Understanding Some Basic Facts about Real Estate Investments
When it comes to investing in real estate, most people have some basic queries. For instance, is renting more beneficial than owning a property? Should I consider property as a long term investment over Mutual funds? Naturally, the answer depends on multiple parameters that can vary from one person to another.
Owning a property is a dream for an individual. It also carries a sense of pride, and one always has an emotional attachment to a property. Keeping aside the socio-emotional parameters, let's evaluate what parameters one should keep in mind when making a decision to invest in a property.
Renting versus Owning
In this case, both the dynamics of the property market and an investor’s financial situation can impact the decision.
Upfront Investment: When an individual decides to invest in a property the bank provides a loan up to 80%-85% of the registered value of the property. So, the individual will have to plan for 15%-20% of the property value as a down payment. On top of the down payment, one has to plan for at least 7%-10% of the property for registration, stamp duty, and other government fees. Alternatively, in case of rental only security deposit which might range from 3 months to 12 months rental payment will have to be budgeted for.
Taxation benefits: Furthermore, homeownership has tax benefits via deductions on the repayment of loan, interest on loan in case the individual uses the property for own use and additional deduction of standard deduction & property taxes in case of rented out. [1] On the other hand, renters also can claim house rent allowance from their salary income through their employee, but yes there are restrictions.
Cash flow: Incase the individual owns a property which is funded by loan, the EMIs are fixed for the period of loan which helps to plan their future better, but if the property is rented the rental increase is erratic and dependents on the landlord’s whims and fancy leading to surge in expenses and impact the future planning.
If all aspects are equal, buying a home is the superior option in the long run. Although renting provides flexibility, homeownership has a series of financial benefits. As realty values appreciate with time, it’s a sound means of prospective wealth accumulation. Owning one’s home also offers the pride of ownership and a deep sense of stability. Moreover, homeowners can enjoy control over their space, creating a sense of belonging. Also, unlike renters, homeowners have the freedom of customising and maintaining their property since there is no landlord.
Nonetheless, as mentioned earlier, renting may be convenient if one’s finances preclude ownership. If funds are no constraint, investors should consider the varied benefits of homeownership versus rentals according to their situation, keeping the long-term perspective in mind.
Investors also wonder whether real estate is a genuine tax-saving option. It can be – especially for those taking loans to buy property. However, if investors have already reached their tax-saving ceiling, purchasing property will not help in saving taxes.
Property versus Mutual Funds
Another question is regarding the ROI on property versus mutual funds over a 10-year cycle. Most investment experts recommend that MF investments over the long term offer returns of at least 12% while realty investments in the same period may provide only 8% returns. Again, there are caveats and the situation could become more complicated in certain circumstances.
To elaborate, if an investor has surplus funds to invest, MFs are better from the long-term returns perspective because of the 12% yield versus 8% for realty in the same timeframe. MF investments also offer the ease of liquidity since money can be redeemed within a few clicks. One of the major fact to be considered is the liquidity of real estate investments is a time-consuming process without the option of partial withdrawal as with MFs.[2] Nevertheless, investment experts recommend if real estate involves rental income, which investors can then invest in MF SIP, the dynamics of realty versus MF returns can change.
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Commercial or Residential?
Finally, people are perplexed whether it makes more sense to rent residential or commercial property. Again, both have pros and cons. To begin with, the residential sector acts as an ideal investment for investors with a medium or low-risk appetite. Also, given the big-ticket investments required in commercial realty, the residential segment is preferred by most investors.
Conversely, commercial property offers higher rents with longer lease tenures. So despite the higher investment, the returns are also high. Yet, the risks are equally high as rentals of commercial properties can decline drastically during a market slowdown.
However, finding residential property tenants is much easier, unlike commercial ones, because of the lower rents. Reselling residential property also has fewer hassles, unlike commercial. Additionally, the onus of maintaining the residential place devolves on property owners while tenants are responsible for commercial premises.
In terms of legal paperwork, registration, etc. acquisition of commercial property is more complicated while delayed possession of residential property can be a major disadvantage. When it comes to gross rental yields, residential realty is in the 3-5% range per annum of the property’s market value while this goes up to 6-10% for commercial property.[3]
Choosing between residential and commercial can be challenging as both have distinct benefits and drawbacks. Accordingly, the choice will be contingent on the financial goals of investors. For example, if budget isn’t a constraint and higher rentals are sought in the long term, commercial is better. Besides, it is a stable investment since the lease is longer and owners don’t need to manage multiple tenants. But if budget and maintenance issues prevail, residential is better. Investors can enjoy the rental income or later sell it easily if required.
Therefore, the final answer of rentals from residential or commercial property depends on investors’ financial goals and the quantum of investments they can make.
Whatever the case, it goes without saying that every investor must undertake individual due diligence before taking any decision one way or the other.
Disclaimer: Please note that the views expressed in this newsletter are personal and do not necessarily reflect the opinions of any associated?organizations.
Marketing Manager @ McGraw Hill | MBA, Growth Marketing
3 周Very helpful
National Manager- Channel and Judiciary Segment Sales at LexisNexis India (Online Research Solutions & Print Sales Management)
1 个月ROI on other options are now much better than purchasing a property (not the land)...it further worsens if one has taken property on loan....and benefit of indexing factor in CG is also no more (these ideas are personal)
Vice President Employee Relations
1 个月Good one Vinay.