Owning a home with land is aspirational for many. And if you plan to explore this path, there are usually two options — buy a villa or buy land and build. The latter option, which had faded away over the last few decades in metros, is making a comeback due to its various advantages — lower cost, more customisation, higher return potential and cash-flow flexibility. But, as with any choice, it is important to understand the pros and cons, and then decide on which option suits your situation better.
Cost factors
A key factor to consider is the actual cost differences between the two routes. Villas tend to cost more as you pay the profits of multiple stakeholders — developers, contractors, architects and suppliers. So, the price could be two-three times the cost of building a house yourself, depending on the location, the brand of the developer and amenities provided. For this reason, developers too prefer a villa project as their margins can increase two-three times viz-a-viz plotted development.
In plots, the overheads can be less — the contractor margin is limited due to competition — and is about ₹2,500 per sq ft in many cities. You can save even more if you go for labour contract — which can be ₹450 per sq ft or so for civil work.
Two, there is also the timing differences in cashflow. Plot buying and building has the advantage of splitting the payment over at least two periods (for buying land first and then later build when you have saved money). With villas, your payments must align with the schedule set by the developer.
That said, if you take a bank loan, the considerations are different. While villa-buying is seamless, if you build, make sure you have sufficient money for the initial basement and structure, as getting disbursements from bank loan for construction can take time.
Three, one needs to consider the difference in potential for returns. Typically, villas may suffer from base effect where there is loading of common areas and amenities, while plots can be better as investment. In simple terms, villas have more depreciating component (building) compared to plots — lowering return. However, the appreciation for plots depends on picking the right location — where the city will grow — and missing out on this, can certainly hurt return.
Risk factors
The nature of risk also differs between the two options. Plots may have higher risk of poor social and other infrastructure than villas. For example, villas come with more amenities such as parks and clubhouse within a project, whereas only established developers provide basic amenities such as parks in plotted layouts. Also, villa projects typically come up closer to key roads and areas that are ahead in development. Plots tend to be in upcoming localities in the periphery of a city and infrastructure may take a few years to come up.
When approaching self-building, you must be cautious on the time and expertise needs. There is a need to grasp multiple aspects — such as structural design, materials used by the contractor and labour workmanship. You may have to give up on your weekends and vacation, and take frequent trips to the construction site for sepervision. And without a turn-key contract (which can add to cost), you may have to understand and sort clearances — such as NOCs required, zoning certificates and other clearances based on the location of the land and proximity to infrastructure such as airport.
There are also legal risks to consider when buying a plot. Be sure to check if it is approved, and not get carried away by the infrastructure the plot developer creates.
Villas may have liquidity risks. For example, land in plotted layout is identifiable and saleable more easily. Some villas may not have clearly marked land and have the concept of undivided share (UDS). Be sure to check the agreement, as it might have restrictions on usage and even sale. You must also check the reputation of the villa developer in delivering within agreed time and of quality.
Factors influencing decision
So, how do you decide? One, be sure to understand the suitability of the location for you. This includes proximity to social infrastructure and connectivity. In general, villas are in the periphery of a city and rarely very outside. Whereas plotted projects are usually located further away from where a developer envisages livability over a longer period.
When buying a plot, consider your time-frame. If you want to move in within 2-3 years, pick projects that will be occupied soon. Developments marketed as an investment versus an end-use product tend to be vacant for longer periods. If the plots are near to city and the location has social infrastructure, most of the buyers tend to build, especially if bank loans are available. However, if your finances are such that longer wait is suitable, be sure to keep an eye on social infrastructure planned when selecting.
You must also critically consider the customisation you really need. While the ability to tune everything exists with building on your own, it may be time consuming and expensive. Often, developers allow personalisation within bounds, and this may serve your purpose rather than taking on full construction.
The author is an independent financial consultant