Should I invest in Indian real estate?

Leave apart the poor or lower middle class. Even for the upper middle class today, it is not about the dream home but dreaming about a home. Property prices across India have increased tremendously to the tune of 400%+ between 2003 and 2008. We tend to purchase house assuming that in the next five years, property would again give us the same return i.e. a CAGR of 32%. Let’s see when it makes sense to buy a property.

There are two ways owners make money through property, capital growth in property prices as well as the rental income he gets when he rents out the property.

In addition to these incomes, one should be aware of a number of necessary costs. Mortgage, Insurance premium, Replacing fixtures and fittings, Maintenance, Ground rent and service charges (If the property is leasehold), Empty periods are the major costs involved.

Once you have deducted these costs from total income, you have the true or net rental yield. So if net rental income is Rs. 2 lakhs and the property cost is Rs. 60 lakhs, the rental yield is simply 2 lakhs divided by 60 lakhs i.e. 3.33%. The “house price to rent ratio” in this case works out to be 30. Generally, this ratio should be below 20 else the cost of owning is considered higher than cost of renting. Once you do the maths, you may find that the net rental income is less than the cost of your mortgage, leaving you with a shortfall. Even by investing in fixed deposits, you may get around 9% per annum. Though no ratio can be blindly applied, this is a good point to start with.

Home loan EMI as a part of your income (i.e. debt to income ratio) should be within 35% of your income. Teaser loan rates at lower EMIs in initial years would do more harm than good.

However if you have made a well-researched investment, you should also get a good capital appreciation over time. It’s strange to watch that real estate prices never come down but markets simply become illiquid. No transaction happens but still the price on paper remains high. It’s always wise to buy a property that provides you with a good rental income as well as appreciate in capital value over time. But that’s the real challenge, isn’t it!! J