Buyer Guide: What to Buy? Residential vs. Non-residential land

Investing in land is significantly different from purchasing a built property. However, the returns on investment are largely governed by the type of land you invest in. One of the most frequently asked questions by all investors is – Which offers better ROI – residential land or non-residential land? Little do the buyers realise that there are various types of non-residential land, each having its own set of challenges and prospects of growth. If you are facing this dilemma of which type of land property to buy, it is essential to understand the types of land parcels and the kind of returns on investment you can get from that piece of land.

Based on usage, land is broadly classified into residential and non-residential. Non-residential land is further classified into –

Industrial

Commercial

Agricultural

 

Out of all, independent buyers can opt to invest in industrial, commercial and agricultural land. The Government holds the land reserved for recreational and transport purposes and awards it to private players for development through tenders.

 Residential Land

 Any land, plot, parcel, lot, tract or area of land including any building used primarily or intended to be used for owner-occupied housing or tenant accommodation constitutes residential land. Single-family housing, as well as multifamily units, can be constructed on residential land to qualify as residential property.

 A piece of land is zoned for residential use by the local development authority or the department of town and country planning. But, you can use it for other investment purposes such as making rental income and, under certain special circumstances, for commercial or agricultural purposes.

How to buy residential land?

For purchasing land, you must first draft an agreement with the seller made on Rs 50 stamp paper. The agreement should contain details such as:

# The agreed cost of the land

# Details of the advance deposit

# Action to be taken in case one of the parties defaults on the sale

# The particulars of the land such as size and location. 

Once the agreement is prepared, the next step is to register the land. You must prepare all the relevant documents and register with the office of the Sub-registrar of Assurances after paying a registration fee that varies in different States. The relevant documents also vary from State to State, for instance, in Gujarat, you must submit the photograph of the plot, and in Maharashtra, you must submit the property card and 7/12 extract document.

The final step is getting the property title mutated from the previous owner to the new one in the land and revenue records of the local administration or municipal authorities.

How can you use residential land?

Residential land is primarily used for building a dwelling unit for a single-family or building a multifamily condominium or apartment building.

The other use of the land is for investment as a rental property. To do so, you must consider a few factors, including:

# The proximity of the property to the town’s amenities such as schools, shopping areas and employment providers

# The accessibility of the property by road and connectivity with the important nodes of the town

Non-Residential Land

 Any piece of land that does not hold residential property can be classified as non-residential land. Additionally, undeveloped land is technically non-residential but can be residential if, in an effective duration, a residential building is constructed on it. This type of land is used for purposes such as building an institution for education or housing students, a facility for providing medical or palliative care, correctional or rehabilitative facilities, a hotel, for agriculture, constructing a factory and so on.

Based on the particular purpose, non-residential land is further classified into various categories:

 1. Industrial land

When land is used to construct a factory or an assembly line for manufacturing, it is termed as industrial land. Cities and towns often demarcate specific areas or parcels of land for industrial constructions, and these are usually situated on the outskirts of the urban landscape to avoid conflicts between businesses and the local residents. Businesses use this type of land to build factories, warehouses, cold-storage, light-manufacturing plants and research and development labs.

 2. Commercial land

Offices in central business districts and retail spaces are generally built on land reserved for commercial development. This land is usually located in the city centers or in regions easily accessible with public transport. While the residential property has low and stable returns, commercial property offers high yield, which comes at a higher risk. Commercial land is often classified as primary, secondary and tertiary based on how far they are from the center of the city. If you plan to buy commercial land, look for a location with upcoming infrastructure projects in the vicinity.

Advantages of investing in industrial or commercial property

Industrial or commercial properties are considered to be highly lucrative investment tools from the non-residential real estate industry. The advantages of investing in industrial or commercial property are:

Higher yields: Industrial real estate has fewer deviations in market value because of which the worth of such property may increase by seven or ten percent annually. Such high returns on investment mean that the invested amount is recovered in a short span of time. Commercial properties, too, are known to deliver higher rental yield to the tune of 3-4 percent as compared to residential properties (1-2 percent), making them a better instrument of investment.

 Long-term tenants: Tenants for industrial and commercial land usually sign longer leases than residential tenants, with leases ranging from three to 10 years and even up to 99 years. This ensures a long-term flow of income with very little effort from the landowner.

 No maintenance costs: In the case of industrial or commercial properties, the tenants usually take the onus of making repairs and paying for maintenance work as they prefer to keep an appealing storefront for attracting business on their own terms. The tenants leasing industrial land like minimal interference from the landowner in their business, which saves the landowner considerable expenditure on maintenance.

 Tenants pay taxes:  Lease agreements for industrial and commercial property are usually framed in such a way that the tenants bear the property tax and other rates such as council rate, water rate and land tax.

 3. Agricultural land

Arable land that is used for cultivating permanent crops or pastures is known as agricultural land. The rules pertaining to the sale of agricultural land allow only farmers to transact for this property. However, several urban investors are finding means to invest in this type of property to reap hefty returns on investment in the long run. The use of agricultural land is limited to farming activities, and owners need to convert the same to non-agricultural property to use the property for residential or commercial purposes.

Pros of buying agricultural land

 

The potential for high ROI: As agricultural land is available in rural and developing areas, with a future possibility of upcoming infrastructure projects such as special economic zones (SEZ) and highways, the value of such land might go up exponentially. This ensures guaranteed high returns on investment and ideal resale value.

Cost of compensation in case of a government project: Under the Land Acquisition Act, 1894, the government can acquire privately held land for public development purposes and it usually acquires farmland for this purpose. Based on the value of the land and improvements made to the land, the government pays adequate compensation to the landowner, which is higher in the case of rural land in comparison to urban areas.

Tax exemption: Rural agricultural land is not considered a capital asset, so when you sell this land, it may be entirely exempt from income tax under the head Capital Gains. The compensation received on compulsory acquisition of this land by the government is also non-taxable.

Cons of buying agricultural land

 

Only farmers can buy agricultural land: In most States in India, only an agriculturalist is permitted to purchase agricultural land. A non-agriculturalist can only inherit said land in this situation by way of gift or property inheritance through will.

Complex conversion process: The conversion process of ‘land use’ from agricultural to residential or vice versa involves a lot of paperwork and complicated procedures resulting in delays. Several States have, however, adopted the online route for conversion, bypassing a lot of these hurdles.

 Land Ceiling Act: Land ceiling laws, varying from State to State, define certain limits to the amount of land you can own. If the land is irrigated for two crops a year, the amount of land, which can be held is much lower than if one crop were grown on it perennially. These laws also prohibit the amount of agricultural land you can lease out.

 Tips for buying farmland

Owning farmland can reap great benefits for you, given that the income earned from this land is exempt from taxation. However, rules governing the sale of agriculture are different for different States. For example, Telangana lets you buy agricultural land irrespective of whether you have any experience as a farmer or not, whereas Karnataka lets you purchase cultivable land only if you are registered as a farmer.

 Some other prerequisites for buying farmland:

Ensure that the land for sale has a clear title

Check that the property does not have any prior litigations

Rules pertaining to the relevant State must be verified as some States have a ceiling on the area of farmland you can own, while others do not permit conversion of the land to residential land

Verify that the land is registered with the land and revenue authority as farmland

 

Conversion of agricultural land to residential land

You can convert agricultural land into residential land by getting a ‘change of land use’ after acquiring the necessary sanction from the local authorities. First, you must write a letter to the commissioner of the land revenue department describing your intention for the conversion of land. With the application, you must attach the following documents:

# ID proof

# Mutation letter

# Original sale deed/Gift partition deed

# Last paid tax receipt

# Certified land survey map

# Details of the extent of land, present and past owners’ names, kind of soil and crops, mortgages and litigations

 

Any investment in real estate, be it residential or non-residential, requires the investor to consider all aspects of the property. The current leasing environment, the existing market trends, legal limitations and clearances, the distance from important industrial and commercial nodes and other nuances govern the degree of returns on investment. Once all these aspects are weighed, you can choose the kind of land you want to invest in.