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Four Forbidden Rules for Real Estate Investment

Do's and don'ts apply to practically everything that we do. The idea being that we should derive the maximum benefits besides protecting ourselves from the pitfalls, if any.

And, in this respect, our personal finances are no different. Various facets of our day-to-day money matters — loans, credit cards, investments, insurance, taxation, etc. — too are guided by certain principles.

After forbidden rules on fixed deposits and insurance, we now look at the what we mustn't do when buying property.

1. Don't ever overstretch your budget
Buying a property costs lots and lots of money. So much so that not only (a) do we have to shell out practically all the money that we may have saved till date as down-payment, but also (b) pay a sizeable portion of our income every month as EMI for almost 15-20 years. This can seriously endanger our other significant commitments viz. children's education and medical emergencies; not to mention the everyday financial struggle, year after year, for even minor pleasures like vacations, mobile phones, entertainment etc.

As such, never ever exceed the prudential levels when buying a property either for own use or as an investment. Make sure that you are left with decent money even after the down-payment. And ensure that 50-60% of your take-home income remains with you after EMI deduction.

2. Don't buy an under-construction property
There are simply too many instances wherein the construction of property is delayed. The promised date of completion being repeatedly postponed up to a year or two has practically become an industry trend. In fact, extended delays running into many years and even incomplete / shelved projects too are not rare. By ignoring this fact, you are putting your lifetime of savings (both present and future) at a grave risk.

Many continue to suffer the double burden of rent and EMI as property projects often remain in a limbo for years. Many cannot claim the varied tax benefits available on real estate investments as they become time barred when they don't get the possession in time. Given this scenario, buying a ready property would be the most prudent thing to do.

3. Don't be over-invested in real estate
Indians don't like financial assets, except bank deposits. This is evident from the fact that more than 90% of their surplus money is either in property or gold. And since property prices are comparatively way beyond the gold prices, the portfolio of many people ends up being totally and completely overweight on property. And the value of all other investments put together is practically negligible.

Unlike stocks, bonds, deposits etc., property cannot be converted into cash in a day or two. Percentage-wise, transaction costs in property are relatively quite high. Distress sale can often lead to offering steep discounts. Property cannot be sold in pieces. In view of all these constraints, effectively locking up all your money is not a smart idea.

4. Don't switch properties too often
Some people "trade" in real estate. Rather than buying and keeping properties for a reasonable period of time, they are buying and selling them too often. With their frequency of trading, they sometimes even beat the stock / commodity traders.

This is counterproductive. On one hand, there are no tax benefits on the gains when properties are sold in the short-term. On the other hand, even the tax benefits claimed on long term capital gains from property can be withdrawn if the subsequent property sales happen before a prescribed time period.

Apply these rules to your real estate investment to make the most of this wealth-creating asset. Don't let it become a millstone around your neck, which could destroy you and your family.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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