How often have you heard that – Real estate prices never fall?
Given the recent woes in the sector, this is no longer true for most of the markets in India. And the question of whether real estate sector is worth investing, especially for investing purpose, remains.
Let’s look at some arguments made by pro-real estate enthusiasts and sharing my comments on the same.
Tax savings on home loan
Yes it makes sense, and you can save a substantial amount if tax by investing in a house. These can fall under:
Section 80C – Payment of principal of home loan can make you eligible for tax exemption under Section 80C. And so can PF/ PPF/ NSC/ ELSS etc, which may give better returns too. Current limit for this is Rs. 1.5L per year across all instruments.
Section 80B – Payment of interest of home loan (up to Rs.2 Lac per annum). Does tax savings in this case offset the cost of borrowing? Probably by a little. But if you are hitting an interest of close to the maximum amount within this, the loan burden is likely to be high which may be difficult to service unless you are making lot of money.
Section 80EE may help you get some more tax exemption if you are a first time home buyer (do research a bit to check your eligibility for this) and this might reduce your cost a bit. But, is this incentive good enough for you to take a plunge?
2. It gives rental income
Fair enough. You get a good cash flow, assuming a good occupancy rate and a decent enough rent. However, if the rent you get is less (say, Rs. 10K a month) you may end up spending a part of that money in maintaining the property (e.g. taxes, furnishings, repairs, installations, maintenance bills etc, as needed)
3. Property prices always appreciate.
In last few years, prices have been mostly stagnant at most places.
And it seems that it may take some time before the prices appreciate and beat even the FD rates. And while prices in the locality increase, will the prices of the apartment increase too? Or the wear and tear will pull the prices down a bit?
4. You have an asset to your name
Can you encash it within a short notice if you need money urgently? Unlikely, in most cases.
5. Other costs which you may not notice initially
Cost of registration & GST which may be 10-20 percent of the property cost, is often ignored!
Among others, one needs to keep above points in mind while looking to buy a property for purely investment purpose. However, if you are looking to live in the property or looking to deploy excess cash (probably without needing a loan, though you may take it for tax benefit), then the story may be different. And if the expected appreciation of property prices is in the vicinity of 10% or above, you may even make a windfall, like many people have in the past.
Comments and feedback welcome.
Originally published here