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Is it a Good Idea to Invest in a Plot of Land? Research Team | Posted On Tuesday, December 03,2013, 10:08 AM

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Is it a Good Idea to Invest in a Plot of Land?



One has surely heard the saying "Landlords grow rich in their sleep". There is no greater saying to emphasize the need of having an investment in real estate be it an apartment or a plot of land. It is widely believed that an investment in land has no recessions and downturns. If one is not going to put his money in land then where else is he going to invest? There is a famous saying by Anthony Trollope "It is a comfortable feeling to know that you can stand on your own ground. Land is about the only thing that can’t fly away".

What is Meant by a Non Agricultural Plot of Land?

In non agricultural land, development is carried out on the land which makes it unfit for cultivation. This land is converted into residential land in the revenue records of the local development authority. One can purchase a plot which is generally ready for possession. This is unlike an apartment where one has to wait until the construction is complete. The value of a plot is all about location. A plot in a well connected location carries a high price tag and can be easily developed and sold for a decent profit in a time period as less as a couple of years. There is no construction cost and time involved and one can easily exit and make a profit. Land plots are less easy to come by than apartments. An apartment might have to be constructed which involves the cost of building the structure. An apartment might age over time whereas the plot of land faces no such problem.

How Can One Make a Tidy Sum by Purchasing a Plot of Land?

One of the most common techniques followed is purchasing a piece of land on the outskirts of a city or in the vicinity of a future upcoming business district. The plot of land can be obtained at relatively cheaper rates. This land can be held for a period of 5-10 years and sold for massive profits. A plot of land in a decent location can appreciate over 800% in value over a couple of years. Of course luck does play a role. Another common approach one can follow is of purchasing plots of land as a group. This reduces the chances of one being cheated or shortchanged when purchasing a plot of land. If the plot is close to a road, major highway or an upcoming business district vast profits can be realized. Plots can also be used for generating extra income or an alternative source of income. They can even be given as parking space or rented out if necessary. However it is very necessary not to fall for misleading advertisements or promotions. Many buyers purchase land plots from small developers at low prices with the hope of massive appreciation in prices. When things go wrong these developers disappear. It is always good to purchase a plot of land from a well established and a reputed developer as the chances of being cheated are less. Another common trick used by developers is the promise of an upcoming infrastructure project, highway or a mall near the plot of land where one can make vast profits in a relatively short span of time. These constructions may be hampered by regulations, lack of funds or any other reason and may never take off. One needs to be judicious while purchasing that plot of land.

Things to Note Before Purchasing a Plot of Land?

  • Location plays a very important part in selecting the plot of land. One needs to select a plot of land near a school, hospital and other basic necessities. Even though these properties might be slightly expensive they can be sold for a huge profit after a few years.
  • One needs to check the title deed which shows the sellers right over the property. Always ask for the original title deed and never settle for a Xerox copy of the same .The seller needs to be the sole owner of the land and should have the right to sell the land.
  • One of the most important things one needs to note while purchasing a plot of land is the encumbrance certificate. This certificate shows that the land under consideration is free from any legal dispute. This certificate can be obtained from the sub-registrar’s office .One needs to check the history of the land one is purchasing and should obtain the encumbrance certificate of the last 10-15 years.
  • One needs to check if the layout has been approved by the concerned authorities. One needs to get the land surveyed and all dimensions and area need to be marked accurately to avoid any disputes which might occur in the future with the authorities as well as property disputes, title issues and so on.
  • One needs to check if the property has been mortgaged ,and if it has been in the past ask for the release certificate from the bank stating that there are no dues against the property. One needs to get a release certificate from all the owners of the plot if there is more than one owner.
  • One needs to check if the property is sufficiently developed in order to be marketable. The plot of land needs to be kept safe from encroachment and squatters. Encroachment might lead to a legal dispute and it might become very difficult for one to sell the land till the dispute is resolved in the court.
  • One needs to check and see if the plot of land is geologically suitable for construction and does not have rocky soil underneath. A plot of land with extreme rocky soil might be difficult to sell as construction of a support structure on it might be very difficult.
  • The plot of land needs to have an extremely good drainage system and should be easily accessible to electric supply.
  • One needs to check and see if the price one is paying for the plot of land is justifiable Study the land prices and selling prices of plots of land in the vicinity and decide whether the price of the plot is justifiable and reflects its true market value. One needs to make sure that he is not overcharged.

What is the Procedure Involved in the Purchase of the Plot of Land?

  • One needs to draft an agreement between the buyer and the seller involved in the transaction. This agreement has to be made on an INR 50 stamp paper. The agreement includes the cost of the land favorable to both the buyer and the seller as well as the advance amounts paid by the buyer and the land dimensions clearly demarcated. It also includes the time span by which the transaction should take place. It also states what needs to be done if either party defaults on the agreement. An experienced lawyer needs to make the draft agreement so that if a default occurs none of the parties involved can escape the consequences. The draft agreement is signed by the buyer and the seller as well as two witnesses.
  • One of the most important steps is the preparation of the title deed. This deed is proof of right to ownership over the property. This document might be printed from a computer or typed but must not be handwritten.
  • One needs to register the plot of land in the court in the office of the sub registrar. The documents required are the title deed, previous deeds, property receipts as well as the torence plan. The torence plan prepared by the surveyor contains accurate markings of the dimensions of the plot of land. If the cost of the land costs more than five lakhs then the seller needs to submit the pan card or the form 16.The input form is filled at the sub-registrar’s office and a token is obtained on submission of the relevant documents. On the announcement of the token number all parties involved present themselves at the sub-registrar’s office in order to execute the document. All parties involved provide photographs and a thumb impression is taken and they need to sign on a sheet in front of the concerned officer. The relevant fees need to be paid and a receipt obtained. Once the registration process is done all the documents are returned within 30 minutes of getting the receipt.
  • One needs to pay the stamp duty depending on the cost of the land and its location. The registration fees paid would be around 2% of the cost of the land. Document writing fees depending on the cost of the land and type of document are charged. A computer service fee is also charged.

How Can One Procure a Loan in Order to Purchase a Plot of Land?

  • One needs to remember that only 60-70% of the value of the land can be obtained as a loan from the bank or a housing finance institution and the rest of the amount needs to be financed by the buyer. The processing fee might be 1% of the loan amount. The interest rates charged may be 1-2% higher than those charged for a home loan. This is because a plot of land is harder to sell than an apartment and since a plot is left vacant there is a chance of a legal dispute.
  • Banks compute the value of the land based on the circle rates in the area. The cost of the land along with ones income determines whether the loan will be sanctioned or not.
  • The maximum tenure of the loan is 15 years which depends on ones retirement age.
  • The land boundaries need to be clearly demarcated and registered with the municipal Corporation.
  • The land needs to have a clear marketable title so that it can be pledged as collateral for the loan.
  • The land needs to be purchased from a developer or a society and not from an individual owner to get the loan sanctioned.
  • The amounts are disbursed to the seller of the land and not to the buyer unless an amount is paid by him. The plot of land should not have been purchased over 6 months ago.
  • One must repay all existing loans before taking a new loan .A joint loan taken along with one’s spouse would put one in a better position to get the loan sanctioned and a lesser stamp duty would be paid if the property is registered in the wife’s name.
  • If the loan is taken for the purchase of a plot in another city the bank’s branch present there checks the details of the property. If the bank has no branch in the city of purchase then the loan will not be sanctioned.

What are the Tax Benefits of Taking a Loan to Purchase a Plot of Land?

  • If a loan is taken to purchase a vacant plot of land one needs to note that there are no tax benefits. However if a loan is borrowed for the purchase of a plot of land and that land is rented out the interest levied on the loan borrowed shall be eligible for deductions as per income tax act 1961.However no such tax benefits occur for the principal amount .However if rental income is incurred by letting out the property this income is clubbed with ones total income and taxed as per slab rates.

I would like to end the article with the famous saying by Franklin Roosevelt” Real Estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense paid for in full, and managed with reasonable care,it is about the safest investment in the world.

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