Is Real Estate Investment REAL ?
Real estate in India is a booming industry, with the country's population and economy continuing to grow. From luxury apartments to affordable housing, India has something for everyone. With its rapidly expanding infrastructure, India is becoming an attractive destination for investors and developers alike. With its vibrant culture and rich history, India is a great place to invest in real estate. Numerous people are drawn to the idea of investing in real estate. Let’s take a look at few of them.
1. Property ownership has been a symbol of wealth and opulence, providing people with a tangible embodiment of their hard-earned success. But more than just a financial asset, residential real estate can also be a source of emotional fulfillment.
2. The second most common reason to purchase a second property is its capacity to generate rental income.
3. Another reason given to justify the investment in is property is “Second Home”. Second homes can provide homeowners with an escape from the hustle and bustle of everyday life.
4. Apart from the appreciation in value of property over one's lifetime, there is a deeply satisfying feeling that they are leaving something permanent and valuable for the next generation.
5. Investing in property can lower your tax liability by way of deduction of interest paid from total income if property in purchased on loan
However, there is a downside to this investment. Before jumping to any conclusion, let's take a closer look at the other side of real estate investing.
1. Huge amount of initial investment is required –
Investing in property is not for the faint of heart. It requires substantial amount of capital and a great deal of patience to complete legal formalities and paperwork. Furthermore, it is essential to have an understanding of the surrounding area, its potential to grow and the interest of potential buyers in the event that the property is to be sold in the future.
2. Interest cost will add to your property cost –
Interest cost should be factored into any financial considerations when making a purchase. Interest cost adds to the total cost of the property over time, as interest rates are common for mortgage loans and other forms of financing.
3. Problem of Liquidity –
Converting property into liquid money is no easy feat. This cannot be done overnight. It is a lengthy process, often taking anywhere from one month to a year, due to the legal paperwork, large sums of money involved, and the availability of potential buyers. All of these elements must be in place before a successful sale can be made.
4. Next generation may not be interested in keeping ancestral property -
The younger generation tends to prefer liquid assets over a large sum of money that cannot be easily converted into cash. They may not be interested in retaining the property due to the costs associated with its upkeep. Furthermore, transferring the property to their name and selling it in the future can be a complex and costly process, especially if they are settled abroad.
5. The myth of rental income –
In general, people are happy if the property generates a steady rental income. But what they don’t calculate is what the percentage of real return is. Let’s take a look at an example. At present, a 1BHK flat in Central or western suburbs of Mumbai will easily cost anywhere between Rs. 1 crore to 1.20 crores. (Price is based on comparison drawn from various housing websites). Assuming that the property was let out for the entire year on a monthly rent of Rs. 30,000 here is the calculation of returns on property:
Cost of Residential Property
Annual Rent Received
(30, 000 Per Month)
Maintenance Charges (4,500 Per Month)
Net income from property
[ (2) - (3) ]
Yield of Rental income to Property Cost
Note: For simplicity of calculation we have assumed zero municipal taxes & no increase in rent during the year
The yield calculated above will reduce further after factoring in the income tax paid on rent income.
Now let’s assess the various features of alternate investment choices and compare them to investing in real estate.
What will happen if the same amount was invested in bank FD or mutual fund?
Investing in real estate can be an attractive option, but it is important to remember that it is a high-risk, low-return avenue for most people. When making any investment decision, it is essential to consider one's risk tolerance, financial resources, and future plans, rather than relying on emotions.
This blog is for educational purpose only. We have conducted a comprehensive analysis of real estate investments and compared them to other investment opportunities. This should not be used as an advice for investment in any product. Each investment option has its own risks associated with it. Please consult your financial advisor for making informed decisions.