Viability of buying a Second Home vs Financial Products

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Viability of buying a second home as an investment option and its prospects vis-a-vis other investment options such as shares, mutual funds, FDs. etc.

We have learnt from our ancestors that real estate investments have been the best investments and the investments have taken the shape of precious Assets over the years and they have given the family a sense of security and social stature.

The ups and down of the jittery stock market are probably making you look for a safer investment haven with lesser turbulence. The real estate market, although a tortoise in the story here, can be a safer and long-term bet plus an asset that, in our country, brings with it, a high level of social respect.

If you are a new entrant into the property market, especially buying your First or Second home as an investment then you have some respite from tax as well. Presently, you can get a tax deduction of up to Rs.1.5 lakh on the interest you pay plus up to Rs.1 lakh on the principal.

Real Estate more importantly has to be a long term investment and you should consider being put in for at least 3-5 years, keeping in mind the short term and long term capital gains. The entry and exit loads in real estate are also pretty different and higher than capital market instruments available. Although, the returns spread over a period of years can be more tax effective and have a better yield than an average instrument in the stock markets, FD, mutual funds etc. Real estate today is getting extremely dynamic and with the same being the centre of attraction today, the sector is due for its much needed reforms which will bring in more transparency and clarity from an appreciation or a yield perspective here.

Here is a brief on how you could maximize your returns from real estate investments, there are enough avenues available for one to understand the stock markets, mutual funds but for real estate investments you need to be visionary. You could invest in both the markets simultaneously to get the best of both the worlds.

Minimum Investments – Exit and Entry Loads

It is imperative for you to know how much can you invest in the property today, the investment in today’s date comprises of a Down Payment of nearly 10-15% and the balance of around 85% as home loan. So you need to clearly understand how much down payment without squeezing yourself can you pay and how much of a monthly EMI you can afford to pay for the next 15 Years at least. You need to leave behind the calculations for lease rentals at this stage and deal with them later as the yields begin to pay off your partial EMI’s.

Not every location and property will give you the yield you aspire for and a slight miss in the calculations or a wrong choice of the property can see your returns dwindling for sure.

Apart from the EMI you need to overall understand the cost of the property with all incidentals like stamp duty, registration, car parking, club house charges and other sundry charges by the builder. Please remember that the entry load for investing in real estate market can be as high as 10% compared to the stock markets which is any where from .50% to 1% etc. depending on the instrument you are looking at.

If you can spare anywhere upward of Rs.20,000 as EMI and a down payment of anywhere between Rs.5 Lakh to Rs.15 Lakh, you can begin investing in an under construction project with an average value of around Rs.30 to 40 lakhs. This value can go up depending on your flexibility to pay more. In the current market most of the good options in Mumbai are available in 50Lacs + range. Thane and Navi Mumbai can be in the range of 30 to 40 lacs for better builders. However, if you look at other cities e.g. Pune, Jaipur, Nasik etc. this value could be considerably lower, but one needs to study and understand the returns based on both the Capital appreciation, Lease Rental values and Re-sale ability in II and III tier cities

Staggered Payments Approach – Which is like SIP in Real Estate

As a property buyer you get 3 dimensional benefits to buy under construction properties. Firstly, you can only pay around 10 to 30% in a project as down payment, which can be partially from your own savings. The balance amount can be paid over a period of time through a home loan. Secondly, the staggered payment is linked to the construction of the building. Typically, the amount is released to the builder/developer as per the slab and the EMIs also increase over the period of construction. Hence, for the first year, the commitment level from the buyer is not more than 50 to 70%. If it is a larger township project then there could be some more delay and lesser payment outflow, as the time for completion of the project is nearly 3 years or so, thus staggering the payment further. Thirdly, with a low investment in the beginning the rate you have bought the property is frozen and you get the benefit of price escalation for nearly 3 years.

It is often witnessed that till the time the builder has a presence in the project or the property the prices are constantly revised upwards. Hence, in most of the under construction projects you will see that the builder is increasing the prices every quarter or less depending on the project, location etc. This also shows that the builder is giving returns to the investors periodically and the investors remain happy.

Since the markets have climbed a lot, if you are looking to buy a second home, stay put close to a Central Business District for the sake of sheer convenience of easy lease and re-sale.

For good returns one should stay invested ideally anywhere between 3 to 5 years and of course take further action depending on market conditions.

Home Loans – A must for Real estate investment.

You can apply to any bank for a home loan. You can get a pre-approved home loan letter, which will mention your entitlement and approximate EMIs payable. Once you are armed with this letter you can go out shopping for the new property. It is a time consuming effort to get your self pre-approved but it helps you tremendously when you are ready to make a decision. If you do not want a large exposure of your money into real estate then going for Home Loans is the best option, you can simultaneously stay put in the money market and transfer funds from the earnings into the EMI as well.

Capital and Lease Rent Yields

The present day market is galloping and one should take a very conservative approach contrary to the market conditions. The last 2 quarters have shown returns on an average between 12 to 23% in most of the locations in the Mumbai market. The past 3 -12 months’ period has seen a steady growth in real estate prices and the same has been any where from 15% to 100%. Another aspect of the returns is if you give your property on leave and license basis, after it is ready you can get average returns varying from 4% to 9% or so depending on various factors safely.

Choosing the Right Location & Project

Choosing the Right Location is an integral part of real estate investment. Typically if you see that the maximum capital appreciation and lease rental values are often realized from locations which are close to CBD’s (Central Business Districts) and with better connectivity to major parts of town. You could also consider a developing location which has grown or is growing up and this can be because of an infrastructure development driven impact.

Along with the Location an important factor will be the type of apartment in terms of the amenities, built and quality which will further help you in all respects. The present generation is pretty much concerned with the amenities and if you have open spaces, swimming pools, club houses, gardens etc. in a Project then it strengthens the investment as a lot of people in future will want these as basic amenities.

Unlike the stock markets or mutual funds, real estate is a fixed asset and hence there are always liquidity issues and one has to time the selling or exit well in advance, if one is looking to exit. Another aspect to keep in mind is that capital gains in real estate qualify as short term capital gains till the first three years from date of original purchase.

Comparison Chart of Returns

Stock Markets Mutual Funds Property Fixed Deposit of Banks
Risk High Medium Low to Medium No Risk
Returns (p,a) Volatile in both Negative and Positive Side Depends on which type of mutual funds you invest in. Capital Appreciation + Lease Rental Values Fixed
Liquidity Easy Easy You can get a loan against property if you are in an emergency situation, but as a distress seller you may loose your gains Easy and Immediate
Period 6 Months – 2 Yrs 1 yr – 3 Yrs 3 yrs – 5 yrs 1 – 3 yrs
Transparency in dealings Yes Yes You need to do your home work well Yes
Recurring Income Yes, subject to the returns if positive. Yes (Dividends) Yes, if you lease your property. Yes (Fixed Interest)

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