment instrument? Chances are that it is not the most positive of reflections. Does ignorance play a major factor in this perception? We will make an attempt to dispense some myths about investing in land and inform readers of the best practices to adopt and pitfalls to avoid when it comes to reinforcing your investment portfolio with land as an asset class.
Let’s take the example of Rahul, who wants to invest money to satisfy long-term goals in solid investment assets which will combine great returns with lower risk. While real estate will crop up as a possible option, there are various factors which make it seem unattractive. The volume of investment required to purchase a flat or a weekend home is too high. For a salaried individual, this involves heavy and lengthy financing options which will put a constraint on the quality of his family life. Adding to this, the murky reputation of the housing industry, non-transparent and long-drawn legal paperwork makes matters worse.
Let’s focus on an oft-ignored product in real estate that is land. Investment volumes are lower than other real estate products and returns are stable and are in the high category bracket if the locations are chosen correctly. Let’s get into details so we can explore the investment category to its full potential. Land investment includes different kinds of potential land investments like:
Residential development land, which is predominantly used to build houses. These plots can be used to build independent houses, apartment buildings and villas. Another option is commercial land whose intended use is commercial in nature like office space rentals or sale. Farm land is typically devoted towards agriculture, so if you plan to cultivate on it, then invest in the farm land in accordance with its fertility level. While recreational land might be part of or might qualify for several governmental programmes, it is necessary to procure permits from the municipality or you can take help from a developer.
According to a Knight Frank report (Graph one), land (134%) was the best performing entity of all investment options in terms of value appreciation between 2008 – 2015, followed by gold (87%) and Unit Linked Insurance (74%).
Graph one: Performance in terms of value appreciation between 2008 – 2015 Land investment, like any investment option comes with its own set of advantages and challenges, which depend primarily on your investment goals. The main highlight of purchasing land is that it is a tangible asset and because of a constant and steady increase in demand, the returns are more or less assured over time. Land has better resale value with comparatively lower cost and property tax than residential properties. Another advantage is that land is available at most locations with different sizes; this makes it easier to invest in small portions and keep increasing the investment according to your savings. The primary challenge with this investment is that there is very little return versus the effort required in the short term. Geological surveys and other maintenance parameters might add to original purchase costs. Entering into land investment can be substantial due to many reasons. Few reasons why you should think about investing in land are:
•It is ‘Hands-off investment’: You don’t need to worry about too much of an extra cost for the upkeep of the area. In a residential property, one has to worry about maintenance, tenants and other issues. With land investment, you only have to worry about its management or minimal maintenance to prevent encroachment.
•Future plan: With vacant land, you will have many options like selling it, building your house, building commercial property or convert it into farm land. The sense of liberty is limited with residential properties like apartments or houses.
•Value addition for long term: Land investment is more affordable than residential property. With less need for maintenance, you will save a considerable sum of money. However, land investment can be tricky and also fraught with risks. In order to ensure safety of your venture, you will need to be mindful of a few things before investing: Budget Before you start research on your land investment options, take time to pan out your budget. Make a checklist:
•Evaluate your savings and income: To begin with, estimate your savings and debt-income ratio should you be availing of financing for this venture. Other investment instruments like fixed deposits or mutual funds, which are more liquid in nature might also be a good source of financing. Together, analyse the amount you will be investing along with the amount you will be left with. Investors should be careful while investing as the liquidity in land investment is less as compared to gold, fixed deposits and mutual funds.
•The amount you are willing to invest: After all the calculations estimate how much amount you will invest in land and keep in mind any legal or maintenance costs. Research This is probably the most crucial step in successfully investing in land. Exploring and collecting information regarding the investment is an essential step in making the right location and developer choice. Learn more about market trends and the news related to the area you are interested in. This information will add up to your overall knowledge regarding the sector and will aid your decision-making.
•Market trends: Investigate further on the recent market reports and trends in the real estate sector. Keep an eye out for news related to price, popular investment plots or areas, investment options, type of land investments and details on whom to contact.
•Pricing: When you are planning your different plot options, compare them on the basis of the amount and the quality they offer for that amount.
•City/ State development: This can be a game changer. For example, Gurgaon, now a leading financial and industrial city, was a village up until the 1990s. Similarly Koramangala in Bengaluru, was once called Sollemangala (Solle means mosquitoes in Kannada) due to its remote nature but is now bustling with commercial and residential hub.
•Government policies or legal issues: The plot may be under litigation or may be due for a government project.
•Zoning: Also note that a few areas may be categorized as forest land or can be in a coastal regulation zone. Investigate and enquire about these factors before you invest. All the information you will obtain from local municipalities and development authorities.
•Location: Plots situated near to a well-developed city or an airport, railway station or business sector will be a great investment. This venture will also secure employment opportunities. Try to invest in areas in the proximity of such sectors, this will ensure maximum future returns. Every metro and Tier II city has its growth corridors. Even tourist spots can be good investment destinations. If you want to steer clear from these variables, then make sure you invest in a location which provides you basic amenities at a good price.
•Workforce and labour: If you are planning to build a house or commercial property on the land or sell it to a developer, keep in mind the potential for employment prospects. If the plot is near a developed segment, the employment options will be aplenty.
•Public transport and amenities: If you are planning to develop estate on the land, it’s better to search for amenities like public transport, water supply, hospitals etc.
•Scope of growth: Always invest in land where you see possibility of growth and development. This judgement will be easier if you thoroughly research your options.
How long can you stay invested? Plan out your long-term goal. Land is not a liquid asset and the efforts are considerable when it comes to finding a buyer at a fair price. Make sure you have an alternative source of income or savings that you can bank upon during times of crisis. Your land investments will gain on capital appreciation when you sell the land. Long-term goals like child benefits or a retirement corpus are more suited to land investments. Planning will help you maximise returns and turn your venture into a success. Remember, turning ignorance into knowledge and action is more a factor of your approach rather than purely focusing on the negatives and challenges of possible outcomes.