When people think of real estate investment options, their first choice is usually an apartment. However, from the perspective of return on investment, a plot may be a better option.
There are several reasons why an investor can consider a plot over an apartment. The capital required to invest in a plot, is lesser than the amount needed for an apartment. You could buy a small plot on the city’s outskirts, or an upcoming area, with just around Rs 5 lakhs, depending on the location. On the other hand, an investment in an apartment will cost you at least Rs 25-30 lakhs, even in upcoming areas.
The expenditure on a plot, after it has been purchased, is also low. “All you have to do, is construct a wall around it and perhaps, pay a chowkidar’s monthly salary. On the other hand, you may have to spend a couple of lakhs, even on a new apartment, before it is ready for occupation,” says Rajan Ahuja, director of Realty & Verticals, a Gurgaon-based real estate consultancy.
In case of a plot, its entire value appreciates. However, in case of a house, only the value of the land appreciates, while the value of the building depreciates as time goes by. Then, there is also the issue of demand versus supply – the number of plots that can be carved out of a piece of land, will be lesser than the number of apartments that can be constructed on it.
Before investing in a plot, however, consider the risks involved. Like all sectors, the real estate market also witnesses cyclical phases. At present, it is caught in a slowdown. Consequently, the rate of appreciation may be sluggish. Nonetheless, the returns from a plot, are likely to be better than that from apartments, owing to the huge unsold inventory of apartments in most metros.
A plot is also an illiquid asset. If you put your plot for sale, you may not find a buyer at short notice, especially during market downturns. The amount of money required to purchase a plot, is also higher than the money needed to invest in mutual funds, where you can start a systematic investment plan, with as little as Rs 500-1,000 per month. Moreover, a plot will not yield any regular income, unlike stocks or mutual funds, which can pay dividends, or an apartment that can provide rental income. The only gain from a plot, comes in the form of capital appreciation.
Another big risk of investing in land, is that it is susceptible to encroachment. To avoid it, invest within a builder’s complex, rather than in an open area. Also, build a wall around the plot and post a watchman to guard it.
One should also ensure that there is no dispute over the ownership of the land, to avoid getting caught in litigation. “If you are investing in an agricultural land, enlist a good lawyer to conduct a thorough title search for the past 30 years, before making a purchase,” cautions Ahuja. In case of agricultural land, there is also the risk that the government could acquire it, for an infrastructure or public works project.
Despite these risks, if done diligently, the returns from plots can be high. “If you invest on the outskirts of a city, you can easily double your investment in 4-5 years, thanks to rapid urbanisation,” points out SG Raja Sekharan, a Bangalore-based professor on the subject of wealth management and author of the book ‘How To Get Rich And Retire Early’.