Is This A Right Time To Invest In Real Estate?
November 20204 min read
Did your bank approach you with an “All Time Low” interest rates on Home Loans? Have you come across advertisements, articles showing how this is the right time to buy a house? Have you been thinking about doing that long pending real estate investment? If Yes, then this blog is for you. No, we are not talking about whether you should buy or rent a house. We are going to explore whether you should take a plunge into buying an investment property at this time. This blog is not to persuade you to invest or not to invest in the real estate but it is a simple checklist that you should keep in mind before taking the big decision. So, let’s dig in.
Home Loan Rates At An All-Time Low – But Is It Enough?
On account of an on-going pandemic, Reserve Bank of India reduced the repo rate to a multi-year low of 4%. Subsequently, the Loan and deposit rates were also slashed to pass on the effect of reduction in repo rates. This also means that the Home loan rates were reduced by all the banks and we are now looking at these rates being at an all-time low. Here are some of the lowest home loan rates as of 18th Nov 2020:
These rates are surely impressive especially in India where we have never seen such low home loan rates. However, is this an only factor you should focus on while investing in a real estate property? What are the other aspects to look at before you make this huge investment? Let’s take a look.
Is There Any Appreciation In Property Prices?
While owning an investment property does give strong sense of pride, it is also important to understand whether as an investment it adds any value or whether it appreciates enough over time. RBI publishes Housing Price Index every quarter to track the movement in residential housing prices across key cities. We took some of these cities and calculated CAGR returns of housing prices over 3 different time frames: 10 Year, 7 Year and 5 Year. Here’s how the data looks:
10-year return across all cities and on an all India level is impressive where almost all cities cross the CAGR of 10%. However, over 5- and 7-year period, the return is suboptimal barring a few exceptions. So, if you would have bought a house 10 years back, chances are that the valuation today will be very good. But if you did buy a house 5 or 7 year back, the you could hardly beat Bank FD returns.
While these are past performances and can’t be relied upon completely to take a decision whether to invest in a property now; it is important to understand potential upside to expect before you buy a house. This depends on various factors like Location, Proximity to railway station, airport, schools, colleges, etc., demand and supply of new properties in the area. Hence, understand these aspects and then decide whether it makes sense to invest in a house.
Are You Compromising With Liquidity?
Buying a house impacts the existing cashflow as well as investments considerably. Two major aspects that you need to answer for yourself are:
- How will you pay the down payment for the house? – While buying a house you get a loan of up to 80% of the actual value of the house and remaining 20% you have to fund yourself. Out of this 20% some amount you need to pay as a down payment. It is important to know how you will fund this down payment. This cannot come at a cost of other goals and you cannot simply compromise with your other important goals like retirement to buy an investment property.
- Will you be compromising with you daily cashflows? – Taking on the burden of loan can mean that either your expenses have to go down or your regular investments will reduce. In most cases, people reduce the investments which in turn has impact on future goals. Hence, impact of Loan EMIs on daily cashflows needs to be studied carefully before jumping in.
In short, Real Estate is a non-liquid asset. It may add a substantial value to your net worth but it cannot be liquidated in case of an emergency. Hence, ensure that your liquidity is not affected while buying an investment property.
Do You Know About Rental Yield?
Rental Yield in simple words means the rent you earn on your property. While on paper having a second source of income is very exciting, but at what cost? In India, the rental yield is somewhere around 2-3% per annum. Which means that on a house worth 1 Crore, you can expect rental income of about 16,000 to 25,000 per month. However, a loan of 75 Lakhs for 20 Years with 6.75% pa interest comes with an EMI of 57,000. The Monthly rent is not even half of the Loan EMIs.
Additionally, the Rental Yield also depends on Demand and Supply. If a lot of people start buying a house and rent it, the rental yield will come down. Hence, understanding about these teething issues before investing is a wise move for any investor.
Have You Exhausted Other Investment Options?
Now that you are thinking about investing in a real estate, do you have enough investments across other asset classes like Equity, Debt, Gold etc.? This matters because if you are buying an investment property, it means that you already own a self-occupied property. So substantial part of your wealth is in real estate. Apart from the above point of Liquidity, in most cases a well-diversified portfolio with a mix of Indian and International Equity, Debt and gold will always beat returns on Real Estate.
Unlike real estate, this portfolio will help you to create a substantial corpus with small investments over long term. Hence, create a portfolio that has higher exposure to liquid assets as per your risk profile and goals. Ensure that you are on track to create a sufficient corpus to take care of your goals and emergencies. You can then explore investment options like Real Estate.
Real Estate investment is a big decision and one wrong step can impact your finances adversely. Hence, use this checklist to weigh pros and cons and make an informed decision.
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