NRIs cannot even benefit from indexation, which adjusts the purchase price for inflation. Buyer must deduct tax based on total sales value. However, buyers can apply for a lower TDS certificate to reduce this amount.
Furthermore, NRIs often face difficulties in managing their properties remotely. Tasks such as approving repairs, managing maintenance costs or renewing a lease agreement often require the property owner to be physically present. However, NRIs do have the option of specifying a Power of Attorney (PoA).
Mahesh Ahuja, a veteran real estate agent with many years of industry experience, shares with us Mint His take on why residential properties may not always be the best investment option for NRIs.
Why did you decide to continue renting instead of buying a house?
As someone who had earlier served in the Indian Navy, I experienced the hassle of frequent moves due to transfers. I didn’t want to have to go through this again, so renting gave me the flexibility to move easily.
For most people, a house should be viewed more as a consumption item than an investment. Residential properties tend not to appreciate as much as commercial properties, and my focus is on commercial properties.
My son is an NRI based in the US and I have seen many NRI clients face difficulties in maintaining and transferring Indian properties, especially when their children are settled abroad and have no interest in the property. I don’t want to cause that kind of trouble to my family.
However, I find that the emotional and practical benefits of owning a home are often overemphasized, especially for people at my stage of life. At this age, I am more focused on ensuring the financial security of my family through strategic investments rather than plowing large amounts of money into residential properties, which are difficult to liquidate.
How and when did you start your real estate career?
I served in the Navy for about 13 years. I resigned due to personal reasons. Just before I quit my job, I started looking for a house to buy. My first visit was to a property where I met a real estate agent who was selling me the project.
Even though the agent was very good, I remember thinking I could do the job better. I was impressed with his sales pitch and personality, and given my background in public speaking and training, I felt I had the right skills to be successful in real estate.
So, when I quit my job, I decided to try real estate in the early 2000s. Over the next few years, from 2003 to 2006, I ended up flipping around 20 to 25 properties of my own and making a lot of money in the process.
Why sell all the real estate?
By 2006, I had built a nice real estate portfolio, but I began to have some concerns about market conditions and the sustainability of the rapid appreciation we were seeing.
I encountered some challenges while selling my clients’ properties. Due to disputes over the payment terms and transfer process, I had to sell my property to pay back the investors. Also, personally, I don’t want to own a home, and I mentioned earlier the hassle that comes with it.
Finally, in 2006, I made a conscious decision to sell all of my residential real estate, considering the hassle of transferring the property to my son.
What challenges do you think NRI families face in owning properties in India?
Ensuring that the property is well maintained and cared for can be a constant headache for NRI owners, especially when they are not present. Finding reliable tenants, collecting rent, and dealing with any issues can be a logistical nightmare abroad. When a parent dies, the process of transferring property to children can be very tedious and complicated, especially if the children are not interested.
Why is real estate not a good investment for NRIs?
As an NRI, any real estate investment I make in India will be subject to the risk of the Indian rupee depreciating relative to the foreign currency I earn. The rupee has lost nearly 50% of its value over the past 20 years. This can significantly weaken the actual return on investment. Rental yields on residential properties in India are generally quite low, sometimes ranging between 2-3%. This makes it difficult to generate meaningful passive income from investments.
Additionally, buying and selling real estate in India involves significant transaction costs such as stamp duty, registration fees and brokerage fees, which add up to approximately 12% of the property at the time of purchase and capital gains tax at the time of sale. When it comes time to sell the property and repatriate the funds to my home country, there can be complex tax and regulatory hurdles. These all impact overall returns.
The returns are often insufficient to justify the hassle and risks faced by NRIs. For NRIs, I find that the potential benefits of owning real estate in India are often outweighed by its drawbacks – currency risk, low yields, high transaction costs and repatriation challenges.
Unless an NRI has a very strong emotional or personal attachment to property in India, I believe this is generally not the best use of their capital. It’s usually better to invest your money in more liquid assets like fixed deposits so that you can get more or less the same returns without any hassle.
How do NRIs deal with inheritance and property transfer challenges?
Given the complexities involved, it is important for NRIs to plan ahead and take proactive steps to facilitate a smooth transfer of property. Here are some key things I recommend |:
It is crucial to draft a clear and legally binding will. This ensures that the property transfers according to your wishes and not left to chance or family disputes.
Appointing a close family member or friend residing in India as agent or power of attorney. This person can handle day-to-day management. Keep all property-related documents (such as sales deeds) up to date and easily accessible. This will simplify the transfer process when the time comes.
Gifting property to your children while you are still alive may be another way to facilitate a smooth transition. I have personally decided not to own any residential properties in India. Instead, I focus my investments on more liquid commercial real estate.
What advice do you have for elderly parents who own properties overseas for their NRI children?
I see this happening quite often and I have come to the conclusion that owning a property in India is generally not recommended for elderly parents in this situation. When children settle abroad, they often have little interest in property in India. To them, it’s more of a burden than an asset.
Ensuring that a property is well maintained and managed can be a constant headache for older parents, especially if they are not in India.
My advice would be to seriously consider selling the property and invest the proceeds in more liquid, easier-to-manage assets. This can be in the form of fixed deposits, mutual funds, or even giving money to the children for their own use.
What advice do you have for today’s young investors?
Approach real estate investing with a very strategic and pragmatic mindset. Here are the key points I want to highlight. If you want to invest in real estate, focus on commercial real estate, especially well-located shops, rather than residential investments. Commercial real estate tends to appreciate at a higher rate and offer better rental yields, so be selective about which properties you invest in.
Think of residential property as a consumption item, not an investment. When buying a home to live in, it is assumed that the price of the property is essentially zero. When it comes to your primary residence, prioritize your own comfort and needs over return on investment. Look for a reputable real estate consultant with a proven track record.
Diversify your investments across different asset classes. Seek professional advice.
Are you still actively working as a broker?
Yes, after 2006 I consciously avoided investing in residential real estate for myself. My focus is commercial real estate, which I believe provides better returns and less hassle.
As a broker, I continue to be very active in the market. I am involved in the real estate industry through a brokerage rather than directly owning residential properties.
This decision has served me well over the years and fits in with my overall investing philosophy.