Rent or buy?
Should you rent or buy?
What are the options really available for a common man to invest?
Is real estate an investment or a savings instrument?
read on
http://epaper.timesofindia.com/Repository/ml.asp?Ref=VE9JTS8yMDE0LzA1LzA2I0FyMDIxMDM%3D
Abhijit
Though I am not a big fan of RE, here are some of my observations from the article that are misleading.
1. FD rate as well as Home loan rate cannot be same (10% in this case).
2. Usually a person in 30% tax bracket does not opt for 80% loan. He/she usually has a bigger down payment.
3. Rental income usually grows between 8 to 10% (at least here in Pune) instead of 5%.
4. Rent of 15k for a 50L flat usually means the flat should be furnished (I am paying 10.5k rent for a similar flat). So the furnishing costs need to be taken into consideration during buy as well as sell transactions (but will be complicated).
Ravi
After reading comments on TOI.. i see how difficult it is for common man to understand ROI!
Siva
The calculation compares RE profit with RD/FD maturity value (with principal & interest). Am I missing something? Could not believe that a head of advisory & financial planning can make this mistake.
gunda
Upfront fee and stanp duty of 13 Lakhs when selling is borne by buyer, not the seller…isn’t it? Am I missing something?
gunda
Please disregard my earlier comment, I understand the 13 Lakhs is from the original buy transaction.
VK
While the numbers do favor the idea of renting, at the moment, and I am all for renting until you are truly ready to buy (with no loans); few people I’ve spoken to have different (logical & sentimental) concerns –
1) What happens when you are 50+, your investments haven’t grown as well as you’d have liked, banks will not offer a loan or will offer it only for a shorter term (< 5 yrs)? Add to that, you have the hassle of your kids weddings + many other commitments + not @ physical/mental peak to undertake so much stress packed in so short a duration….Sky's falling!
2) The investments have worked out fine, but you can no more find the apartment of your choice in the geography of your choice. You make compromises to end up in a ghetto-ish place!
3) Few people have made very incisive observations about the type of apartments and general nature of the people dwelling in them…before things can get any more bad, they want to pick the right ones before it's too late.
-Under normal circumstances I'd pick 40-45 as right age to buy a house considering, of course, one has slogged out well to maximize the earnings, savings, and intelligent investments to minimize home loan.
sangita
Also consider rent as 10% increment every 11 months – at least in Mumbai.
I consider it like this – if I have 30k emi/month for housing loan – 12k would be rent (had I stayed on rented flat). Remaining 18k emi/month, I ll own my flat in 20 yrs time.
sangita
I hope it becomes comparable to or near enough investment as in Mutual fund – knowing I do not know abc of direct equity.
Sandeep
The TOI article is completely flawed. 37 Lakhs vs 44 lakhs is not the right comparison. 44 lakhs includes the principal whereas 37 lakhs is the net profit. In the real estate scenario, what the person will actually have in hand after 5 years is close to 65 lakhs. So its actually 65 lakhs ( real estate ) vs 44 lakhs ( FD/RD ). Please correct me if I am wrong.
Nikhil
Can flat value in cities like pune gets doubled in 5 years? I think it will take more time to double its value.
Abhi
Double in 5 yes means a ROI of 15%.If your interest cost is 10% and then rental yield is 3% overall return would be around 8%.Savings returns can be around 9-10%. I am not considering taxation in both cases(including stamp duty etc.which can be adjusted of the fact loan cost will be lower as it will have a down payment component). In my view the main problem with RE is lack of liquidity,asset concentration risk,risk of fraud,market downturn,hassle of dealing with renters, dealers etc.
Lalit Gandhi
Hi,
Although I am not a big fan of RE, but as far as the calculations in the article are concerned, I agree with Sandeep.
44 lakhs in case of FD/RD is the total cash inflow (including principal). So net profit is 44 – 36 = 8 lakhs appx.
In case of RE, the whole 37.5 lakhs (and not 65 lakhs as Sandeep mentioned :)) is the profit
I also verified this in excel by using a simple cash flow statement for RE and FD/RD.
Please correct me if I am wrong.
Allam
You are wrong. Entire 37L is not profit. in both cases, 37 and 44, there is 13 lacs investment. In RE, 13 Lacs gives 37 lacs and in FD+RD cobination 13 lacs gave 44 lacs.
Also, Flat price doubling in 5 years is not possible in current conditions. So, RE returns will be even lesser..
Santosh
Lalit,
In both cases, the article provides what is left at the end of transaction. Even in RE case, you don’t have an asset beyond the 37.5 Lakh mentioned. So how is it only profit?
RD scenario also includes the total at the end of 5 years. So I assume it is a fair comparison. Do you see any asset in RE scenario?
Lalit Gandhi
@Allam – Flat price doubling in 5 years is not possible in current conditions – This is a separate topic to debate upon and here I do agree with you. But we are just looking at the calculations keeping the assumptions same.
Nevertheless, I have pasted below the calculations I did on excel. Cash outflow is shown in negative and cash inflow positive. The net balance is the sum of all cash outflows and inflows.
—–House for investment—–
Upfront payment and stamp duty, etc. -1300000
Total EMI for 5 years -2316060
Rental income 994613
Tax on rental income -198923
Capital gains tax -400000
Principal repayment -3592098
Tax savings on interest paid 572447
Sale of flat 10000000
————————————————-
Net balance 3759979
————————————————-
—–FD/RD—–
Principal -1300000
RD for 5 years -2316060
Interest on principal 650000
Interest on RD 529798
Tax on interests -353939
FD + RD Principal back 3616060
———————————————
Net balance 825859
———————————————
Calculations are open for analyses!
Santosh
Lalit,
Nice way to calculate. Leave out the profit /loss confusion.
Simple Question: How much do you have in hand at the end of 5 years in RE scenario and in FD scenario. Which one is bigger?
Sandeep
Santosh – In the RE scenario, you will have 65 lakhs. In the FD scenario, you will have 44 lakhs. The point is – if a RE doubles in 5 years, RE will be a winner by a mile. Thus the debate on calculations is meaningless here. What can be debated though is whether a RE really doubles in 5-6 years.
Lalit Gandhi
Thanks Santosh! The bigger in-hand after 5 years is in RE – 65 lakhs vs 44 lakhs in case of FD.
And I agree with Sandeep. Whether RE will double in 5-6 years is a debatable topic.
Santosh
I have no clue as to how you came up with 65 lakhs at the end of 5 years in RE. Calculations please?