Real estate has been one of the most popular investment options among people. People buy it either for living or as an investment. Among other things such as rental income & price appreciation, the pride and satisfaction of owning a home is one of the reasons why people invest in real estate. However, what is often overlooked in the real cost of buying a home for investment.
Over next few lines, I’ll try to highlight different factors to consider while calculating the real cost of buying a home for investment. Use that in your context to arrive at a number for yourself, if you are looking to invest in a home. And calculate your expected ROI based upon that (and not the cost that is marketed to you).
Key Assumptions: in arriving at the real cost of buying a home for investment
- The property is for investment and NOT for residence. The purpose and dynamics are quite different in buying a property for residence vis a vis investment!
- Your expectations are – Rental income & price appreciation (and eventually sell the property for a good profit)
- Wherever there are numbers involved, I am assuming the property price to be Rs. 1 Crore (= Rs. 1 Million/ Approx. $ 140,000). This is primary for the ease of doing calculation!
What are the one time costs while buying a property?
- Registration cost – Typically you need to pay for stamp duty and registration. This comes out to be in the range of 5-10% of the property cost depending upon the location. If it is an under construction property, you need to pay GST also. The GST slab is currently at 5% (1% for affordable housing) (More details here)
- Add-ons – Parking charges may or may not be covered in the property cost. In addition there may be charges like clubhouse charges or paying for other amenities you may be getting. Preferential location (e.g. apartment with better view) may come with its own additional cost. These costs can add to the tune of few lacs of Rupees.
- Furnishings – Even if you go for bare minimum, you’ll need at least basic electrical and plumbing setup ready. So be ready to shell put some money to get tubelights, fans, taps, window grills etc. in place. You can add on air conditioning, television, washing machine, beds etc. if you want to (discretionary, because your objective is not to live in it and probably rent it out)
- Interiors – Now that you have the house, you’ll want to beautify it. And this can be really expensive. The costs can vary – from spending zero on interiors to spending tens of lacs! It is not uncommon to see people spending more than the value of the house on furnishings and interiors. Again this is discretionary, since you may be renting out the property and not living in it.
- Brokerage – Typically brokerage for buying a house (if you are buying through a broker) can be anywhere between 0.5-2% of the property cost. So for a Rs. 1 Crore property, you can end up spending around Rs. 1 lac, assuming brokerage @ 1%.
What are some recurring costs if you own a property?
- Maintenance – If you are living in a housing society, be ready to pay close to 0.5% of the house value as annual maintenance cost. In a decent society, you may end up paying a monthly maintenance of Rs. 4,000- 5,000 for a Rs. 1 Crore property. Again, the cost will vary based upon the facilities being offered.
- Wear and tear – Over the years there is bound to be wear and tear in a house. This may be more prominent as the house gets older. So be ready to shell out money for fixing broken tiles or leaky roofs as the building ages. Or painting the house every few years.
- Insurance – While it is not mandatory, it may be a good idea to have a home insurance. Several banks insist on home insurance while giving a loan. This may cost few thousands (Rupees). (Saving Habit has a good write up on this)
- Loan servicing cost – If you have taken a home loan, the EMIs are likely to take a good chunk of your take home pay. With the principal and interest payment, you can calculate home much money you actually end up paying. Add to that application/ processing fees you need to pay while applying for a loan. There are tons of online calculators available to calculate your principal & interest repayment.
- Brokerage (For renting it out) – This is usually half or one month rent of the agreed rent. So, if you are using services of a broker, be ready to shell out some money as brokerage. You may incur this every year (whenever the agreement is renewed) or the tenant changes.
(You may also be interested in – 5 mistakes to avoid while buying a house)
What can give you return on investment on the property you invested in?
- Rental income – Annual rental yield in India is typically 2-3 % of the property cost. So, for a property worth Rs. 1 Crore, you can expect a monthly rent of Rs. 20,000-25,000. Once in a while, it may come down to zero for some time, if there is a period of no occupancy.
- Price appreciation – This is arguably the most important reason why people invest in home. Hopes to sell the house for profits later on. You may probably have heard several stories like – “The value of my home doubled in 3 years” and similar. One question to answer while calculating capital appreciation is the cost on which you are calculating the returns – since the cost of home and cost to you are different.
- Intangible benefit – With a home in your name, likelihood of more respect in society increases. For many, home can also be a symbol of “I have arrived in life”. And for some, that may hold a very high value.
Now that you are aware of what all broad parameters you can consider while calculating the real cost of buying a home for investment, do do your own math and find out what that number is for you, in case you are evaluating.
Based upon that, you can cake a call whether you should invest in a home for investment or not!