Monday, April 26, 2010

Real Estate - Investment or Debt Trap


Recently I came across a very new type of investment” Real Estate Investment” . It works in its unique way. I mean a place where you live is not investment its "Home" and has to be bought. (Although I would prefer rent) However for Investment I found it little funny. Let me explain how.

If you go to buy this “investment” you are told that nothing is remaining and everything is sold. Or you are told you have only 3 options one on 2nd one on 6th and one on 17th Floor. Funny part is same is told for almost a year. (I always wonder for selling 3 flats why such a big sales office is maintained. Anyways.) Then cost grows as floor number grows. Also depending on “pool side” or backside, rate changes. I don’t remember I have seen anyone swimming in open pool in any residential area in India …maybe … with growing economy people will start swimming....

So it’s kind of complex thing. You have to go from one builder to another and see flats. While you are spending time, rates are growing so you are under that pressure as well. I came across one such builder who told me On coming Saturday till 12.00 in midnight if you come price is 2400 Rs / sq ft. But if you come on Sunday it’s 2800 Rs / sq ft. I asked him then why don’t you close sales office till Sunday? from Sunday you will get better rate. He went to council another customer leaving me to watch site alone...

One of my friend passionately told me when he went to builder he told him flat is for 4300000 INR. When I went via “Agent” he got the flat for 41,00000. Though he paid agent 40,000 he saved 1,60,000….

Well by selecting the right flat your investment is not over infact it begins there. Below is real time data collected from one of my friend who got flat for 41 lakhs (This amount is something I can not even think of buying but my friend who bought told me it's common now a days).

Real Estate Investment
Let me explain it a bit If you see the table above, you can make out that the Brokerage for this investment is on little high side i.e. 14.63% and In order to make this investment work, i.e. to rent it, you have to add furniture and some work like kitchen trolley etc… So total overhead now becomes 21.95%, which is almost non-refundable.

So one thing is sure that before starting testing fruits of that investment of 41,00,000, “Sum of 10,00,000 has already gone and there is loan for 40,00,000 resulting EMI of 40,000 per month for Next 20 Years (Assuming Interest rates are same)”.

Now we must understand that if we are considering Real Estate for "Investment", Total of 10,00,000 Spent already + 40,00,000 Loan @ End of 20 Years should be less than Price at which it will be sold after 20 Years. Will it happen or not? Nobody knows at the moment. Though almost everyone believes it will only time can tell us where it goes. 

Because it's an investment he rent it and then getting rent of 25000 Which is 15000 less than his monthly EMI.. He spent 10,00,000 + 40,000 / month and bearing loss of 15000 to allow someone stay in his "Investment" for 25,000. Seems like deal huh .. :) 

Also before closing just update on Indian Inflation. RBI is speaking about hiking CRR once again to control inflation, which is a very good move for a long term. In short term it may mean more EMI for all loan but for economy in general it will be good.

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