How to Calculate ROI in Real Estate in Mumbai

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ROI (Return on Investment) is the first thing Property Investors ask when a proposal is brought to them either for an Under Construction Property in Mumbai or a ready possession and for that matter a pre-leased property. After investing they must evaluate their investment and mentioned below are some formulas which will assist you in making a long term decision either to hold, lease or sell the property.

3 T’s of Property Investment which need to be factored in while understanding the ROI calculations.

·      Transaction Cost

·      Time

·      Taxes

1.    What is Transaction Cost of buying a Home in Mumbai?

Typically speaking the Transaction Cost generally are:

a.    Cost of Property

b.    Stamp Duty

c.     Registration

d.    Car Parking – Usually Built in the Cost of Property

e.    GST on Under Construction Property as per the current rules in 2021 in India

f.      Floor Rise/Preferential Location Charge – Both these charges are over and above the base property cost, these used to be in fashion a lot from 2009 to 2020.

g.    If you are holding a property purchased between 2001 and 2020 you may have paid either 5% Stamp Duty, 5% + 1% Metro Cess in Mumbai, or 2% or 3% During 2020 – March 2021 Covid 19. You may have paid Service Tax Prior to  GST.

h.    Amount paid to the Developer for possession, club house and other legal incidental expenses.

For resale property you may have also paid a 1 or 2% realtor fee depending on the location and other factors.

In case, you have leased property in the interim, then you also may would like to add the furnishing costs like sometimes you have to furnish your flat with Kitchen Cabinets, AC or Wardrobes and other furnishings to rent the same.

Once you compute all the expenses, you will come to a cumulative figure which can be termed as “TPV – Total Purchase Value”.

The simple ROI For Capital Appreciation formula is:

This formula is for Self-Funded properties without Bank Loan.

“Take the net profit or net capital appreciation on the investment and divide by the original cost and multiply with the number of years to ascertain the ROI.”

Example:

You bought a Home for 2.25 Crores in 2009 and the current value is 4.25 Cr. So you got 88% return.

Now divide 88% into the number of years you are holding which means if you are in 2021 then the returns in 12 years is approximately 7.33%

Rent Yield Calculation Formula is:

Annual Rent/Purchase Price x 100 = Yield

So example Annual Rent is Rs.12,00,000/- ( 1 lakh a month) Now Divide by Purchase Price – 2.25 Cr and Multiply by 100 = 5.33 % per annum

So if you club both Capital Appreciation and Lease Rent returns on an annual basis (if your property is rented) then your yearly yield could be upwards of 12%.

2.    What is Time Cost of buying an Investment?

Let us call this as an opportunity cost to make it simple to invest?

Assuming you had 1 Cr in 2010  – what options you had and that time what did you do finally do?

Options could be :

·      Fixed Deposits – Let us say in 2010 the interest rate was 8%

·      Stocks – Average – 10% (with associated risks)

·      Mutual Funds – Varying from 5% to 15%

Taxes

This is quite simple..

When you Sell a property held more than 2 years now, you are liable for Long Term Capital Gains and you have option to exit the investment by paying tax or reinvest into another property and save taxes and review your next decisions as to where you would like to go. For Short Term Capital Gains you have no alternative but to pay tax on whatever the appreciation you may have received.

In case you are looking to Professionally manage your real estate portfolio and would like to have an understanding on what should you Hold, Sell or Buy then please feel free to call me and we can have a chat and ensure that your ROI is in sync with the market conditions.

Sandeep Sadh – +91 9820030685 – ssadh@mumbaipropertyexchange.com

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