The amount of work, legal issues, and financial assistance are some aspects you can check before deciding to go for flats or plots.
Real estate is a preferred investment option for a few investors. Investment in this sector can also help diversify the investment portfolios of investors looking for an additional source of income.
According to a joint report by NAREDCO and EY, India’s real estate sector is expected to reach a US$ 1 trillion market size by 2030.
So, are you looking at real estate as a form of investment? If yes, you might be confused between buying a flat or a plot.
In this article, we will look at the different aspects of buying a plot and buying a flat so that you can make the best decision.
Amount of work
Buying a plot involves a lot of work. If you have bought the plot to build a house, you have to hire resources such as architects, masons, plumbers and electricians. You have to be actively involved with the work and every step of the process. If you are unaware of the various construction processes, you must also learn about them. So, buying a plot and building a house involves a lot of time and energy.
Moreover, when you buy an apartment, the only work involved will be the interior furnishings and buying electronic items if you want to rent it out as a fully furnished house.
Appreciation rate
Although plots and apartments form a part of your real estate portfolio, the appreciation rate of these categories will vary. Typically, we see that the appreciation rate or the return on the investment on plots is generally higher than apartments as the plots’ supply is limited compared to apartments.
Moreover, the value of apartments tends to depreciate over time due to normal wear and tear. However, there is no normal wear and tear in the case of plots. Moreover, if the plot is situated in an upcoming place, the appreciation rate will be greater than other plots in already-developed areas.
“Plots usually gain value faster than flats. For flats, while the underlying land on which the flat is situated might go up in value, the building itself gets old and depreciates in value. That’s why brand-new flats cost more than older ones, even if they’re side by side. However, flats are usually a safer bet than land for other reasons, though the payoff might be a bit less,” said Shailesh Bahety, Business Head at Amaze Realtors.
Modification
When you buy a plot, you can build the house as per your taste and modify it as required. You have the freedom to build a villa or a building with several units for rental purposes.
However, when you buy an apartment, you have limited freedom regarding modification. These modifications will be basically internal changes.
Financial assistance
If you’re looking to get a loan, it’s generally simpler for an apartment. You can often borrow up to 90% of its price, and the interest rates are usually lower than plot loans. Plus, you get up to 30 years to pay it back.
However, getting a plot loan is more difficult than getting home loans. It comes with much more paperwork and fewer loan options since the demand for plot loans is lower than home loans.
Financial institutions will lend you only about 80% of its cost; the rates are a bit higher, and you can repay the loan within 15 years.
Income potential
When you buy a plot, you have to build a house and give it on rent to start earning rental income. It might take a few months or a year or so. However, when you buy an apartment, you can earn rental income immediately.
Delivery
Delivery of plots is almost immediate. On the other hand, you might have to wait for several months or even years to get possession of your apartment. This makes apartments a risky endeavour for many investors. While there are laws to protect buyers, delays and legal issues when buying a flat are very common.
Tax benefits
Most investors like to invest in a plot as a long-term investment, but there is no tax relief on buying a plot.
“When you buy an apartment, you can get tax breaks on the loan, including the principal, interest, and other costs like stamp duty. But if you buy just land, you don’t get those benefits unless you build a house on it,” said Nisha Sanghavi, Certified Financial Planner and Director of Promore Fintech.
However, once you build a house on the plot, you can get tax benefits on the loan taken to purchase the plot as well as to construct the house.
Legal issues
A significant challenge when buying a plot is the transfer process from the current owner. Often, there can be complications in figuring out the ‘real’ owner and the paperwork.
However, it doesn’t mean that you can blindly buy an apartment.
“When you buy a plot, you’re essentially purchasing ownership of that land. But when you buy an apartment, you’re acquiring the unit within a building on a piece of land. There’s a potential risk here: the building your apartment is in could have disputes or issues down the line. That’s why it’s crucial to verify the land’s ownership when buying an apartment,” said Nisha.
So, should you invest in a plot or buy an apartment? The answer is that it depends.
You can invest in a plot if you are looking at capital appreciation, want to build your house as per your terms and have enough time and expertise to monitor your investment and construction progress.
Invest in a flat if you are looking for regular rental income from the first month onwards, don’t have much time, want better security facilities and common amenities like club, swimming pool, gym etc. You can look at flats if you are also seeking bank loans.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
