Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…
1. Your appetite and eligibility for a second home-loan
The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.
2. The appreciation in property cost
Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.
3. Do your financial math
If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession. Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.
* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.)
| Disbursement Month | Payable Amount | Disbursement Amount | Actual payment including interest (@ 10%) as on Jan’2014 | |
|---|---|---|---|---|
| Month 24 | Jan’2012 | 25% | 1000000 | 1220391 |
| Month 22 | Mar’2012 | 10% | 400000 | 480121 |
| Month 19 | Jun’2012 | 10% | 400000 | 468315 |
| Month 16 | Sep’2012 | 10% | 400000 | 456800 |
| Month 13 | Dec’2012 | 10% | 400000 | 445568 |
| Month 10 | Mar’2013 | 10% | 400000 | 434612 |
| Month 7 | Jun’2012 | 10% | 400000 | 423925 |
| Month 4 | Sep’2013 | 10% | 400000 | 413501 |
| Month 1 | Dec’2013 | 5% | 200000 | 201667 |
| Total Payable | 4000000 | 4544899 |
In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.
4. Long-term horizon
If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.
Indian real estate is artifically inflated. House is cheaper in developed country like USA (don’t just compare absolute price, compare real features u get with house. In india buillder sells house with all rosy assurances but when u get house u get nothings and builder is not answerable to anyone, neither u can go to court or to police) All black money is going in real estate and that is how builders are keeping house price artifically high and common man invest in costly house thingking he is going to get good returns from his house.
Today, a decent 3 BHK house costs around 65 to 75 lakhs. We pay about 11% interest for home loan. if loan tenure is 20 years then you will pay 1.13 crore as interest so you have payed total of 1.88 crores for you 3 BHK house. to get 15% return from house, you will have to sell it for 2.16 crores. who will buy 20 years old house for 2.16 crores? do a simple calculation and u will know it is stupid to buy an appartment for 75 lakhs.
@987e2407b2eb01c978f173247b357a2e:disqus Yes I agree with you on real estate scenario in India and that its stupid to buy an house for 75 lacs for investment purpose. I think that is why the author is asking investors to look at developing areas where rate are not so high and there is still scope for good returns 5 years down the line after possession. Your calculation is perfect but an investor is not going to hold flat for that long.
it is good to buy in developing area. Because property price never go sizable down. if u go any time even for real estate window shipping it look expensive. so 1st go for window shopping then decide. second it is good financial tool for investment for long term. third it gives disciplinary saving for long term. 4th it gives status . as if u cna buy GOLD of 40 lac instead of FLat/land it will not provide status.
@977227faea85b982afaf985cee8b92ce:disqus I agree with the points you listed above. Thanks for your comments!
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