Real estate as an Investment…
I hope Dr. Khan finds this article useful…Arjuna seek your answers here:
Many people have been screaming about real estate as an investment. Well I have nothing against it, except that I do not understand it. Given limited brain power, I would rather not do it, instead of making a mess of the same 🙂
Let me share one real estate transaction that I saw from close quarters:
India Bulls has a property in Panvel (a suburb of a suburb of Mumbai!!).
Cost / buying price for the customer in Sep 2010Â Â Â Â Â Â Â : Rs. 2200
brokerage                                                                                                      50
total cost say Rs         2250
the price at which one can be reasonably sure of selling : Rs. 4000 (the builder says 4400)
BUILDER’S transfer charges: Rs. 400
brokerage (assumed)              Rs.    80
Net cash that you will get (over a 16 month period) :Â Â Â Â Â Â Â Â Â Â Â Â Â Rs. 3520
Capital Gains 3520-2250 = Rs. 1270
Cap gains tax @ 25% (short term cap gains, so you will pay at max marginal rate): 320 (rounded off)
so net gains: 3200 (cash) on an investment of Rs. 2250 over a 16 month period.
Net gains: 1270 – 320 = 950….
Not bad at all.
Right? Sure, you took the risk, made the investment and the broker still decides to take Rs. 400 – which is greater than the Capital Gains that the government of India charges…
So is realty a good investment…?
Well if you did invest cash, or if you leveraged (after all you did not have the money to do the deal)..and you made money…yes.
Did I do this transaction? NO.
I have done transactions where I have got about 10%p.a. return over the past 3 years. Not cribbing.
I have seen / done a funding transaction with a builder @ 28% p.a. – secured.
I have seen / done a funding transaction with a builder @ 24%p.a. unsecured….
but my debt transactions are rarely worth talking about 🙂 – I take too much risks.
Capital gains tax (short term cap gains so assuming 25% tax)
aniket
sir,my father is going to sell hdfc and hul stocks which they hold from last 12 years,for the flat in nasik.. ;(..ppls still have affection towards cement and bricks…
Ashish
Sir,
Bit confused here – woouldn’t the net gain be 1270 – 320 = 950?
Also – my slower brain asks – whats a funding transaction with a builder? Is it kind of giving loans to builder on secured/unsecured guarantee?
Ashish
M S PANJWANI
One of the most childish article i have ever read from Subra’s armoury.
The house which i live in, my owner bought for just one lakh, i repeat..just one lakh..in 1982,now he is getting annual rent 1,20,000…the property is in the name of female family member and they have many IT files in their family….hence the rent falls in zero or nil tax bracket.
So, the rent on investment of 1,00,000 is neat 1,20,000.
They are in no mood to sale the property, even if i specualte the market value or in other terms the distress sale value it would be easily 38 lakhs.
And how u have arrived MMR at 25%?
Short term capital gains forms part of the total income and regular slab rate is applicable.
The highest slab rate is 30% plus 3% cess=33%.
Even if we calculate 10+20+30/3 comes to 20% plus cess.
I think u have taken last two slabs of 20+30/2=25%?
Paramjit
MS Panjwani no clue whether you understand Income Tax, so I will not comment on that.
‘no mood to sale the property’ – I guess you mean ‘no mood to sell the property’, so that is a comment on your English.
You said it is worth Rs. 38 lakhs..
EVEN assuming zero maintenance expenses (which of course you can make) the IRR is about 12%, assuming painting, maintenance, and tax as expenses, the IRR will fall to about 7-8% – which is LESS THAN inflation of the 1980s and 1990s.
Also Subra’s example is a short term duration and clearly it is to show the inefficiency of the market. This inefficiency makes real estate a pathetic trading tool and the negative real return makes it a bad investing asset. It is a good saving asset – and subramoney has articles saying that..
Subra, I should be paid for being your Boswel!! 🙂 I do not expect MSP to understand this line, so Subra please acknowledge this last line 🙂
subra
Paramjit – ha a chance to correct your English! You meant Boswell I presume! but the comment was vicious, accurate though mathematically. I also calculated an IRR post expenses in an economy which would have had an avg inflation of 8% and a Sensex IRR of 15%+…but then innumeracy is something I have written about, have I not?
Milind Nitsure
Who is childesh ,who is Great ,whose English is poor….All Educated Professional People are talking and writing this language…PLEASE…For Heavens sake lets not make our blog as Insulting /Humiliating grounds.If anyone of us dosent like any particular blog ,Ignore it …Subra is not the final authority in world and he never claimed like that .This blog should be a House of Enlightment and building of Knowledge ,Diffrent View points expressed in a Tone and Language which is not hurting to anyone….Lets Forgive and Forget …..start a new dawn to make this blog more meaningful..
dinesh
My brother is so much of in favor of real estate that for him it is the only investment. I have explained him several times the importance of asset allocation but he do not show any interest…
Reason being that he bought one 1bhk flat in 2003 end for 6.5 lacs and in today’s market he people are asking him for 35 lacs. He understand this logic and thinks that it will exists forever.
thanks to many bloggers like you who have taught us to look at things differently(mathematically and logically) because of which I have helped myself resisting the pressure from him in buying more property
M S PANJWANI
@Subra:
“Childish”-i do not mean it literally to insult Subra,it’s a slang or lingo(forgive me my english is poor)we use it in our day to day life, my wife tells me-“Do not behave like a child”, I tell her “Do not talk like a child,sometime’s we both say “mum and dad are behaving like child”. If knowingly or unknowingly my langauage appeared derogatory, i wholeheartedly apologize(or apologise).
@Milind Nitsure:
I love ur spirit keep it up.
In ur comment u wrote “dosent” instead of doesn’t-it’s pretty common and acceptable in today’s hitec world-but when i made same kind of mistake one gentlemen reader used unacceptable norms of commenting…god bless him.
Dr Mohammed Ali Khan
@ Subra
And all this count the hassle that we go through to both buy and sell real estate…