NRIs don’t even benefit from indexation, which adjusts the purchase price for inflation. Buyers must deduct tax on the total sale value. However, buyers can apply for a lower TDS certificate to reduce this amount.
Besides, NRIs often face difficulties managing the property remotely. Tasks such as approving repairs, managing maintenance costs, or renewing rental agreements usually require property owners to be physically present. However, NRIs do have the option of appointing a power of attorney (PoA).
Mahesh Ahuja, a seasoned real estate broker with years of experience in the industry, shares with Mint his perspective on why residential properties may not always be the best investment choice for NRIs.
Why did you decide to stay on rent instead of buying a house?
As someone who worked in the Indian Navy earlier, I experienced the hassle of frequently shifting homes due to transfers. I didn’t want to go through that again, so renting provides me the flexibility to move easily.
For most people, a house should be considered more of a consumption item than an investment. The appreciation for residential properties is often not as high as that of commercial properties, which I have focused on instead.
My son is an NRI based in the US, and I’ve seen many NRI clients struggle with maintaining and transferring properties in India, especially when their children are settled abroad and have no interest in the property. I didn’t want to create that kind of hassle for my own family.
However, I’ve found that the emotional and practical benefits of owning a house are often overemphasized, especially for people in my stage of life. At this age, I’m more focused on ensuring financial security for my family through strategic investments rather than tying up a large amount of capital in a residential property, which can be hard to liquidate.
How and when did you start your real estate career?
I had been with the Navy for about 13 years. I resigned for personal reasons. Right before I resigned, I had started looking for a house to buy. My first visit was to a property, where I met a real estate agent who was pitching the project to me.
Even though the agent was quite good, I remember thinking that I could do this job better. I was impressed by his sales pitch and personality, and I felt I had the right skills to succeed in real estate, given my background in public speaking and training.
So, when I resigned, I decided to give real estate a shot in the early 2000s. Over the next few years, between 2003 and 2006, I ended up flipping around 20-25 properties of my own, making good money in the process.
Why did you sell off all your real estate holdings?
By 2006, I had built up a decent real estate portfolio, but I started to have some concerns about the market conditions and the sustainability of the rapid appreciation we had been seeing.
I had some challenges with clients when it came to selling their properties. I had to sell my own property to pay the money back to investors, as there were disputes around payment terms and transfer processes. Moreover, personally, I didn’t feel like owning a house, the hassle that comes along I mentioned earlier.
Finally, in 2006, I made the conscious decision to sell off all my residential real estate holdings, considering the hassles of transferring the property to my son.
What challenges do you see NRI families facing with properties in India?
Ensuring the property is well-maintained and taken care of can be a constant headache for NRI owners, especially if they are not physically present. Finding reliable tenants, collecting rent, and dealing with any issues can be a logistical nightmare from abroad. When the parents pass away, the process of transferring the property to the children can be extremely tedious and complicated, especially if the children are not interested.
Why may real estate not be a good investment for NRIs?
As an NRI, any property investment I make in India would be subject to the risk of the Indian rupee depreciating against the foreign currency I earn. The rupee has depreciated almost 50% in the last 20 years. This can significantly erode the real returns on the investment. Rental yields on residential properties in India are often quite low, sometimes in the range of 2-3%. This makes it difficult to generate meaningful passive income from the investment.
Moreover, there are significant transaction costs involved in buying and selling real estate in India, such as stamp duty, registration fees, and brokerage, which together are roughly about 12% of the property at the time of purchase and capital gains taxes upon the sale. When it’s time to sell the property and repatriate the funds back to my home country, there can be complex tax and regulatory hurdles to navigate. These can eat into the overall returns.
The returns often don’t justify the hassle and risks for NRIs. For NRIs, I’ve found that the potential upsides of owning real estate in India are often outweighed by the downsides—the currency risk, low yields, high transaction costs, and repatriation challenges.
Unless an NRI has a very strong emotional or personal attachment to a property in India, I believe it’s generally not the best use of their capital. The money is often better off invested in more liquid assets like fixed deposits, which give you more or less the same returns without any hassle.
How can NRIs tackle the challenges around succession and the transfer of property?
Given the complexities involved, it’s important for NRIs to plan ahead and take proactive steps to facilitate a smooth transfer of property. Here are some key things I would recommend|:
Drafting a clear and legally binding will is crucial. This ensures the property is transferred as per your wishes rather than leaving it to chance or family disputes.
Appoint a close family member or friend residing in India as a nominee or power of attorney. This person can handle the day-to-day management. Keep all property-related documents, such as the sale deed, up-to-date and easily accessible. This will streamline the transfer process when the time comes.
Gifting the property to your children while you are still alive can be another way to facilitate a smoother transition. I have personally decided not to hold on to any residential property in India. Instead, I’ve focused my investments on more liquid commercial real estate.
What is your message to elderly parents who own properties with NRI children abroad?
I’ve seen this scenario play out quite often, and I’ve come to the conclusion that it’s generally not advisable for elderly parents in this situation to own property in India. When the children are settled abroad, they often have little to no interest in the property back in India. It becomes more of a burden than an asset for them.
Ensuring the property is well-maintained and managed can be a constant headache for elderly parents, especially if they are not physically present in India.
My suggestion would be to seriously consider selling the property and investing the proceeds in more liquid, easily manageable assets. This could be in the form of FDs, mutual funds, or even gifting the money to the children for their own use.
What is your suggestion to young investors today?
Approach real estate investments with a very strategic and pragmatic mindset. Here are the key points I would emphasize. If you want to invest in real estate, focus on commercial properties, especially well-located shops, rather than residential investments. Commercial properties tend to appreciate at a much higher rate and provide better rental yields, be very selective about the properties you invest in.
Treat a residential property as a consumption item, not an investment. When buying a house to live in, assume the price of the property is essentially zero. Prioritize your own comfort and needs over investment returns when it comes to your primary residence. Look for reputable real estate advisors who have a proven track record.
Diversify your investments across different asset classes. Seek professional advice.
Do you still actively work as a broker?
Yes, after 2006, I’ve consciously avoided investing in residential real estate for myself. My focus has been on commercial properties, which I believe offer better returns and fewer headaches.
As a broker, I continue to be very active in the market. I participate in the real estate sector through my brokerage business rather than directly owning residential properties.
It’s a decision that has served me well over the years and aligns with my overall investment philosophy.