Decoding end-use homes vs investment property: What buyers need to know?

A conversation between Saroja Sharma and her neighbour went something like this: “We have invested in the 2 BHK that is being constructed near the Chembur Railway Station. We intend to shift there in the last week of 2024, once we get possession.” Here, Sharma is talking about a property investment; she also speaks about moving in, suggesting that she has bought this for end-use.

End-use property and property as investment are two terms related to real estate purchase that are used interchangeably more often than not. Explore the breakdown of the differences between these two terms, which buyers should know so that there is clarity in the purchase they make.

End-use home vs investment home

Factors to remember for end-use property

• Location: Anybody who wants to buy a home for personal use should evaluate whether the location they are exploring enjoys good connectivity to their place of work, other places in the city, and has basic facilities such as schools, hospitals, banks, and shopping markets in the vicinity. This is true for both resale/ready-to-move-in property and under-construction properties. In the latter, know how the area will develop once the project comes into play. One should look at the safety index of the location whenever investing in a property—irrespective of the type that it will be used for.
• Configuration: When you are moving in for personal use, you should choose the type of property and configuration that best suits your needs. A buyer can choose from options such as a flat, a villa, a duplex, a penthouse, etc. For instance, a family of four in a city generally opts for a 2 BHK or a 3 BHK for personal use, as per industry reports. However, a family of 4 in a Tier-2 city mostly opts for a 3 BHK or a 3.5 BHK to have a nice, spacious house.
• Budget: When you are buying a property for self-use, invariably there is a stretch in the budget as there is always a lookout for the best thing when given a choice.
• Financing options: When you are planning to buy a property for personal use, explore mortgage options to arrange finances. Evaluate who offers the best interest rates with respect to loan options and make the decision.
• Property construction status: When you are buying a house to stay, evaluate the type of house that is financially viable for you.
  1. Under-construction property: These give you time to arrange your property buying finances. With schemes such as the sub-vention scheme, you can breathe easy even when you have bought an under-construction property. However, plan in advance if you are staying in rent, as in case you take a home loan to buy the house, you may have to manage both EMI and monthly house rent, which will form a big chunk of your salary.
  2. Resale Property/Ready-to-Move-In: In this, you will have to make the payment all together. So, if you were staying in a rented apartment, moving early will help you replace the rental component with the EMI. Also, if you are buying a property for end-use, know that a property bought at this stage will be more expensive than one bought during the under-construction phase.

• Asset creation: If you buy a property for end-use, you are creating an asset for yourself. As you will be staying here and holding the property for a long time, the value of the property will appreciate in the long run.

Factors to remember for investment purposes

• Location: If you are looking at putting the property on rent, then choose one that is closer to workplaces—corporate IT parks—and has good social and physical infrastructure around. While such properties may be expensive, they also have a good rental yield. Thus, you may recover your money invested and make profits once you follow good financial hygiene. For instance, according to industry reports, Ulwe, a node in Navi Mumbai, commanded a price of Rs 22-28 lakh for a 1 BHK in 2016. Today, the node commands a price of Rs 54-60 lakh for a 1 BHK. This is because of the facelift that the place has got with respect to infrastructural developments such as the Mumbai Trans Harbour Link becoming operational, the Navi Mumbai International Airport almost completed, and the extension of the Harbor Railway Network from Nerul to Kharkopar.
• Configuration: Invest in a configuration based on market demand. If the property is near IT parks, it’s a good idea to invest in a 1 BHK or 2 BHK house that may be preferred by young working individuals. Based on the rental crowd sample, you may also decide if you want to invest in a standalone building or a gated community. For instance, there are pockets in Bangalore such as Whitefield and Sarjapur, where fresher recruits of IT companies prefer to stay when they move from their hometown. So, either investing in smaller units or a larger setup that can be rented to 3-4 individuals will be profitable.
• Budget: Since you are not going to stay in this property, you can set up a budget and stick to it, rather than stretching it.
• Financing options: Since this is an investment, choose financing options that will help you maximize your returns. Evaluate mortgage and leveraging options to find what fits the bill best.

• Property construction status:

  1. Under-construction property: While there are risks involved, investors generally buy under-construction properties to generate profits. Properties at the pre-launch and launch stage are available at cheaper property costs, the only risk being that the project may get stuck and not get completed.
     • Investors sell the property midway through construction and roll this money into another newly announced project.
     • Wait for the project to get the possession certificate and then sell it.
     • Get the possession certificate, furnish the property, and rent it out to generate rental income.
  2. Resale/ready-to-move-In: If you are looking at investment purposes, investing in resale/ready-to-move-in may prove slightly expensive. This chance can still be taken if the rental yield is high, the property sold is a distress sale, or you have disposable income that you want to invest in a property that is sought after in the resale/ready-to-move-in market.
     • If you have invested in a property other than the one you stay in, you have created an avenue for steady passive income—a strong backup even in volatile market conditions. You also add to your portfolio a real estate asset class that will further strengthen your financial stability.

What are the other real estate options for investment?

In addition to residential property, investors can also look at other real estate options for investment.

• REITs: They are companies that own and operate real estate, helping investors generate income without having to own a physical property.
• Commercial real estate: You can generate rent by leasing office space in a commercial property. The various options are leasing shop space in a mall, office space to a corporate, or setting up a co-working space that ensures that the setup always has takers. This is a popular option, and even celebrities including Amitabh Bachchan,Kartik Aryan, Sara Ali Khan, Ajay Devgn Salman Khan, etc., have invested in office space in Mumbai. An advantage of leasing commercial real estate is that it has a longer rental tenure compared to residential property.
• Second homes/vacation homes: This segment has increasingly become popular. If you have a second home, you can list it on holiday home portals for rent. While maintenance may be expensive, the rentals generated during peak holiday seasons will also be more. However, one should also be prepared to deal with low to no rentals during the off-peak season.

Investments: Buying and selling short term and long term

• If you buy and sell short-term, you may make quick returns that may be small to marginally medium. If the holding period of the property is less than 24 months, then one may have to pay the short-term capital gains (STCG) tax.
• If you hold the property for a longer period of time, the returns will be higher and the property will also enjoy long-term appreciation. Once you sell this property (after a holding period of more than 24 months), the long-term capital gains (LTCG) tax is applicable. Note that for a property registered until July 23, 2024, one can pay LTCG with indexation at 20% or without indexation at 12.5%, whichever is beneficial. All properties registered after July 2024 have to pay LTCG without indexation at 12.5%.

Problems envisaged when you buy a property for end-use

• While you may have paid a premium and invested in a property from a reputed developer, there may be construction quality issues that may make staying in the property difficult.
• If it’s a new property, then forcing the developer to take ownership and rectify problem points will be a difficult task. 
• You may end up with bad neighbours with whom co-existing may be difficult.
• New constructions may come around your project that may block the view, natural sunlight, and air.
• The society may object to changes in the exteriors of the project as it may spoil the uniform look—for instance, installation of safety invisible grills may be a violation according to the society.

Problems envisaged when you buy a property for investment purposes

• In case of an under-construction project, the project gets stuck.
• The area doesn’t develop the way it was promised, and so rental properties never took off in this location.
• There is a demand for unit size that doesn’t match with what you own.
• You may have to deal with rude tenants who may not follow society rules, default on rents, or refuse to vacate your property.

What are the things to consider when you buy a property?

Irrespective of the kind of property you want to invest in, whether for end-use or investment purposes, ensure that you take care of the following points:

• Study the market: Before entering the real estate segment, ensure that you do a thorough market study. Check through periodic studies if the real estate market is doing well growth-wise and there is no long-term market fluctuation expected. Time the market such that you have a stable start.
• Rental yield: Invest in a property that generates a good rental yield.
• Maintenance costs: A property in which you have invested attracts maintenance costs. This is a regular outflow of money that has to be considered when you buy a property.
• Property manager: If you are renting your property, you may either manage it yourself or get in touch with a property manager who will manage renting it out to proper clients, collect rents regularly, maintain the property, etc. This will come at a cost that will be significant.
• Property tax: This is an annual tax that has to be paid to the municipal body. This depends on the property’s location, configuration, value, amenities, etc.
• RERA registered property: Invest in a RERA registered property so that in case of any problem, there is a regulatory body that will take care.

Housing.com POV

Real estate is one of the most rewarding asset classes today. When evaluating a property, first be clear on if it is for end-use or you want to earn revenue from it. Based on this, follow a strategic approach that will help you make a successful acquisition. Knowing the market conditions, assessing your financial strength, and seeking professional advice will help you sync with this home-buying goal.

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