In the beginning of 2011, the financial experts predicted worst market fall in 2 years. Some cash crunched real estate developers saw it as an opportunity. “Why risk your money when you can get 12% assured returns?” is a claim they are using as a gimmick to project themselves as a better investment option against stock market.
Truth Behind “Lucrative” Real Estate Investment Schemes
The fact is that these real estate companies are either finding it difficult to get loan from financial institutions as the liquidity is low or the interest rates on the loans are too high. The question arises why these schemes are not offered by the developers who have been established for decades in India. Most of the developers claiming such returns are new and don’t have a good track record of timely delivery of projects and return on investment. Construction projects undertaken by them are generally delayed and there is a risk of losing even the capital, leave the returns aside.
Interest offered in real estate investment during construction is inclusive of service tax: In case the service tax is payable on interest/assured returns then it will be a part of 12% assured returns. Thus the effective return might be lower than shown.
Exit in emergency is not possible: The amount of money required for real estate investment is generally high for assured return options. In case you need a part of your investment back, it is close to impossible. Because there are no ready buyers and the lease rentals assured by the developers cannot be financed.
Returns in real estate investment are not guaranteed: What are your rights if the monthly returns are not delivered? Are you investing for court cases to follow? If not then how can you trust someone who does not have a goodtrack record?
You can invest in such assured return schemes if you want 2 to 4% higher return: Yes, you can get 2 % higher return from such schemes, if you can go to the courts for recovery of your money or you know the builder or the track record of timely delivery is available. You can take the risk of losing capital i.e. this is not your only investment. You can wait for more than the period assured. You do not want to be a proud owner of ready property which offers 2% lower return. The ready property yield is 8-1.68= 6.32% (ready commercial property @8% less 30% deduction means 5.6% is taxable. Suppose your tax slab is 30% then tax is 1.68% ). If assured returns are there then tax will be 2.4 hence net return will be 12-3.6= 8.4%.
Rentals from ready property are taxed at lower rate and returns are only 2% lower: The assured return offered by developers in real estate investment schemes is taxed as interest income under the head “income from other sources” without any deduction. Whereas, the income tax laws allow 30% deduction from rental income. Hence even if you are in 30% tax slab the effective tax rate will be 21% . This makes the ready property with 8% rental more attractive and safe. In addition to safety it gives you an option of lease rent finance for emergency needs. The interest paid is fully deductible from the rental income. Ready property can be kept as security for business loan as well.