Written by : DG Gupta

A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries

Financial Planning for Real-estate Business

DG Gupta
DG Gupta, CA, CS

Dec 5, 2021 04:01

Real estate is a booming market in India. Economic Times noted that after the lull caused by the pandemic, the residential sales are gaining momentum, recording a robust improvement of 124% in the largest cities like Mumbai. According to estimates, the real-estate business will contribute to 13% of the country’s GDP by 2025 (IBEF). Currently, it is the second-largest employment generating sector in the country. Due to rapid urbanisation, real estate is further pushing its growth to reach a sharp recovery in FY22. Hence, IBEF states that it will surge to more than Rs. 35 trillion in the next two years. However, buying real estate is a costly affair, and it includes many complex procedures. You need to analyse the current market and evaluate the future market before investing in real-estate businesses. To cope with these requirements, it is vital to do financial planning prior to signing the agreement. In this article, we will take a quick glance at the cruciality of real estate accounting and planning.

What is real estate?

Real estate means tangible property, and it comprises land, buildings, and air rights above and below the land. There are mainly 4 types of real estate, namely,

  • Residential real estate
  • Industrial real estate
  • Commercial real estate
  • Land

Why is financial planning in real-estate accounting important?

Real estate is a profiting business that guarantees a lump sum amount to investors. As it comes with numerous tax benefits and cash inflows, investors are attracted to it like flies to fire. Nevertheless, only a strategic approach of real estate accounting can take you forward, considering the damage caused by the pandemic.

Real estate financing is a multifaceted concept that covers a wide range of long-term and short-term financial goals. The main objective is to augment the capital investment of the mortgage that you have acquired. So, calculating the renovation cost, expenses, cash flow of the rental property, and financing the mortgage – all need holistic financial planning from the lender as well as from the borrower. While planning for real estate accounting, it is crucial to incorporate the income statement, cash flow and balance sheet. You also have to ensure that the rental income should exceed the mortgage in meeting the financial wants. Creating a real estate business plan might help you achieve the future goals of your venture. All these plans will strengthen your business, bring capital and boost your overall performance. Along with this, remember to maintain accurate information of your performance in the plan. Exaggeration can negatively impact your business, so try to keep a clean image.

What are the different sources of finance for the real estate business?

Due to the cost-intensive feature of real estate, you can get financial support from various entities. Let us take a look at the various potential options for real estate accounting;

Bank Loans - Taking EMI from banks is one of the most popular options, as the value of EMI will eventually decrease, but not the price tag of your property. Be vigilant about the type of loan you acquire. This is because the wrong scheme can compromise your interest rate, thereby impacting your income. Usually, banks support you with a 20% down payment and a tenure of 20 years, which is more than a successful real estate business person might seek. Additionally, lower interest rates, low processing fees all make it an ideal option for future investors.

Fractional real estate investments – This supporting system will be taking over the Indian market after its rooting in the US. Fractional real estate investments assist high cost commercial real estate businesses that come under combined ownership. If you are a retail investor with limited CRE, then you can take this opportunity and diversify your portfolio.

Real estate investment trusts – To easily manage your real estate accounting and financing, you can benefit from mutual fund schemes like REITs. Since its inception in 2014, it backs real estate investors with Alternative Funding Mechanism (AIF) and securities that give extra investment portfolios through Grade A commercial reality. The Securities and Exchange Board of India (SEBI) regulates this support scheme and is utilised after they appear on the stock exchange listing.

What are the critical elements of real estate accounting?

Real estate accounting is pretty different from other sectors. The guidance note covers all the crucial parts of a real estate transaction, joint development agreement, renovation of existing property, sales and so on. The accounting treatment of substances is often compared to the delivery of goods (Accounting standards 9). All the facets mentioned in the Revenue Recognition will also be a part of the sales. You can register the revenue after you include information about the transfer of ownership, the amount collected, risks and rewards of ownership transfer. On the contrary, if the substance of the transaction is like a construction contract, then accounting standard 7 will apply. To figure this out, you can check if the majority of the deals showcase the features of construction contracts or if an individual unit of sale is attached to the common amenities like flats under the township. Whatever the category you are in, you need RERA registration to proceed further.

What is RERA?

RERA keeps the real estate business projects under control with various regulatory standards. It creates a balance of interest between the consumer and the seller. As real estate accounting involves handling bulk amounts, RERA also protects real estate agents from misusing the money. As per the RERA Act, every individual who registers under the act needs to open a bank account called a “Designated bank account”. Hence, 70% of the received money are allocated to this bank account. This means a business person can only save only 30% of the amount to pay the admin fees. To withdraw the rest of the amount, you need a CA certificate in Form 3.

Apart from this, RERA compels promoters to update real estate accounting every 4 months on the website. You also need to submit documents on CA, Engineer and Architect Certificate along with this on the website. Form 2A should be uploaded every four months, stating the quality certificate of the supervising engineer. This data should comply with the rules of the national building codes. Additionally, the annual audit should be submitted within 6 months from the end of the year using Form 5.

The significant highlights of RERA are

  1. All promoters need to register under RERA.
  2. If you haven’t registered within the deadline, then a penalty will be initiated. I will be 10% of the project cost.
  3. Advertisements of the property are allowed only after RERA registration.
  4. Any changes to the approved plan are not acceptable. If it is highly essential, then they need joint consent from 2/3 allottees who handled the work.
  5. You can give all the amenities in a brochure. Misinformation or mismatching accounts are strictly prohibited.
  6. If you are selling a flat, you need to establish a society for flat owners and ensure that they are taking care of the flat in the upcoming 5 years.
  7. You can create an Agreement of sale with the buyer if you have acquired 10% of the total flat cost. You also have to pay for the full stamp duty.

Manage your real estate accounting and finance needs with Gotaxfile!

If you are a beginner, managing real estate accounting can be daunting. In such cases, you can seek the help of a professional to handle you with the necessary accounting supports. Gotaxfile is an industry leader when it comes to setting accounting standards. We make the financing documentation process easy and hassle-free for you. We ensure that all compliances and RERA requirements are met with efficiency. For diverting penalties reach out to us as you kick off your real estate investment plans.

DG Gupta
DG Gupta, CA, CS

Dec 5, 2021 04:01

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