US NRI Investment Guide - Part 4 - Real estate

Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.

An NRI can invest in homes or land in the USA, and also in the same in India. Investing in real estate in the USA is more transparent and secure, but is currently under what might be the beginning of a long downturn, where people may not be able to get mortgages approved for at least the next few years. However, once the real estate market bottoms out, it may make sense to buy into US real estate as well. The US also provides investment in real estate through REITs in the form of ETFs – these are simply traded on the exchange and avoid the logistical overhead of buying or selling land directly. Consider for instance, RWX (international REIT ETF) and VNQ (US REIT ETF). However, for the same reasons listed above, this may not be the best time to buy into real estate in any form.

Real estate in India, on the other hand, is a more complex beast, which we will discuss next.
First off, the real estate scenario in India is fraught with legal and bureaucratic risk. Many stories are told of lands that have been sold simultaneously to multiple parties. What documentation is needed for clear transfer of a piece of property to another person is not a universally accepted norm in, for instance, Bangalore, India. Some buyers are satisfied with just a GPA (general power of attorney) transfer, whereas others are particular about all the documents being clearly available. Some legal documents are not being released by the government due to various reasons, and hence the risk associated with purchase of land is higher today in many cases.

Clear land with clear title documents in a reasonably developed location is now exorbitantly overvalued, and the upside potential of such land in most tier I cities in India is suspect.
However, the rewards of buying land in India have been tremendous. Most people who bought land in a then suburban area of a major city in the 90s or early 2000s, and held onto it till date, are enjoying returns that can only be described as astronomical. For example, one piece of land close to the center of the city has grown around 8 to 9 times in a period of about 4 years.
Also note that an NRI is allowed to invest in most real estate, but not in some kinds such as farmlands. (See http://www.rbi.org.in/scripts/FAQView.aspx?Id=52 )

I have listed below a general process for benefiting from real estate investment in India (I have avoided discussion of commercial real estate since I do not know much about it – all these recommendations are related to residential real estate):

1. Focus on city suburbs (land sold in grounds – one ground is 2400 square feet) or rural land (land sold in acres – one acre is 43560 square feet).

2. While purchasing city suburbs, focus on buying land that is less than 500 rupees per square foot. This is because land in most cases plateaus out somewhere in the range of 5000 to 10000 rupees per sq ft. The lesser the price the higher the theoretical potential for growth. As long as the area is growing, or has a reason for growth, the percentage growth of a property worth 500 rupees per sq ft is likely to be higher than the percentage growth of a property worth 5000 rupees per sq ft.

3. An exception may be made to the last rule in case of unusual demand. For instance, you may buy land worth 1000 rupees per sq ft if available in, say, a distress sale, in a more central area of the city that has huge upside potential (which may be measured by close by properties being sold for say, five times that value).

4. While buying rural land, make sure that the land is already converted – conversion is a process where the government has converted formally agricultural land into land that can be used for residential purposes. Conversion is a process that has a lot of risks associated, so, avoid any land that has conversion under process.

5. Avoid agricultural land and farm houses. NRIs are not allowed to purchase such properties in most cases, and they need to be converted to be saleable as residential properties.

6. Avoid buying apartments as an investment – apartments, especially in tier one cities, cost way more than they can get in returns, and the upside potential is also stunted by the fact that the supply of apartments is, in general, increasing by the day. For every apartment complex that is completed, there are at least three or four new ones being built in the neighborhood (in most developing areas). Also, the growth in value of investment in an apartment is automatically slower than the growth of the investment in land – since the cost of construction material does not go up as rapidly as the underlying land.

7. Avoid buying homes as an investment – homes in most developing areas are likely, over time, to be replaced by apartments. Also, in most cases, the land is the appreciating part – the value of materials, etc. increases more gently than the value of the land.

8. Buy land that can be protected from encroachment – encroachment, or illegal occupation of land is a common problem in India – hence, if you are buying land, be sure to fence it, and if possible, have someone you trust watch over the land periodically.

9. Buy land that is recommended by someone you know and trust personally – this is critical for most land dealings in India, as there are several land based scams – people selling land that they do not own, people selling the same land to multiple people, people selling land that has a lien on it, people selling land that has a legal dispute over it, are all cases that have become commonplace.

10. Do not buy land that is too close to a developing government project such as a new highway, or a road widening project, etc. – recalculation of the dimensions could lead to your land being taken over by the government.

11. Preferably buy land (especially city land) that has some construction nearby – this reduces the chance of the land being grabbed by miscreants, or used by government or other projects.

12. Check the price of the land from neighboring sources – before buying any land, ask neighbors or people in the area, what the land in the area is worth – sometimes the easiest scams are where the land is worth a lot less than what you pay, since the prices change very frequently.

13. Always verify all documents associated with the land – have a lawyer, preferably from the same state or region (since laws vary by state in terms of what documentation is needed, etc.) look at the documents and certify that it is in order.


Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.