Home loan rates are down from 9.5% to 8.50%, property prices are stagnating and the new Real Estate (Regulation and Development) Act (RERA) promises to protect the buyer against delays and frauds. Many real estate developers and housing finance companies are saying that this is the best time to invest in property. However, what kind of investment? That is an important question one should ask before investing. There are two types of investment: One for personal use and the other for ROI. According to a recent research report, home prices in major cities are increasing very slowly since the past 2-3 years.
In some markets, including the National Capital Region (NCR) and Kolkata, property prices have actually come down since 2014. This is not the case for the entire real estate market. There are a few cities that have witnessed a consistent rise whereas in some cities prices have come down. In MMR, some pockets have done poor business, while others have done decent business. For example, locations like outskirts of Mumbai (Navi Mumbai, Thane, Kalyan). Let’s see the below example to evaluate why it’s not a good time to invest in real estate just for ROI (Return on investments).
We assume that the home buyer would take a home loan of Rs 50 lakh (at 8.5%) and pay a down payment of Rs 10 lakh to buy a property worth Rs 60 lakh. Stamp duty and registration will cost up to Rs 6 lakh. So taking everything into consideration, the total cost of property comes to Rs 66 lakh.
How much will you earn from real estate?
Returns from property will depend on the projected rise in prices and could change as per locations and cities.
Assume the home buyer falls under the 30% tax bracket.
# Monthly rental income of Rs 10,000, which will rise by Rs 1,000 every year, i.e. 10% increase in rentals.
# Buyer also claims Rs 2 lakh deduction for home loan interest
# Home loan EMI is Rs 43,391 for 20 years at 8.5%
Let’s consider situations after 3 years:
# If the property prices rise by 3%, the investor will get a profit worth Rs 7.86 lakh. Even though the investor claims tax deduction of Rs 2 lakh on the home loan and earns rent Rs 10,000 a month, he still needs to pay off 8.5% on the loan while the asset grows at 3%.
# If there is a delay in getting the possession (not rare in the current situation), the returns would be much lower.
# If property prices rise 6%, the investment would nearly break even in three years, i.e. No profit no loss.
Similarly, if property prices rise by 9-12%, the investor would make money but the property prices are not likely to move up too much in the next couple of years. So, it’s a great time to invest in a property for personal use. In other words, it’s a favourable real estate market condition for end users especially for the affordable housing segment. The sentiment in real estate, which has always remained a profitable sector, is positive. Builders are no longer nudging out the end user. Instead, they are offering genuine prices, showcasing beautiful and aesthetic properties and encouraging confidence in the end users.
(By Amit Wadhwani, Director, Sai Estate Consultants)