To Build or Buy a Home – Everything you need to know

If you are on the verge of investing in a home and are weighing pros and cons of various aspects of this investment – you may want to look into the feasibility of building a home versus buying one. Here is a discussion with Dr. Madalasa Venkataraman, Lead Researcher, Century Real Estate Research Initiative, Indian Institute of Management, Bangalore that may help you make a choice if you are looking to invest in a home for personal use.Housing may be looked at as a consumer product. It has two aspects – that of consumption and investment. As a product you consume, you may use it as your primary residence and live in it. From the investment point of view, this is a product that you will be pumping a substantial portion of your life savings into. These two aspects are rarely independent of each other, especially for the first-time buyer.How do we choose a home?Whether to build a house or to buy depends on the primary motivation for the purchase- to live in, or to rent out. If our primary motivation to buy a home is to live in it, there are various aspects based on which we evaluate our prospective home.

1. Locational attributes :

The centrality of the location, with respect to place of work, commute times, the access to roads and other transportation infrastructure, the proximity of amenities, availability of soft infrastructure such as schools, hospitals and shopping centers, parks and open spaces, lake fronts, etc. are some of the aspects we take into consideration. Very often, access to water and other urban services also impact the decision of finalising the location. Locational attributes are priced at the value of the land. For example, you invest in a home in Koramangala, you have all your amenities and requirements in close proximity and you will be paying primarily for being centrally located.

2. Community

As social beings, we are concerned about the community we are going to be living in. Our neighbours and the demographics of the region will factor into our decision-making. Evaluating the community you will be living in is a very personal decision. You may want a home with an old world charm, or you may choose a gated community where you have your privacy, and have neighbours with similar demographic profiles. Families with small children and the elderly may prefer close-knit communities, with public spaces such as parks and play areas.

3. Housing attributes

This pertains to the attributes related to the housing unit – both the interiors and exteriors. Housing attributes are partially related to money and how much you are willing to spend to customize your home. Some housing attributes such as the car parking space, the view, etc, may be a function of the type of housing.What makes a sensible investment?There are three kinds of home

• The independent home, where you own the land and home completely - either as a part of a privately developed layout, a BDA layout or a revenue layout.
• The villa, where you own the portion of land that your home is built on, yet is part of a larger (usually gated) community of homes with shared amenities.
• Then finally you have the apartment, typically within a large apartment complex.

A buyer who buys a house to live in gives greater importance to 'liveability' considerations viz. location, community and housing attributes.  To such a buyer, any appreciation of property, while welcome, is only 'on paper' till he/she sells and moves out of the house. However, a person with an investment perspective may give more weightage to monetary considerations such as return on investment, ease of rental, and property appreciation and desirability of the area.From an investment perspective, the following attributes need to be considered

1. Cost appreciation

Owning an independent house and the land makes perfect investment sense, if you are looking primarily at appreciation. The generic thumb-rule here is that, land appreciates, whereas buildings depreciate over time. Dividing the cost of undivided land by the total cost of the house, gives us the proportional cost of the land. Higher the share of land, greater is the appreciation due to locational factors. From this perspective, return on investment is highest for an independent house since the entire land parcel belongs to the housing asset. These rates will be lower for a villa, and the lowest for a flat.

2. Demand and supply for housing units

In certain areas, there is a higher demand for certain housing products. For instance, in places close to IT parks where rental demand assumes importance, renters may prefer apartments to houses. Therefore, apartment owners find it easier to rent out their houses compared to owners of independent houses, thus making higher rental returns on apartments.

3. Financing costs or 'leverage'

How much you spend on getting the home of your dreams in each of these residential categories is also something to consider. When a bank provides a loan for purchase, it increases the affordability of the house. It is very difficult to obtain a loan to buy only land, and banks have stringent norms for construction loans for independent houses. Loans for flats and villa projects are much easier to obtain, especially if the projects are by large reputed builders and are preapproved.Transaction costs also matter.Independent houses are not for the faint hearted - there is a lot of running around to establish title and to get property papers in order, hassles in terms of following up with contractors on the project. But the benefit here is that you may customize the house to any degree. Though you may have to work hard a lot initially, all of the appreciation will be yours completely.In a villa, your role in the completion of the project will be minimal, and you will get a good amount in terms of appreciation, though it may not as much as an independent home. Despite this, the demand for a villa is on the higher side, especially in Bengaluru, since it combines the charm of an independent house with community amenities. With a rise in income, there is an increasing demand for luxury floor space. A villa makes a nice investment option for those who do not have the time or inclination to see the project to completion personally, and the developer takes the effort with due diligence and project management.The only downside to this option is that you have to deal with constraints in terms of customizing the space. This is especially for the exteriors, where residential societies impose several restrictions. Even your interiors may face similar restrictions because of the construction style.Finally, an apartment is totally dependent on the legalities associated with its purchase and is completely regulated by the builder. If minimal hassle is what you are looking for, then this may be the option for you.Your final choice of home, constructed or bought outright will depend on your personal comfort level and your expectations from your home. How much of time you are willing to dedicate to the process will also make a world of difference.