Master Residential Real Estate

Chapter 11

Real Estate
Investment: Basic
Legal Concepts

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Buying real estate is an excellent investment opportunity that can be lucrative if done
right. However, the process can be nerve-racking and confusing, especially if you
are a beginner. There are several complex steps and jargon involved in the process.
Moreover, there are multiple legal matters that you must consider before making a
real estate purchase. The good news is that these laws and processes can be easily
understood with some research.

Best Ways To Invest In Real Estate

When you think about real estate investing, the first thing that probably pops into your
mind is a home. However, if you are a budding real estate investor, there are several
options when it comes to selecting investments, some of which are non-physical
properties. These include Rental Property, Real Estate Investment Groups (REIGs),
Real Estate Investment Trusts (REITs), and House Flipping, each of which has been
explained below:

1. Rental Property
Investing in rental properties can provide a regular source of income, with
potential for property value appreciation over time. Both residential and
commercial properties can be rented out, and rights of landlords and tenants
are protected by the Rent Control Act of 1948.

2. REITs (Real Estate Investment Trust Funds)

If you are looking for a hassle-free,

liquid way to diversify your investment
portfolio, REITs are a great option.

As the name suggests, REITs are

investment trusts which are comparable
to mutual funds that own and operate
income-generating real estate properties.
Profits made through this investment
are taxable under certain laws by the
Government of India. We will learn more
about REITs later in this book.

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3. Real Estate Investment Groups (REIGs)

REIGs are companies that collect investments from multiple investors. These
investors wish to earn profits through investments, without the hassle of
managing and operating these properties. This type of investment is not as
liquid as an investment in REITs.

These groups mainly focus on buying,

renovating, selling, or financing
properties to make a profit. They buy
or construct multiple unit properties,
sell them to investors, and oversee
operations and management.

4. House Flipping
House flipping is usually a short-term investment aiming at making quick profits.

Flips the
property

Buys an old property Sells it at a higher

price after renovation

It is a good investment
option if you have extensive
experience in renovation, real
estate valuation, or marketing.

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Fundamental Real Estate Laws In India

While there are several federal laws that are applicable throughout the country, most
Indian states and union territories have specific laws.

The Constitution
of India
Both the central and state
governments can make and enact
laws related to these matters.

Central State
Government Government

Concurrent
List Land

Laws pertaining to the transfer

of property, contracts, and
registration of documents for
non-agricultural properties,
belong to the Concurrent List.
Moreover, India is undoubtedly a diverse country with varied sectors. Laws related to
matters such as inheritance are often heavily influenced by practices and customs.
Broadly speaking, some of the most important laws governing Indian real estate
include the Transfer of Property Act (1882), Registration Act (1908), and (Regulation
and Development) Act (RERA) (2016). A few of them have been outlined in the next
page.
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1.
Transfer of Property Act, 1882
This central act lays down
general principles of movable
(jewellery, money, etc.) and
immovable property (land,
buildings, etc). The act covers
aspects such as the sale,
lease, exchange, mortgage,
and gifting of properties.

Per this act, “sale” is

defined as the transfer
of ownership in exchange
for a price. This price can
either be legally promised
or paid in full or partial
amounts.
It also states that the transfer of
ownership for immovable properties
like land can only occur through
registered documents.
The act also protects your rights as a buyer. For example, let us say you found a pre-
existing material defect in the property you bought, like a roof leak or foundation
damage, which the seller did not disclose to you at the time of sale. This failure on behalf
of the seller to disclose a material defect gives you the right to seek compensation
from the seller, as per this act.

2.
Indian Contract Act, 1872
This act is applicable to all Indian states. It dictates the circumstances under which
promises made by two parties, like the buyer and seller, are legally binding. Per the act,
a “contract” is defined as an agreement that is enforceable by law. It covers aspects
such as who can enter into a contract and how it can be implemented and executed.

In addition, it covers circumstances where someone is allegedly involved in breach of

a contract and remedies available for the parties. For example, if you and the seller
signed a contract to buy a piece of land for Rs. X and if the seller refuses to sell it at that
price later, you can seek legal action.
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3.
Transfer of Property Act, 1882
Property A Property B An easement refers to your legal
right to either occupy land owned by
someone else or use the facilities on
the land for some specific purpose.

The most common example of

an easement is when someone
Easement is given the right to cross a
road that is on someone else’s
property to get to his own house.

Other examples of easements include electrical lines, groundwater, and drainage. You
cannot transfer an easement to another person, but it is transferred by default when
the property is transferred. The laws governing easement are stated by the Indian
Easement Act.

4.
Indian Stamp Act, 1889
The primary purpose of this act is to generate revenue
for the state governments.

This act mandates the payment of a certain

amount of tax called stamp duty, on specific
documents.
A document that is stamped by an authorized person
is considered valid evidence in a court of law. Since
stamp duty is to be paid to the state government, the
rates vary across states. In most states, the stamp duty
is a percentage of the total transaction.

1000 sq.ft Land In, Bangalore: 5.6% Stamp Duty

whereas, Mumbai: 5% Stamp Duty

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5.
Registration Act, 1908
This is a central act that regulates the procedures required to register
immovable or movable property. It also lists the specific documents you would
need to register these properties. Moreover, according to this law, you would
also have to pay a certain amount, called a registration fee, to register your
property. The fee is usually 1% of the property’s value and is capped at Rs
30,000, in Mumbai.

6.
Rent Control Act, 1948
If you are planning to invest in real estate by buying a property and renting it
out, this act is especially important for you. The renting out of any property in
India is subjected to several rules and regulations as laid out by the Rent Control
Act. It protects the rights of both the landlord and tenants. If you lease out a
property, for example, you cannot charge an extraordinary amount of rent.
In most states, the rent must not exxceed 8-10% of the value of the property.

7. Right to Fair Compensation and Transparency in

Land Acquisition, Rehabilitation and Resettlement
Act, 2013:
Land acquisition refers to the power of the
central or state government to take private
property for public benefits, like the widening
of a road.

In such a case, the government is

required to compensate the original
owners and all those affected by
the acquisition.

This act outlines what fair compensation to

the owners is and mandates the transparency
of the acquisition process. It also assures
the rehabilitation (restoring the property to
an improved state) or resettlement (moving
people to a different place to live) of those
affected.

Road Widening
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8.
Land Revenue Codes
These codes vary from state to state and cover taxes paid to the government
by the property owner. These codes cover regulations related to tenancy types,
land revenue, and agricultural land holdings, among others. It also classifies
immovable properties within a state. Transfer restrictions, powers and duties of
revenue officers, as well as penalties for infringing these codes are all covered
by land revenue codes.

Apart from the laws stated above, there are multiple other local, municipal,
and state laws that cover aspects such as rent control, slum redevelopment,
urban development, building byelaws, property tax, land zoning, land use,
environmental protection, and Special Economic Zones (SEZs).

Law What Who How

Lays down
Transfer of Transfer of Property buyers principles for the
Property ownership of and property sale, lease,
Act, 1882 property. sellers. mortgage, and
gifting of properties.

Two or more
Determines the Covers who can
Indian parties, like
circumstances enter into a contract
property buyers
Contract under which
property sellers,
and a contract’s
Act, 1872 contracts are implementation and
or tenants and
legally binding. execution.
landlords.

Indian Property owners

Legislates and
Right to and general
Easement easements members of the
governs the right to
Act, 1882 easements.
public.

Two or more Document stamped

parties, like by an authorized
Indian Stamp Validates official property buyers person after paying
Act, 1899 documents. property sellers, stamp duty is
or tenants and considered valid by
landlords. a court of law.

Property Lists specific

Registration Registration of buyers documents and
Act, 1908 properties. and property procedures to
sellers. register a property.

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Law What Who How

Ensures fair Legislates aspects

Rent protection of the
Landlords and of rental properties
Control rights of
tenants such as fair rent
Act, 1948 landlords and and eviction.
tenants.

Right to Fair
Compensation
and
Legistlates the Property
Transparency acquisition owners, the
Ensures
transparency and
in Land process general public,
fair compensation
Acquisition, by the central and union
during the
and state and state
Rehabilitation acquisition process.
governments. governments.
and
Resettlement
Act, 2013

Real Estate Promote Mandates the

(Regulation real estate
Real estate
registration of
investments and certain projects with
and developers and
make the real RERA. Ensures
Development) estate sector
property
quick redressal of
buyers.
Act transparent disputes with the
(RERA), 2016 and accountable. Appellate Tribunal
and RERA.

Cover taxes Property Includes regulations

Land to be paid owners related to tenancy
Revenue by property and state types, transfer
Codes owners to state governments. restrictions, and
government. duties of revenue
officers.

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Notes

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