Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Planning to ‘invest’ in real estate? Think again

Posted by Muthu on April 7, 2011

By commonsensical valuation methods followed globally, Indian real estate sports nosebleed valuations. It is important to be aware of this if you want to ‘invest’ in real estate

Property prices across India have run up a lot between 2003 to 2008, appreciating as much as even 400%+ during the said period.
 
Some places have now cooled down, like Hyderabad due to the Telangana agitation and Bengaluru. Meaningful correction is yet to be seen in metros like Mumbai and Chennai, etc.
 
Recently, a prospective buyer wanted to purchase a second-hand flat in Chennai for Rs1.2 crore. This flat was purchased for Rs30 lakh by the original buyer in 2005.
 
The buyer’s line of thinking is as the value has multiplied by 4 times in the past 5 years, he would buy now and sell it in 2016 for Rs4.8 crore! He is assuming an absolute return of 400% in the next five years, a CAGR (compounded annual growth rate) of around 32%.
 
The annual rental yield for his Rs1.2 crore investment is only Rs.2.4 lakh or a mere 2% per annum.
 
Recently, a client of mine wanted to purchase a property she is residing at for Rs65 lakh. The rent she is paying is only Rs9,000 a month. Even by investing in fixed deposits, she may get around 9.5% p.a. whereas by investing in this 20-year-old flat, her yield (or saving) would only be 1.67% p.a.

The ‘House price to (annual) Rent’ ratio in her case works out to 60 times. Going by international standards, if this ratio is above 20, then the cost of owning is considered higher than cost of renting.

Please continue reading by clicking the link below

http://www.moneylife.in/article/planning-to-invest-in-real-estate-think-again/15407.html

One Response to “Planning to ‘invest’ in real estate? Think again”

  1. amol said

    eye opening article…thanks for sharing

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