Most people invest in equities, debt, real estate, …..and I guess they invest so that they are able to sell it at a premium later on, right?
Well, when people speak to me they say “I bought a house for Rs. 80 Lakhs in just 10 years it is worth Rs. 1.9 crores”.
Nothing wrong with this argument, except that it is wrong.
When this person bought the house he had to make a down payment of Rs. 15 lakhs and he took a loan of Rs. 65 lakhs. He also paid a brokerage of Rs. 1.5 Lakhs, stamp duty, loan processing fees, society charges, etc. This cost has been ignored.
Assuming that the flat is worth Rs. 3.7 crores at the end of another 10 years, now let us calculate what return he has got:
EMI: 65000 * 240 = 1,56,00,000 +15,00,000 +other expenses 1,50,000 + Interest 20 years 10,00,000
so the total cost of the flat is about 1.82 crores and that is now about Rs. 3.7 crores.
Sure the rental income has been ignored, but if you put this in an ixrr or irr calculator you will realise that the returns are not too high!
Now if you take the case of Equity, the returns are not magnified because we NEVER LEVERAGE – the way we leverage with Real Estate.
So if you have to compare this Real Estate deal should be compared to an equity investment made in 1988 – say Rs. 80L – Rs. 15L of own money and Rs. 65L of borrowed money. You need to use a part of the proceeds to repay the loan. Then see how much is the comparative return.
My guess is take any 20 year period from 1979 to 2013, invest LUMPSUM and withdraw every month or quarter to repay the Loan, chances are equity would have out performed real estate.
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