How reverse mortgage works
Real estate investments are known for their il liquid nature- one of their biggest drawbacks. So, while owning a house is a basic need, this basic need takes up a huge chunk of one’s lifetime savings. Consider a scenario where during your retirement years, your house is your only big asset- built during your working years by saving regularly, taking a loan, cutting costs and later repaying it in instalments. Now, you do not have a regular income, and the constantly rising cost of living is making it difficult to survive on the meager pension. So, it there a way your biggest asset- your house can be of help?
Yes. There is. Thanks to the concept of reverse mortgage.
Renting Vs. Buying a house
Owning a house is one of the most important financial goals for the common man; and also one which requires a huge monetary commitment. Buying one’s first house for self occupation is regarded more as an asset than an investment made for capital appreciation or gains. But the sky rocketing real estate prices, especially in metro cities like Mumbai, Delhi and Bangalore have made investing in a property almost impossible. Here comes the dilemma- Whether one should still go ahead, take a huge loan, compromise on your lifestyle and cut down other expenses to service the sizeable monthly loan installment for almost their entire working life, or simply go in for the more affordable rental accommodation?
Income from house property-allowable deductions/exemptions
Last month’s post on calculation of income from house property evoked a few queries/doubts on what are the allowable deductions/tax exempt income under this head.
The following property incomes are totally exempt from tax
How to calculate income on house property
Out of all the heads under which income is chargeable to tax, income from house property is the most difficult to calculate. This is because this is a tax which is paid on notional income, i.e the annual value of the house which is its capacity to earn income and not on the actual income earned.
If you own only one self occupied house, it is not chargeable to tax.
If you have more than one property, you have an option of choosing one of them as self occupied whose annual value will be taken as NIL. The other property, even if it is not rented out and earning you an income would be deemed to have been rented out and tax is payable on the annual value based on this deemed rental income. This annual value is calculated as per the provisions of section 23 of Income Tax Act. Let us see how this is done step by step. Continue reading →
Physical Real Estate or Real Estate Mutual Funds?
If you already have a house of your own and are desirous of making further investment in real estate solely with a profit motive, it is advisable to go through the mutual fund route. Real estate in the physical form suffers from a lot of disadvantages.
- Risk of loss due to fire and other natural calamities and hazards.
- High ticket size- The cost of even a small piece of land could run in to lakhs of rupees. Real estate mutual funds ( REMF) require relatively lesser minimum investment.
- Concentration risk – It is very cumbersome to maintain a diversified portfolio of real estate through multiple purchases. In a REMF, the fund manager takes care of this.
- Risk of encroachment- This applies especially to vacant plots of land which need to be guarded and visited regularly.
- Illiquid- Physical real estate investments are not as liquid as other investments like deposits, mutual funds or gold. Deals could take a long time to get executed.
- Lack of transparency – The prices of real estate are not standardized and lack transparency. REMFs are valued through regularly published NAVs
- High transaction costs – Real estate deals – buying and selling involve high transaction costs like stamp duty and registration charges.
- Owning more than one house has greater tax liabilities.
These reasons make Real Estate Mutual Funds with a professional manager, flexible entry amounts and transparent prices a superior investment option.
The following are detail of some of the popular Real Estate Mutual Funds in India :
- Kotak Realty Fund – Closed ended fund started in 2005 for a term of seven years and the target segment are corporates and High Networth Individuals.
- HDFC India Real Estate Fund – Closed ended with a minimum initial requirement of Rs 5 crores.
- Anand Rathi Real Estate Opportunities Fund – Closed ended fund which mainly focuses on acquiring secured rental income real estate assets with good quality tenants.
- IL & FS Realty Fund – An aggressive private equity fund which seeks to deliver a compounded annual growth of 25 %.
- ICICI Ventures – Seeks to invest in commercial and residential real estate projects in the developing cities in India.
Though real estate mutual funds haven’t yet really taken off in India, they have a huge future potential. Investors wanting to take exposure to REMFs should check on the fund’s reputation, past returns and investment objective before doing so.
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