Buying a 2nd Property as an Investment - Read This to understand the numbers...
Please note - This article is not to suggest that real estate investment is good / bad. This is just to understand the numbers behind the investment. Many-a-times, we get carried away by absolute numbers of price rises & make emotional decisions.
Let's calculate the TOTAL OUTFLOW for this home purchase:
Interest Paid to the bank in 20 years: 52 lakhs (More than even the loan amount taken).
Interiors done for the home: 6 lakhs (You don't get this money back)
Opportunity Cost of investing the Down-Payment of 12 lakhs & Interiors of 6 lakhs in Bank FD @ 6% interest rate: 1.08 lakhs every year.
TOTAL OUTFLOW in 20 years: Around 80 lakhs extra for 60 lakhs property!
But I will pre-pay the home loan soon? So this calculation is wrong?!
Great – Can we assume you will REPAY 5 lakhs every
year starting from 1st year onwards till the loan amount is closed?
Home loan will get closed in 7 years instead of 20 years – that’s fabulous.
But do you know – how much interest you
would have still paid to the bank in these 7 years? – Around 15.75 lakhs. Add to
it, interiors cost of 6 lakhs & the opportunity cost of investing this
amount in FDs for 7 years (7.56 lakhs).
Total outflow in 7 years: Around 23.25 lakhs extra for 60 lakhs property!
I will sell-off my property after 7 years - It will anyways appreciate!
Sure it will appreciate! But you should get at least 83.25 lakhs to break-even. That means, the flat price should have appreciated to 8325/- per Sq. Ft. from 6,000/- Sq. Ft. for you to get back the amount of your investment. Did you do all these just to get back your money after 7 years?!
I was hoping for at least 10% return:
Then
the selling price must be 16,000/- per Sq. Ft. from 6,000/- per Sq. Ft. purchased 7 years back!
You didn't add up my rental income at all - the scenario may be different in that case!
Oh yes - rental income was not added. But I didn't add up registration / stamp duty cost & yearly maintenance costs too. Anyways we will add up rental income of 15,000/- p.m.
This translates to just 2.70% interest for your investment. You could very well have had this money in your savings account. We already saw the property appreciation rate for you to get 10% return.
To Break-Even: The price per Sq. Ft. should have appreciated to 7,000/-
And to get at least 10% return, it should have moved up to 14,000/- per Sq. Ft.
Ok - as such, I didn't purchase it for investment. It was just for my next generation - for my children!
Your case may be different - But in today's environment, right or wrong, many children don't prefer to stay in one place. They are educated abroad mostly & prefer to settle there permanently or at least in different cities. Next gen feel real estate as a burden & prefers financial assets as it gives the flexibility & freedom. Hence leaving the asset for your children may or may not serve its purpose, as you are making an investment that you are comfortable with - it may not be with your children, especially if you are sending them / or they prefer abroad for studies & to settle down for their career.
