I wanted to take up a topic that most people don’t pay attention to. A lot of people buy houses here in South Delhi and then put them on rent with hopes of getting good returns. They feel getting 1 Lakh per month is a great return on investment. Let us examine that. Say one buys a 300 sq yds floor in Green Park for 5 crores and puts it on a rent of 1 Lakh. Now he may feel it’s a lakh! But let’s look more closely now. If he had put that money in the safest thing, an FD, he could get about 7.25-8.5% interest without any hassles. That’s around 3,20,000/- per month, risk free. By investing in this house and giving on rent the investor is losing 2,20,000/- per month. The net return he’s getting is around 2% per year.
Plus as the apartment gets old it loses value. For example after 5 years if market prices don’t increase and he wants to sell his property it will only sell for 4 crores, because it’s an old property. Also even if prices increased to 6 crores he would be able to get only 5. I’m not even taking up the scenario where property prices dip to 4 and he’s able to sell his for 3.25 crore.
For discussion sake, let’s say market value of 300 yd new floor stays same at about 5 crores. Now his property will sell for about 4 crores. And let’s add the total rent he got in that period. That’s about 55 Lakh after adjusting for repairs, brokerage on renting and few months transition period from one tenant to another. So after 5 years if he’s selling his property his net money in hand he got is 4.55 crore. If he had done an FD the return would be about 7.2 crores or so. I’m not even discussing mutual funds or investing in business and getting 15-20% returns. The idea that I’m trying to get across is that buying a residential property and putting it on rent is a silly investment. The only time you would put it on rent is when you are going to retain it and won’t or can’t sell it, so may as well rent it out and get something. But to buy and put in rent as an investment proposition is as silly as it gets.
There are better ways to buy and sell where you can make more money. Will cover that in coming posts so stay tuned.