Real Estate investment: a perspective for Indian investors & home-buyers [part-I]
Investing in a residential property is worthwhile for the simple reason that they are long-lasting and real! Hence, the name ‘real estate’! ‘Investment’ and ‘Real Estate’ when combined give you a formidable combination to secure your money and future!
No wonder, we call it ‘Real Estate ‘- a real property consisting of land and improvements that include buildings e.g. property, plant, and equipment. Real estate investment is into tangible assets like fixtures, roads, structures, and utility systems.
Why invest in REAL ESTATE?
- Be it an apartment, builder-floor, row-house, or an independent bungalow/house, Real Estate investment makes your portfolio of investments diversified and low-risk
- Helps you spread the risk, and not put all eggs in one basket!
- You prevent suffering a total loss by buying a property. A real estate investment comes in handy on a rainy day, and NOT investing everything in high-risk instruments like stocks and shares
- With Real Estate, you increase your chances to earn more, earn consistently and minimize losses
- Even if you are yourself living in your home (self-occupied), and have no intention of selling it, you still feel comfortable seeing your home value appreciate over time!
- Of course, real estate does need a lot of money to invest, but the reasons justify investing in real estate
- Plus, when you rent out your home, you become a business person and begin earning monthly rental returns on your investment
Compelling reasons that make real estate investment promising
Investing in real estate could be one of the best investment journeys of your lifetime! Here’s why-
1. Investing with borrowed money (home loan) is possible
Let us understand this better with an example-
- For example- If you have a property worth Rs 1.25 crore, you could take a 1 crore loan if you put your own contribution of Rs 25 Lacs
- This means that with Rs 25 Lacs of your investment (own contribution) i.e. 20% of the total value, you can hold a property worth Rs 1.25 crore
- You pay the EMI of the home loan (approx. 75,000 per month as per current Indian interest rates of approx. 7%)
- The property automatically increases in value over a period of time
- For instance, in Sainikpuri, Hyderabad, a builder floor costing Rs. 1.25 Crore in 2022 is bound to appreciate beyond Rs 1.50 crore over 2 years…i.e. by end-2024 or early-2025. This means you can actually get a return on investment of Rs 25 Lacs on your own contribution of just Rs 25 Lacs along with the mortgage EMI that you pay. To counter the EMI, you continue getting rent of about Rs 30,000 per month. If it’s self-occupied, you are saving on paying the same rent yourself! So, it’s a win-win situation!!
Let us look at a simple ‘Return on Investment’ calculation:
- You invest your own Rs 25 Lacs
- You take a home loan for Rs 1 crore
- You buy a property for Rs 1.25 crore
- You get a rental income of Rs 30,000 per month
- You sell it after 2 years of Rs 1.50 crore
- Even after paying for EMI, you end up getting a NET GAIN of Rs 15 Lacs on Rs 25 Lacs of your own contribution
- So, you invested Rs. 25 Lacs (own contribution), and ended up getting Rs 40 Lacs after 2 years
- Your annual ROI comes to 26% annually as given in the calculator below-
2. Ability to make your home attractive for resale
- You can make your apartment or home look more attractive with the right interiors, and other factors by working on them
- Sometimes, a great flat with the right Vastu, the right location, and the right amount of views could fetch you handsome returns
- Making a conscious choice to make this happen is very easy
- You can increase the rate of appreciation of your property by making the right renovations, repairs, and interiors. Basically, with the right packaging, your home could become even more attractive at the time of resale
- Sometimes, sensible cosmetic renovations and modifications alone can increase the value of your home by more than 10% to 20%
- It is common knowledge that real estate property appreciates by at least 5% every year, if not more
3. Tax benefits as you pay your home loan
- The Indian government has given many benefits to citizens to invest in real estate
- A home loan is eligible for tax deduction under Section 80C
- A home loan in India comes with multiple tax benefits that significantly reduce your tax outgo
- If a home loan is taken jointly, co-borrowers can enjoy tax benefits on their taxable income individually. So, the rewards of buying a real estate property on loan are great in India
Some of these tax benefits are:
- Deduction for interest paid on a home loan. You can claim Rs 2 Lacs of interest paid as a ‘loss on house property’ and your overall income to the extent of Rs 2 Lacs annually becomes non-taxable. That’s a great benefit!
- Deduction on interest paid towards home loan during the pre-construction period. This is also capped at Rs 2 Lacs per annum
- Deduction on principal payment to the extent of Rs 1.5 Lacs annually becomes non-taxable out of your total annual income
- A deduction can be claimed on stamp duty and registration to the extent of Rs 1.5 lacs under section 80C
- Additional deduction under section 80EE is possible where a loan is less than Rs 35 lacs, and the property is less than Rs 50 lacs in value
- Additional deduction under section 80EEA is possible if the value of a property is less than Rs 45 lacs, and a loan sanctioned after April 2019
While the investment in real estate is big, the rewards are huge and long-lasting!
“In investing, what is comfortable is rarely profitable.”– Robert Arnott
To know more about “DO’s And DONT’s For A Real Estate Investor!“. Click here!