How long should your holding period be to benefit from Investing in real estate?
If you are willing to put up with a long gestation-period, and can sink in a large sum of money, investing in real estate wisely will give you a good deal. Those interested in considering property as an investment should be willing to hold on to their investment for 10 years at least to reap the benefits of capital appreciation.

How long does it take to benefit from lower capital gains tax?
To begin with, there's the minimum three years for which you have to stay invested to get the benefit of the long-term capital gains tax. The three years do not commence from the date of construction, but from the date of possession of the property. Your capital gains are calculated on the basis of the cost-inflation index, which has 1981-82 as the base year.

Assume that you acquired a property in 1981 for Rs 20 lakh, and sold it for Rs 80 lakh in 1994. Your investment of Rs 20 lakh is multiplied by the cost-inflation index for 1994 which is 259 and divided by the index in the year of acquisition (100). This works out to Rs 51.80 lakh. Deduct this amount from Rs 80 lakh and the balance of Rs 28.20 lakh is taxable at the flat rate of 20 per cent. That is, you pay a capital-gains tax of Rs 5.64 lakh. So, your profit is Rs 54.36 lakh. Now, if you invest the taxable portion which is Rs 28.20 lakh in a new property, you won't have to pay the capital gains tax. And if you invest part of it say, Rs 10 lakh you will be taxed only on the balance.

After the wait of three years for the capital gains benefit, you may have to wait for a further seven years, on an average, to allow for capital appreciation. Real estate is not as volatile as shares are; so, you may not see as many ups and downs in prices. And there is no way you can really lose on your investment. Then, should you need finances, you can always get them by raising a loan on your property.

Is it possible to make money in the period between the buy and the sell?
You can always lease out your property to get a return on your investment even as you await capital appreciation. You can do this by entering into what is called a Leave & License (L&L) agreement. L&L is very popular with landlords since it does not give the occupant or tenant any ownership rights. The time period for occupation is specified in the agreement and, on an average, ranges from 11 to 33 months.

In the case of a lease, it is, generally, a plot of land that is leased out. Such leases have a much longer time-frame, and can extend upto 99 years. Moreover, in the case of a lease, the occupant can go in for a sub-lease to a third party a right which is not granted under L&L. What L&L does is to license the occupant to occupy the space for the period specified. Hence, an L&L is more restrictive from the tenant's point of view, but more secure from the landlord's. A rental, on the other hand, is nowadays shunned by landlords since tenants are known to claim tenancy rights, and refuse to relocate.

If you, as a landlord, offer your apartment on an L&L basis, you can generate income out of your property in two ways. One, of course, is in the form of the monthly rent. The other is from the deposit. That is, the lumpsum which the licensee pays you. You can invest this deposit in a safe avenue, and generate regular income. However, the deposit is refundable, and must be returned to the licensee when the agreement expires.

How do you fix the rent value?
You should calculate your rent taking into account a couple of factors. The inflation rate must be considered. And, as with any form of investment, your return should be higher. Then, benchmark against bank fixed deposits and government bonds, which are high on safety. But, while comparing returns, make allowances for the capital appreciation on your property.

Assume that a landlord is looking at an annual return of around 14.5 per cent on his investment in an apartment that cost him Rs 25 lakh. He can ask for a deposit of Rs 10 lakh, and a monthly rent of Rs 22,000. The Rs 10 lakh lumpsum can be parked in a one-year bank deposit for interest at the rate of 10 per cent per annum. That would earn him Rs 1,00,000. The rent would amount to Rs 2,54,000 by the end of the year. Thus, his total earnings would be Rs 3,74,000 a 14.56 per cent return on his investment of Rs 25 lakh.

Make sure that your rent covers all monthly payments that you have to make towards, EMI of a home loan, payments on maintenance and property tax. If you want a higher sum as deposit, the rental will have to be cut down, and vice versa.

However, the thing to remember here is that the return you earn is in addition to the capital-appreciation during the period of holding. While comparing returns, you would have to consider the capital-appreciation along with the regular income generated by the property.

If you want to make money from an L&L, you should keep the user in mind while selecting the property. For, it is the user who will, ultimately, occupy the property, and generate income for you. On the flip side, investing in a property that is attractive for the user will push the capital value up. The key, therefore, is to choose property which will provide the best return not just in terms of capital- appreciation, but also in terms of income-generation.

Commercial properties are more risky compared to residential properties?
The returns will be higher in the case of commercial property, but so will be the risks. If economic activity is hit, the one way in which firms cut their costs is by downsizing. In such a situation, commercial property is the first to be hit. In the case of residential property, prices are more stable.

A critical factor is timing the purchase in addition to choosing the location.

The right time to buy is when the building is under construction. That turns out to be much cheaper. In such a case, make sure that the builder is a reputed one. Always check with the developer for the commencement certificate for full work, and make sure that all the titles are clear.

You must avoid buying a plot of land. Because the moment you buy the plot, you'll have to fence it, or build a wall around it. Even that is no guarantee against encroachment. Then, getting hold of the basic amenities, such as electricity and water, may be a problem. You also cannot eliminate the possibility of claims on your land and, thus, litigation. Considering all these possibilities, buying a ready-built house or apartment is a safer proposition.

With reference to your question on timing, it is a crucial factor. Since income- generation is not the sole criteria, and capital- appreciation must also be taken into account, timing is as important as the location. Even prime locations at Nariman Point in Mumbai or Connaught Place in Delhi are as susceptible to downturns as their less- fancied counterparts. And the maxim that holds for any investment buy low, sell high is true for real estate as well.

Those who bought real estate in 1994-95, when the prices were at their peak, will, probably, have to wait for around two decades to reap capital-appreciation. In a way, they will be sharing the same plight as the stockmarket punters who bought scrips like ACC at Rs 10,000 at the peak of the bull run in 1992. Then, avoid buying in areas which have already peaked, or are going at high rates compared with other locations. The chance of capital appreciation will be lower.

Still, deciding the timing is easier said than done. In the past, there was a trend which guided investors: Mumbai was viewed as the benchmark for real estate. If the prices rose or fell in this metro, a similar trend would be evident in the rest of the country, with Delhi following suit with a time-lag of three to six months. Bangalore and Chennai would then follow.

Hence, real estate investors could follow the trend by simply keeping tabs on the prices in Mumbai. The trick worked even within locations. For instance, within Mumbai, Nariman Point was the benchmark. If the prices rose here, the prices in the suburbs also rise with a certain time-lag. However, this trend is weakening, and it may no longer be safe to be guided by it. Mumbai is no longer the real estate leader and, within Mumbai, it is no longer South Mumbai which dominates the estate prices.

In the absence of a trend, timing the investment remains a difficult task. And opinion is varied as to whether real estate prices will start rising, slump before rising, or just remain stagnant. For the seller of a property, waiting could mean a further loss if prices happen to decline further. For the investor, the quotes are already quite low. True, they could be lower, and the market may not have bottomed out. But, given the gestation of 10 long years, the risk is not that great at the levels that we see today.