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Real Estate

Real Estate, Principles, Characteristics

Land and house property are called real estate. Real estate these days is an attractive proposition for investment, as increasing population and disposable incomes have made more and more people take this avenue for planning their future financial commitments.

Sacramento, real estate is an attractive investment avenue mainly because of the following reasons:

1. Capital appreciation of property is very high and average rate of return is very high.
2. For wealth tax purposes, value of property is considered at the historical cost and not market price.
3. Loans are available easily and interest on these are tax deductible.
4. Ownership of real estate is a psychologically satisfying thing and a prestige issue for the wealthy.

Property in law means ownership. Real property includes land and things which are permanently attached to it. The ownership of property gives the person the right of possession, use and disposal of the property. Property ownership can be transferred without losing ownership, eg. leasing of land. Property may be held in trust or as security for a debt like mortgage or pledge. Property interests may be acquired in several ways like outright purchase, by gift or will.

All real estate can be classified into 3 categories: purchaser occupied property, , income producing property and property developed for sale.
If property is used by the person, who has bought it for his residence, or as his business premises, it is called purchaser occupied property.
Income producing property is that which a borrower builds or buys in order to rent or lease .Examples of income producing property are apartment houses, light industrial parks, shopping centres , office buildings etc.
Property developed for sale is a property that is either built or purchased for purposes of selling a profit to persons other than the owner. Examples are residential tracts, condominiums etc.

There are various principles of investing in real estate. The price of property is most valuable for determination of real estate. The property price depends on its location. Property in prime areas costs more. When an investor buys and sells property, he evaluates it according to its most productive use. Since land is accepted as collateral by banks, the investor can borrow against his investment.
The influence of inflation on the value of property is more pronounced in the case of emerging markets. Cash flows related to property ownership in response to inflation, is more predictable than with the ownership of any other asset. Thus we can safely conclude that real estate is stable in value.

To absorb the basic principles of real estate investment, one must know the processes of development of property. These basically include leasing, , outright purchase, planning and design of the property, construction, operations regulatory approvals and and financing of property. These processes last anywhere between 6 to 36 months.
Indian investment generally falls into 5 categories , mainly single family residences, multiple family residences , commercial shopping centres , commercial store fronts and raw lands.
Equity investments in India are generally made by corporates, and some corporates are in the business of developing residential properties.Cash rich companies also develop malls, and commercial complexes.

Real estate is not easily exchangeable or transferable. There are certain unique characteristics of the real estate markets. Firstly each real estate transaction of investment is unique. The principal of pricing of similar products cannot be applied to real estate pricing. Secondly, unlike stocks and shares, there are very few players in the real estate market, as the investment is high. Thirdly, buyers cannot determine the price. Fourthly, property investment has to be made as a single unit. Also property markets are subject to Government controls, and regulations such as tax laws, building codes, environmental norms etc., and these are detrimental factors to development of real estate. Supply and demand in real estate do not balance as it takes time for the conversion of property from one use to another. Price information of property is also difficult to obtain.

The purchase of property should be made after examining the payment of taxes on the property. Property taxes are collected from owners of buildings. Governments depend on property taxes as income for financing their activities like building repair, education etc. The major problem of property taxation is that the property is not assessed uniformly. In many cases the assessed worth is less than the property value. The assessed rates are prone to frequent change and the rates progress slowly as compared to the changes in prices.

The major criteria for successful investment in property is procuring the right finance at the right time, as the quantum of investment is major. There are various sources of finance. These are listed below:
Employers - many employers extend finance to their employees at concessional rates.

Life Insurance Corporations have various schemes for financing homes
Housing finance schemes like SBI homes etc finance homes at long term rates of interest.

Cooperative housing societies offer loans to their society members.
Loans are sanctioned against mortgage of property. The amounts are generally over 50 lacs and repayment is in the form of equated monthly instalments.

A high price is paid to obtain useful information relating to price and finance. Intermediaries provide information on the market. Since the real estate market is inefficient, additional returns are possible. These days institutional investors are exploring the market. New strategies are resorted to by developers to bring about more transparency and efficiency in the real estate market

The government in many developing countries generally gives a boost to the infrastructure sector to encourage more and more builders to construct houses. There are slum redevelopment schemes and tenanted redevelopment schemes where lands are procured. Alternate accommodation is provided to existing dwellers in terms of transit accommodation, and new flats are built on the cleared land area. Concessional rates are extended to existing tenants.

Finally there is a word of caution. Investment in real estate is very risky. Though rate of return is high, there are outflows in terms of tax payments, property taxes and capital gains tax. Property needs to be regularly repaired and holding period is significant. Therefore the motto is look before you leap. Title papers must be checked technical authenticity, and all pros and cons must be weighed, before making the major decision.
Published: 2007-05-14
Author: Amita Shanbag

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