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04 February, 2017

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How to Start Real Estate Development Business?

How to Start Real Estate Development Business?
Real estate development, or property development, is a multifaceted business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property.Image result for real estate development
Real estate development is different from construction, although many developers also manage the construction process.
Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control and orchestrate the process of development from the beginning to end. Developers usually take the greatest risk in the creation or renovation of real estate—and receive the greatest rewards.
Requirement to start a real estate development business:
  1. No Special Qualification is Required: For starting a real estate development business there is no need of special qualification which is mandatory by any law. But having specialised knowledge in specific field always give upper hand to you in comparison to unknowledgeable person.
  2. So, having a bachelor degree is preferable but if you have masters degree than it will good for you. However, if you have a degree in a related course such as in civil engineering or construction or business and management, it would go a long way to help you in the business.
  3. Skills and talent: Excellent communication skills, leadership, problem solving, interpersonal, analytical, presentation, project management, proficient in Microsoft Office, ability to read and understand blueprints, knowledge of construction and architectural design are some basic skills and talent required to become real estate development.
  4. Capital: Starting a real estate development is capital intensive project. You should have strong capital base, even if you finance your business through bank or investor but you need to invest money from your own resources.
  5. Experience: You can work as agents who help to promote and sell properties on behalf of the company and when they have gathered enough capital and experience to start their own business, they leave the company to set up their own real estate development company.
Provide Legal Entity to Business
To provide a legal entity to your business you have any of the following options:
  1. Sole Proprietorship or
  2. Partnership firm or
  3. Limited liability partnership or
  4. One Person Company or
  5. Private limited company or
  6. Pubic company
But as you know this business requires huge capital base. So, it is better to start with Limited Liability Partnership firm or with Private Limited Company.
Other factors to be consider while starting real estate development
  1. Type of properties you want to develop: Real estate business can be categorised in two type residential real estate and commercial real estate. There are also real estate developers who just focus on buying land and sale at later date. So, when you start real estate business decide properties you want to develop.
  2. Extensive Research: Extensive research is important to understand rules and guiding for the business and to known how market works. On other hand research is important for each property or area you want to develop before you go ahead. Because any area seems to be attractive now may be at risk tomorrow due to economic, political situation or increase crime rate.
  3. Good Business plan is required: Real estate business require careful planning to succeed. So, for make sure your success you need to develop a good business plan. The business plan should contain basic overview of your business, your vision and mission, business structure and team structure. On other hand market analysis, sale and marketing strategy, financial projection and costing should also mention in business your plan. You can also include SWOT analysis of your company.
  4. Secure the necessary fund for your business: Real estate is capital intensive business you need to be careful about its financial structure. You can get finance from financial institution like banks and other specialized institution that provide finance to develop real estate business. Another option is partnership. In partnership you can pool your resources together.
  5. Hire Competent Team: As per nature of Real estate development business, it requires experienced and competent work force .In real estate development business contractor is most important element for development of business. The contractors help you to carry out your building project excellently. On next stage you need realtors and estate agents to help you in find credible buyers and tenants for your property.
The following matters are needs to be considered whenever we are calculating taxability of real estate business:
  • Year of taxability of income
  • Computation of income
  • Deduction from income
Year of taxability
  1. Real estate business involved long term projects which may be completed from 1 year to 4 or 5 years. Here the point is when income became taxable. Either it should be on year of completion or it will be on year to year basis.
  2. For the purposes of income tax income has to be determined on a year to year basis. This was so decided by the Supreme Court in the case of P M Mohammed Meerkhan Vs CIT (1969) 73
  3. However the department has been accepting the ‘completed contract method’ also and the   Bombay High Court, in the case of Shree Nirmal Commercial Ltd V CIT 1983 as accepted the completed contract method.
  4. It is also interesting to note that the scrutiny norms announced by the CBDT for picking up cases for scrutiny also state that all cases of builders following the completed contract method should be picked up for scrutiny.

Computation of income
The department has been accepting an 8 % profit on gross receipts or work completed when the project is incomplete. Balance of profit has to be offered in the year of completion.
For partnership firms, out of the 8 % profits, interest and remuneration to partners can be deducted to arrive at taxable income of the firm.
Section 44AD is applicable only in the case of civil contractors ( executing civil work for third parties )  having less than Rs 45 Lakhs of receipts and hence this section cannot be made use of by developers who are selling residential flats or office spaces on their own.
Where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall, subject to the provisions of this section, be allowed, a deduction of an amount equal to100% of the profits and gains derived from such business.
(2) For the purposes of sub-section (1), a housing project shall be a project which fulfils the following conditions, namely:-
(a) The project is approved by the competent authority after the 1st day of June, 2016, but on or before the 31st day of March, 2019;
(b) The project is completed within a period of three years from the date of approval by the competent authority:

Provided that,-
(i) Where the approval in respect of a housing project is obtained more than once, the project shall be deemed to have been approved on the date on which the building plan of such housing project was first approved by the competent authority; and
(ii) The project shall be deemed to have been completed when a certificate of completion of project as a whole is obtained in writing from the competent authority;
(c) The built-up area of the shops and other commercial establishments included in the housing project does not exceed three per cent. of the aggregate built-up area;
(d) The project is on a plot of land measuring not less than-
(i) 1000 sq. mts. where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the distance, measured aerially, of twenty-five kilometres from the municipal limits of these cities; or
(ii) 2000 sq. metres, where the project is located in any other place;
(e) The project is the only housing project on the plot of land as specified in clause (d);
(f) The built-up area of the residential unit comprised in the housing project does not exceed.
(i) 30 sq metres, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the distance, measured aerially, of twenty-five kilometres from the muncipal limits of these cities; or
(ii) sixty square metres, where the project is located in any other place;
(g) Where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;
(h) The project utilises-
(i) Not less than 90% of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai or within the distance, measured aerially of twenty-five kilometres from the municipal limits of these cities, or
(ii) Not less than 80% of such floor area ratio where such project is located in any place other than the place referred to in subclause (i); and
(i) The assessee maintains separate books of account in respect of the housing project.
(3) Nothing contained in this section shall apply to any assessee who executes the housing project as a works-contract awarded by any person (including the Central Government or the State Government).
(4) Where the housing project is not completed within the period specified under clause (b) of sub-section (2) and in respect of which a deduction has been claimed and allowed under this section, the total amount of deduction so claimed and allowed in one or more previous years, shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the period for completion so expires.

So, now we known real estate development business is capital intensive business if we done it carefully it will give us high return.


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