“The current market value of my flat in Mumbai is close to 1 crore , I bought it at 28 lacs in year 2000. The returns have been Mind boggling 72 lacs in 9 years, i.e 8 lacs a year approx , more than my current salary and now I am planning to invest more in real estate instead of Equity, What do you think” . A not so close friend was discussing his Real Estate portfolio with me.
He belongs to first category of common sense deprived idiots, who do not understand mathematics well. 28 lacs flat became 1 crore in Value in 9 yrs, The returns are great ,but not exceptional enough to make someone eyes pop out . Simple maths will tell you that its 15.2% CAGR return over 9 yrs . Now whats so great return about this 15.2% Return ? 15.2% return over long term is desirable and great and whats normal return from Real estate in last decade in our Country , The only thing irritating is how people make fuss about it . Even Gold has outperformed , Gold was $300 per ounce in 2001 and now its close to $1100 ounce , that’s 15.5% return , 0.3% more . On the top of that Builders are not keeping their promises of Delivering Projects on Time and with same quality Promised.
Real estate investments has caught everyone’s attention in the past decade and every Tom , Dick and Harry with 5 lacs salary tries to grab a 40 lacs flat . I will try to throw some light on Average Real estate returns in past 8-9 yrs in India .
Coming back to my Friend, I told him that its been a very good return, and I appreciate his timing, Good job. But definitely he is bragging more than it deserves. A second person (his friend) suddenly comes to his rescue and challenges me . “But Manish , I bought a a flat in 2003 @20 Lacs with 3 lacs of down payment and rest a home loan. I spent total of 7 lacs till date and the flat is already quoting around 60 lacs, that 40 lacs of profit in just 3 yrs through investment of 7 lacs, that’s 78% return on annual basis” , showing off his fast calculations skills and giving me a “anything-else-you-young-financial-planner” looks his face .
These people are from another category of “common sense deprived and mathematically challenged” people . It is worse than first category . The problem with these people is that they do not understand “leveraging” .A situation of sitting on huge profits by just investing a small amount as down-payment and rest with home loan is pure example of leverage and very common in India , This gives a feel to people that they are very smart. These people never consider the case when their house value drops by a big margin like say 15 lacs and they have just invested 5 lacs from their pocket, then they are in loss of -300% (absolute). But as you know , Investors like to consider a rosy picture, they somehow believe that it cant be the case with them . As US citizens who bought Real estate in the middle of the Bubble just because credit was cheap and they could have made a lot of money by taking a Home loan and almost nil Down payment, When Real Estate broke in US , people who has put $10,000 from their pockets for a $4 million house were in losses of $1 millions , because they had to pay $4 million a loan money for something which is now costing $3 million .That’s a unrealised loss of $1 million in a short time . That’s the problem of Leverage . Investors never think about this , India is a success story and housing is scarce , that’s enough for them to take a chance. With my amazing quality of self control , i kept all this in my mind and didn’t argue with him, some times your skills of explanation is limited to blogs only .
What is RESIDEX ?
Dont feel amazed if I tell you that there is an Index for tracking Real Estate in India . Its called Residex and maintained by National Housing Bank in India . Its updated once every 6 months . It covers all the major cities and the sub-areas in that city . The index Value over time will tell you how is real estate prices doing in some area or city. Please understand that these prices are average real estate prices and not some general case which would negate what we discuss here today. I dont know how that is calculated but a common sense way of calculating it is to take a sample 0f real estate plots/flats in a area (for example 1000 units) and calculating the appreciation in value from last 6 months .
Lets see the RESIDEX values for 5 cities
Here is the chart of the same table
What is the mistake people do when they calculate Returns ?
The beautiful mistake which everyone does is that they calculate pure absolute returns from Real estate which is in many lacs of rupees obviously. So if a person invested 30 lacs in a flat and it becomes 60 lacs in 5 yrs. They are sitting on a 30 lacs profit. Thats a lot of money and people are excited to see that much money , but you also have to see that they invested damn 30 lacs !! for that, which is not every one’s cup of tea and the returns are normal 14-15% return/year on investment if you compare it with Gold or Equity. You could have made more returns if you had invested in Equity (SIP in mutual funds in some top funds) . If you consider the risk taken for the return people have got in Real estate , personally I am not very much excited then , Investors forget the risk taken to get some return and only concentrate on Return part . See an Article on GFactor , A tool to find out if an investment suits you .
What you have to see is how much return you got from something after adjusting the risk taken for that . So given a time frame of 1 yr .
- If you do a FD and make 9% , its amazing !!
- If you invest in Real estate and make 10%, Its ok
- If you invest in Equity and make 11% , its just fine .. not a big deal
- If you speculate in Options for one year and make your money grow by 500% , I Would be personally disappointed a lot .
Some smart (second category people) people think that they can buy Real Estate on loan and make 30-40 lacs in 4-5 yrs from house value appreciation , While that is possible and has happened to a lot of them and definitely the return would be amazing . But this exposes them to a great amount of risk which they dont understand , its pure leveraging . There are better ways of leveraging than this . This kind of Leveraging is still nothing in front of Options trading in Nifty or some Stocks . Not that I discourage people from taking a home loan and invest in real estate , but dont over do it , and understand and accept the risk involved, be ready for it . “Risk happens when you have no idea what you are doing”
. If you precalculate it and consider it , then its called Speculation , which is my favorite 
. Options trading is something I would recommend who have great risk appetite and dream of millions in short span of time , Better than real estate .
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What is Average Real Estate Returns in India
IF we see the above chart of RESIDEX Values (for 8.5 years) , you can find out the CAGR return of Real Estate in different cities . Let me show that for 5 cities in India .
Chart f or the same data
Note : I have assigned Index value for “India” by assigning weights of 25% , 25% , 25% , 10% and 15% to all five citites in same order .
What Should you Do ?
First of all , understand that Real Estate is important and You should always invest in it for Diversification of your Portfolio (If you can afford it right now) . But that does not mean compromising with your Risk Appetite and investing just for the sake of Investing. If you want to buy home , make sure you afford it, Buy a 1 BHK which you can afford if you want to live in it . If you want more than 1 BHK , plan for it , take it later . There is no rush. Real Estate is not the last thing in the world . Don’t feel left out when you see others minting money in Real Estate , believe me they are making similar returns which you can make from Equity, just that the magnitude of profits they are making is high , not the returns on average . So Chill !! .
Note : Understand that whatever we have talked here is based on the RESIDEX index and there will be many specific cases which would make this all talk a nonsense , but we have to look at general case and not a specific case .Download More data on Residex from HERE (From 2001-2007) and after 2007 HERE . Note that you cant get all data of Residex at one place . I combined the data from NHB from 2001-2007 and combined it with data on their Website to construct all 8.5 yrs of data . There was a shift in Base year because of which I had to do so .
What do you think about the Real Estate Prices at the moment in India . I do not feel they are justified and the prices are mainly driven because of unnatural demand created by easy access to Loan . People buy it , but can not afford it , If things continue for some more years . I would be surprised to see a big bubble burst in India like we saw in 2007 . Leave your Comments and let me know you are reading this blog .
Disclaimer : I have not invested in Real Estate, I am not very much excited about it and I dont have money for it .
{ 172 comments… read them below or add one }
Hey. Read this one.. nice analysis.. Really love it when some one clears all the crap with numbers/proofs..
@Anshuk
Thanks for the appreciation
, This is your first comment , are you a regular reader . Ping me sometime to discuss things 
. This to know you 
Manish
Bangalore is totally going different fro other metros in those graphs
.-= Taranfx´s last blog ..HostGator $25 off Discount Coupon =-.
Yup .,. Thats based on data from RESIDEX .
Manish
This fall for banglore is due the unprecedented sharp rise and all nonsense hype about the sillicon valley of India and all, and talk of new international airport etc.
Reading all your articles I want to add my comments which are my point of view.
if you buy flat for your self use it cannot be consider as investment its a liability for maintenance and loan emi. so there is no point in discussing returns on it.so as per me if you can afford you can buy flat in best locality,close to your office and by reputed builder .you can go for loan as per your risk appetite and without thinking about returns continue staying in it for long term.so in longterm it will definitely create your assete after repaying all loan with interest.
if you r buying second flat then you have to think lot i.e. rental value,loan amount,interest outgo.
if you r buying newly launched project then consider location,builder reputation and rental value of property. so i will still prefer real estate over equity.
as per me equity gives return only in long term and if 5 yr we consider as long term its a huge time and we really cant hold shares for those periods as lot changes happens in your life by that period ,inbetween share market crash and u think returns are negative and u exit once market up ,ending making no profit. u really need guts to pass through crash period and if you withdraw inbetween all purpose of equity lost. also people dont even see annual report before buying shares they just invest on roumers or friends tips or some big brands.hoping they will earn more in long term.in mf nothing in your hand ,fund manager decides your faith so its like you r paying him for losses also.anyway if you have knowledge and time to study fundamentals of company then only invest in shares. otherwise somebodys profit is somebodys loss.intellegent always wins.
considering above i will suggest u can create asset by investing in real estate faster.no bank will give u loan to invest in equity. so your equity portfolio net worth remains small as you are investing your money availlable to you. in case of real estate u r taking money from bank wchich is chepest loan available.so you can leaveraged with your loan and invest surplus money in equity side by side so your portfolio will grow.
Ashwin .. Your views are appreciated
All we are talking about here is that Returns from Real estate is much hyped and even less than Equity in same time frame . So each person has its own preference of investing or not investing in Real estate .
So If you have the risk appetite and ideas , you should go ahead and invest . People who do not should wait or look for alternatives
Thanks for your insights
Manish
Hi Manish,
Your analysis on real estate investment returns is quiet amazing. The way you explained with help of charts and numbers is impressive and it made it clear that investing in different asset classes like equity, proved equity MFs and gold is on par with real estate invesment. Now a days, most of the people have few myths about Real esate investment and feel that, this is the only avenue which will give more returns and make their protfolio uniquely diversified.
I really enjoyed your way of explanation. I am a regular reader of your blog…. keep blogging.
Cheers, Mahesh
Mahesh
I am equally glad to have you as reader and look upon interacting more on different posts and creating an atmosphere of learning . Thanks for the wise comments .
Manish
What you mentioned as second category of people, I call them people who “talk numbers”. They do not understand maths, and neither are interested in talking maths.
Example
I have a LIC policy (a 11 year old mistake), which my father would not let me surrender (or make paid up). His logic is very simple, the policy gives me 40K every years. And at the end of term I will get X Lacs back. So how can the policy be bad. I have tried convincing him, by showing on excel that returns after 11 years is a measly 6.2%. But he is interested in numbers and not maths.
On a different note, while doing the calculations for flat one should also consider the rent value in CAGR calculations.
Personally i feel 15% from a safe investment like flat is a okay return. I would consider equity more riskier investment. The only benefit with equity is you can start small and diversify easily.
@Manav
I can understand
. People from different times didnt had things which we have today and they read all type of bad things these days that they want more of safety than returns . They trust old crappy mosquitos which has sucked blood out of us only to make them healthier 
.
Anyways .. Choosing some other product over equity is a personal choice and thats perfectly fine , Just make sure you diversify and know what you are doing .
This is your first comment , are you a new reader ? Lets catch up sometime on chat
Manish
Dear Manish,
A very good article indeed.
In India, most problems stem up from comparing to others. Poorly educated guy, making lacs of Rupees in real estate, gets so much attention that people forget that the other options such as equities are also equally good.
And the less is said about real estate the better. flat prices touching A crore Rs .. I really wonder sometimes who must be buying these flats and a single flat is worth it ? (Considering that owner neither owns the land nor the sky below or above the flat.
All this has resulted in dissatisfaction for the medium class people who can not afford / or has to compromise hugely with their lifestyle.
What I like is the sane advice by you : Buy only what you can afford. (i.e. we should not compare to others and buy 3BHK flat or duplex bungalow just because our friend has bought it.)
Regards and best wishes,
Jitendra,
Pune
@Jitendra
Nice to have your comments on this topic , Most of the people buy flats thinking they can afford it , but they are wrong , Might be they never face an issue , but still the situation they are in is riskier
and not recommended 
Manish
Manish,
Nice article. It gives a clear picture to compare the return with huge investment in real estate with other investment. Seriously, this gives an idea, tat real estate is not only the best investment. But, if I need to wait for affordability to buy a property, I think, I am taking a risk.
Ex: Couple of my brothers bought a land & constructed a duplex kind of flat 3 years ago. They also asked me to have one flat on it, which comes around 15L. I don t want to invest that much by loan, but now, it has appreciated to 33L. Now, I can afford to 15L not for 33L, even I can’t find any flat in that area for that price, either I have to move very far from city (with little more price) or I have to go for home loan for around 35L.
Even if I have invested in equity or gold, when I need a home I have to invest most of my investment+profits (provided the risk & loses) unless real estate bubbles out. Also, the monthly rent also increasing too much, which has become almost equal to EMI… Considering these factors, most of people are under pressure, what you say?
Vinay
again as I said , we are not talking about specific cases here, we are talking collectively . Apart from that you are saying this because in your example you have lost the opportunity . But there are cases where people have invested in a flat at 40 lacs before 2 yrs and the prices are now 35 lacs . these people can also talk about their bad experience .
Imagine a case when you would had taken a loan that time and suddenly markets were down + interest rates might have increased to some rate where it would make your EMI cross your limits .
So always there will be some good and bad cases which we cant link to the talk we had on this article .
Did i answer your query ?
Manish
But the case of loosing the money in real estate is very rarely heard today… but as you said it may grow in future if huge no people are taking loans more than their affordability. I agree with that point. People should not be taking loans more than their affordability or by calculating their salary hikes of future years. You answered my question & makes a clear point real estate is not the best investment. Thanks Manish.
Vinay
Loosing the money is not the only loss we should consider .. even if a person makes some profit , still it can be bad .. People compromise their other life events and daily fun running around meeting both the ends meet . Because the burden of EMI is so high .. they dont take holidays much with their families .. cut on expenses which might have increased spend on their kids and other things which increases bonds like going out .. etc .. These are small things , but matters ..
Monitory profit is not the only thing one should consider ..
manish
This is one of the finest reply. I always want to convey the same to my friends too who are under the umbrella of getting wealthy by taking huge loans beyond their capacity and sacrificing on many small things in order to clear of the loan amount.
Hi Manish,
Good analysis. Many people think like “I am left out, every body is making money in real estate”. One of my friend purchased plot and built a house with huge loan of 60L. he never thought about job security and family expenses for the next 30 years. When the news of layoff started, his life was hell. Now he is 35 year old and his last EMI date is two years after of his retirement.
I would like to say people to understand their needs (not wants), never compare with anybody. Plan things based on your income. Live happily.
Srinivas ,,..
Nice , This is an example which makes you everyone feel better . In the same example , if prices would have crossed 30% – 50% more … It would have turned out to be an example which makes us feel bad . So we have to understand the general case and have to logically think about everything ..
Buy what you can afford and not you wish for , I would prefer to live in 1 BHK for some years and then go for 2 or 3BHK after I have some money and I can afford it , rather than buying a 3BHK which I cant afford and constently worrying about “What if’s” in life .
Manish
Great article. Well timed for me because I was considering buying a flat as an investment. Now I will think twice and buy it only when I can really afford it
I am glad it helped you .. So what are your plans now !! ,.
Manish
Manish,
There is no doubt that equities are by far the better investments than real estate, gold or any other form of investments.
As you mentioned the about downside of home buying, there is also a much deeper downside of equities investments. Most of the average people do not have high risk or even a medium risk appetite. They see stock market as a speculative medium.
I guess the reason common people who prefer to buy a property than investing in stocks is mainly to protect the money they have earned the hard way.Most of the people who are first time home buyers(aged 25-35) have saved the money by working hard for many years and they do not have that risk appetite or the knowledge (read courage) to put the money in stocks (investing in mutual funds is a different issue, as it can be done in SIP manner). Though the real estate also poses a downside risk, it is still less riskier and more reasonable to take the first step in investing than equities. But those who have good enough knowledge to play in equities, they must first get the maths correct and then select the better option.
And one of the reason for most of the young people to buy a house is to start the family. We Indians by far are more emotionally than financially attached to our house. And We are also not “programmed” to stay in rented place for long. That said, one must only buy soemthing which is affordable to his/her and only if he knows the costs and strings attached with the home buy.
-Ronak
Well said ,.
Emotional buying is a problem . We go with the Trend . I understand the Joy of buying a house and owning it ,. it gives a sense of Pride and satisfaction and I love it . I am not against it . as far as you know that you are doing the right thing , go with it .
But the problem is that primary reason for most of the buyers these days are
- “Lots of tax saving”
- “Fast value appreciation”
- “comparision with other mates”
And all this at the cost of “leverage” and “a lot of burden” . I know people who have their EMI as 85% of their salary , thats HUGE !! ,.. Not at all recommended .
Manish
Hi Manish,
Very good article. You discussed only about the return. I see some people writing about the risk involved in equity. I am very sure that there is huge risk involved in buying real estate. When people writing about rent, they should think about the interest paid to bank, maintenance charges(exorbitant without any facility, mostly compulsory and maintained by builders) and one time charges like furnishing the house and its depreciation. Now a days, no body is thinking about infrastructure and the quality of construction. My friend was working with reliance energy. When there was a flood in mumbai,he was part of rescue/rehabilitation team from reliance energy. He visited some apartments in mumani without power. There are worst cases. One person newly married and telling that last one week he was not able to have his first night due to power cut. One 65 years old person residing in 11th floor of the apartment, coming to ground floor for taking one bucket of water for going bathroom. These are all some chilly examples, but still we need to think a lot about this. Because we are buying house to enjoy/improve our life style. As you said, day by day my intention to buy house is getting diminished by the seeing the cases in the market.
Thanks,
Sankar
Yes Shankar
Many flats which are not from good builders have issues like under-quality . See the video i have given link in this article . Even good builders who have good names are not delivering on time and what they have promised .
Manish
Good article Manish.As Ronak said above, Indians mostly try to start thier family in own house than a rented one ( I am not an exception). Most of the middle -aged employess (25-35) who are newly wed or with new born kids would like to settle in own houses as early as possible. Owning a house is a milestone in India.So the anxiety for own house is understandable. As you rightly said, people have to buy something which they can afford, not what they want.
You are right . I understand the temptation of buying a home as early as possible . but I dont see any problem personally to live in rented home for quite some time like 6-8 yrs and then buying my home . Now we are entering into the topic of Financial Planning . People who might have planned everything in advance are better off here because they have a plan and they know how and when they are going to buy and how can they buy ..
Without Financial planning we are in middle of no where , doing things randomly here and there .
Manish
What do you mean by “indians” mostly try to start there family in there own house ?
I think everybody in this world would want that. You dont want to keep changing homes with your family every 2 years.
Or unless you want to spend you life in same rented apartment which your landlord doesnt take care about.
Rohit
I wanted to day that the shift in thought is happening now a days in India from last 8-10 yrs, when “Not owning” your own house seems give a feeling to everyone that they have done some crime or left out in the race , which is not exactly true . I was trying to point out that .
Manish
hi manish
great article. opens some hitherto closed eyes on investment topics. i own a website for a layout I intend to stay in, in bangalore. (www.bsk6.in). with due credits to you someday I will put up this article there with the link to this page for people to understand the reality, and not just realty
srikanth
.-= Srikanth´s last blog ..Airtel, once fairTel, now unfairTel – shortly finishedTel =-.
Srikanth .. why not . Just put a excerpt and a link back to this article . no issues .
Manish
Hi Manish,
Nice article. What you said about risks and returns are completely true.
In India, I feel Land(site or flat) is bought more for emotional reasons rather than financial with “Mera ghar ban gaya. Ab koi tension nahi hai life mein. Settle ho gaya mein” kind of justifications. And it is sold only as a last resort like shifting base to the US or shifting to another city permanently or some major health issue in the family. Even in such cases people make loans to meet their ends without selling their land. It doesnt matter if there is a temporary dip in the land’s value as it is considered a long long term investment and there is no time frame fixed like I want to sell my land by 2012 or 2015.
Where as in equities, one would consider one’s stock price to keep appreciating each day. And one keeps changing one’s portfolio often. And in India we haven’t felt a major real estate bubble yet (as per my memory) and so investment in land is considered very stable and safe. For now, with the kind of growth we are experiencing, with home loans available, with tax exemptions on home loans, our age, our earning power, success stories of friends, of relatives, I am sure everyone would consider investing 30 lakhs in land(in prime localities, with home loans) more sane that investing say 10 lakhs in equities. And it is best if one can identify a good area, a city which has good future growth to buy a land in.
I think Real Estate is here to stay atleast till we are hit by a US 2008 kind of a housing bubble. And it is really not justified if one tries to buy land for say 10 times their current salary. They will be very badly hit in such cases. Rather than invest close to 50 lakhs in Central Bangalore, I would prefer to invest 7-8 lks close to the airport if its only for investment purposes.
Thanks,
Akhil.
I agree with you . “Real Estate is here to stay atleast till we are hit by a US 2008 kind of a housing bubble” , nice comment ..
This is true , Thats the reason I feel that people who will invest today in real estate wont get more returns than 10-11% max . Thats my feeling , which does not matter .
Emotional reasons for buying is ok , but overdoing it is not ..
Manish
Nice article Manish
The truth is that in India, real estate is rigged in favor of the builders. The rental yield is still one of the lowest in the world. The industry itself is unregulated & opaque,compared to the the equities market which is relatively transparent and regulated by bodies like the SEBI.
yup .. You are right about rental Yield .
Let me compile more on this and come up with an article .. thanks
Manish
Hi Manish,
great blog. i agree that RE in big cities like Bangalore etc down with hardly any takers. this is true for even independent houses and sites. i myself know a few desperate sellers with no takers. what surprises me is the scene in small cities and even in remote villages. it has appreciated by a lot here too. you might say its just the quoted price and no takers for it. but thats not true here. transactions also taking place. i have no idea why someone buys these. there are so many people in these places sitting on crores of money. last week i had been to one my friends place and there was a potential buyer for a junk piece of land for about 50 laks. it doesn’t even have roads. i have no idea why he is buying..
@Tejas
Might be they see the potential in that land . Well thats a different thing from what I have talked about here . Land can have different valuation than flats . but still overvaluation is something which may be the case with Land too ..
Manish
Hello Manish,
At an outset, it’s a great article, and I can understand the work that went behind it. You hit the nail on its head by quantifying the rate of returns (which is very similar to equities). I am assuming that the “real rate of return” would be less after adding maintenance, taxes, interest on capital, etc.
One thing that I would like you to think about (and perhaps add another post) is the objective of buying a house or an apartment.
In my view, this is where most of us middle class gets trapped into. I cannot understand, why people think buying a house for their own living is an investment. I just do not get this. House is place to live, enjoy with your family, give them a shelter etc. That’s what we work hard for, eat, live, enjoy, and have comfortable life. You cannot measure everything in terms of money or investment.
In my view, housing should be considered as an expense. The benefit of buying it on loan (vs. renting) is someday you will own it. And that someday you will have more out of your salary for other things. By buying a house, all you are doing is keeping your money with yourself in future (instead of giving to others in rent). People tend to forget that 10 years down the road, if they sell and make 50% extra, it has no meaning. It is because to find a similar place to live, most likely, they will have to pay the whole 150% (i.e. 100%original+50%extra). Where is the profit?
The moment folks realize it is an expense; it is more likely that they will restrict their EMI to 35%. Otherwise, they get trapped it is an investment and are happy to pay to more for this easy money. This easy money and concept of credit is great, only if one knows how to use it. This easy money is not free, we as consumers pay a lot in hidden interest and fees.
So the house where you live, is not an investment. In my view, all it is, is preserving your capital (and not giving it to somebody as rent).
We should be careful in understanding the US real estate as an example. We don’t realize, it is a subprime real estate burst (not a bust of US real estate). Because there was cheap money, people who did not need a house, bought it, hoping to flip. People who earn 50K bought houses for 500K. Again, as Manish pointed out leveraging beyond their means. And those are ones that got burnt. More than three fourth of the population happily lives in houses and apartments. Nobody is on road. We tend to dramatize the impact. It was an artificial demand fuel by cheap money, which is now correcting itself. And this is the third time in last 100 years or so US real estate is getting burnt. So message from US real estate is only that “don’t leverage your self”.
Manish, what would be your view on what should be the max EMI as a percentage of earnings?
Best Wishes,
Yup . I agree that house is not a pure investment if its considered for Living purpose .. somewhere its price will appreciate and you have your big money locked into house which you can use if things get worse .
As you correctly pointed out that “US subprime cricis” teaches us that we should not over leverage ourself beyond our risk apetite .Nice points from you here .. I Will definately come up with more things in next set of Real estate articles
Regarding % of salary as EMI . I am not sure about exact percentage and also i am not sure if its right way of seeing it .. The only thing one has to consider is that it should provide enough cushion to the person .. Even if it increases to the max limit .. the person should be able to manage without psychologically being hurt .. BUt if you ask for 1 number i would say max 45-50% of Take Home .. What do you think ?
Manish
Manish,
A general thumb rule for affording EMI is < 30% of your take home salary. That way, you can arrive at an amount that you can comfortably take a house with. For example, a person whose take home salary is 1L, he can afford 30K EMI (after his expenses and other investments) and provided he can shell out 20-30% as down payment for a house, he can afford a house in the range of 40-45 lacs.
If the house is for own use, then the point of returns are moot, but it also may not be bad for a second house as investment.
– Kingshuk
Kingshuk
Agreed
Manish
Nice article manish.
Everytime i read ur articles in this blog it give me knowledge.
Thanx for this eye opener again.
Thanks Vivek
Manish
“I dont know how that is calculated but a common sense way of calculating it is to take a sample 0f real estate plots/flats in a area (for example 1000 units) and calculating the appreciation in value from last 6 months .”
The site that you linked to says the following:
Actual transactions prices considered for the study in order to arrive at an Index which will reflect the market trends.
Abhishek
So it means that I was correct . Right
, even if they were not .. I guess the sampling mathod should be a better one .
Manish
very informative article, well supported with statistics!
in face the statistics were eye-opener..
do read the article ‘reality of realty’ which we have linked on our blog, originally published on valueresearchonline
very informative article, well supported with statistics!
in fact the statistics were eye-opener..
do read the article ‘reality of realty’ which we have linked on our blog, originally published on valueresearchonline
.-= indovesting authors´s last blog ..how emerging markets will grow in 2010 =-.
Thanks
Nice Article
It was a good article Manish. I understand and was planned for buying a flat with my all deposit into down payment and the emi will be equal to my rent what i am paying. But I thought that if in future there is no job security then how it works. Now I dropped my plan and will plan buy a flat after 2 years. When I will have enough money for down payment.
Please let me know whether my decision is correct.
Vivek
Looks good .. the reason you have dropped your decision is good . So you have to evaluate your Job scenario .. If its 95-100% safe and you are in good position at your company , May be you would like to reconsider the plan of buying , At the end its all about Cushion at the back.
Manish
Hi Manish,
Really nice article. Can you also do a cost to cost comparison of buying your house on EMI and living in rent vs continuing to live on rent only and investing the amount (EMI-rent paid) in equity for say 20-25 years time period. I’ am sure it’ll be very beneficial for all.
Amit
Its on the way
.. patience 
Manish
I’d done one long ago – it’s valid for the calculations even today – at:
http://www.deepakshenoy.com/articles/realestate/realestatecf.htm
I considered an optimistic scenario: Renting a 45 lakh worth apartment for 25K per month – that is the same as comparison of staying in a house on rent at 25K versus buying a 45Lakh house. Today, a house worth 45lakhs will not rent for more than 15K, unfortunately.
Cash flow wise buying not very viable (rents at current yields of 2-3% are too low for it to make any sense) If you rent, you make substantially better returns – the cash flow situation on the above is nearly 53 lakhs better in 20 years!
I’ve considered things like tax savings for renters, for principal repayment, for different downpayments etc (the excel sheet is free to download)
.-= Deepak Shenoy´s last blog ..Taxes: Still Not Reflecting An Upturn =-.
Wow .. That was some great analysis .. I plan to do some analysis myself on rent vs buy , let me prepare it with some of my ideas
.
Thanks for stopping by here and give your expert comments
Manish
Dear Deepak,
I tried your excel sheet. Its reaglly great !
The just observe an issue with in the calculation of the Investment Analysis. In the First page [Summary->B 11], Bank Rate of deposit is NOT used in the calculation. Any change in that Bank Rate of deposit value is NOT reflected any where in the results. Kindly do the needful to fix this BUG.
Thanks – It was for a diff purpose, and I’ve fixed and uploaded that now
I have seen a good calculator to decide whether to buy or Rent. Here is the link.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
Nice link
Thanks
Manish
Hi Manish,
Great article. (similar timing as of Shyam’s column – Real estate investment woes!) Personally, i feel more freedom in rented apartment – you are free to move out and go to a new place any time
– you can increase or decrease your rent payments. i had been paying 8200/- per month, and shifted to a larger house (about 1.5 times as big) for 8500/- ! Now, this is similar to having a ‘prepaid’ mobile account – you can change your plans as opposed to postpaid ones!!
Buying a house is good, but with home loan, it is something less convenient. After coming across your blog, i am most of the times evaluating mutual funds and started investing! Thanks for your articles.
great
I have the same views like yours .. I better invest my money is something i am more comfortable and live in rented apartment and buy my own when I have enough money .
Goodluck ..
Manish
Just a thought.
How much Tax Benefits on Home Loan bring down the EMI ( indirectly ) on 20Lakh, 25Lakh, 30Lakh home loan. I am sure it is based on the slab/Interest that you pay… Does Equity stills scores over ?.
How about buying a Home in a good locality now, even if we end up paying 30K as an EMI, the value of 30K tend to decrease over 5,10,15 years down the line due to inflation? and who knows if we ever get a chance to buy a home in that locality ( think of HSR, Jayanagar in Bengalore )later due to non availability of sellers…
Why people think, instead of paying rent, buy home now which might help to reduce the EMI/Years from loan over long term?
I did not run by numbers… just a thought..
-Mahesh
Mahesh
nice points . So buying on loan will obviously save tax , save rent , but then you are exposed to big debt now , If you can afford it , great .. if not .. then its a bad scene ..
Buying house has its share of bad points .. Maintenance , big EMI , you cant move here and there much like you do in rented (loss of freedom) .
EMI will be constant over the years (more or so) .. But then its too long tenure too
Manish
really a nice article . i agree with u that the demand in the real estate sector is created out of leverage which will have a consequential impact in near future.
awesome article dude waiting for the next one
Next one will come soon .. What do you want to read on .
Manish
Good one !
Real Estate is a over-hyped investment. And this should break the myth
Yes Arun
Thanks for your appreciation .. its helping me to get motivated and write more .. so keep commenting
Manish
Excellent post………..well backed by data though data might not be accurate but give you the direction…..my feeling was same…….however never did the analysis…..but belived free market gives you the early indication of where the things are moving…….with real estate companies stocks fell so hard in 2008-09 crash one could have gussed where real estate market is going…..also real estate as such is a sticky market and not as liquid as stock market hence will take time to bottom…….my belief is in India we may have bottom of real estate market somewhere in 2011-12…….i live in mumbai so somewhat disappointed with the above data……..only mumbai real estate has not shown signs of coming down…..Hhhhhmmmmm
Thanks Harsh
I feel Real estate Bubble will burst around same time as you think , but will catch up soon .. So it would be deep and fast
. my opinion (which does not matter)
Manish
Hi Manish,
Excellent post! Though i have some questions..
I agree to a certain extent, house ownership is a big ticket gamble – if gone right has large payoffs. however with Indian growth story intact, cases of loan default are few and far between.
And as everyone expects the BRIC nations to lead the world out of recession, i dont think the US kind default panic situation is here in the foreseable future.
Given this backdrop, i fail to see why we would have a property market crash, infact have been waiting for it since 2006.. Agreed prices in certain pockets would have dropped more however on a whole as your data shows prices have dropped less than 5%. Hardly a crash i would presume. Plus as they say in stock market, things should consolidate before they rise again… Looks to me like a consolidation phase on Indian Reality.
On a side note I would really like to know Financial planning for retirement – target 40 years.
Kindly suggest what investment can provide continuous income plus appreciation to cope with inflation. High yield stocks / commercial real estate…
Cheers,
Mayank
Mayank
I appreciate your views but I personally think you are getting little over optimistic . India was a growth story since 1992 , then still in 17 yrs of time frame we have got not more than 11-12% return in real estate .
You might have heard the good part of the story only, but real estate sector internally is not that strong as it might look : see , http://www.shyamscolumn.com/2009/12/q-real-estate-investment-woes.html
Supplies are way too much compared to demand .. I am mainly talking about out side city limits and not exactly inside
.
For retirement .. you should mainly look at Mutual funds for iniital some years and then start using PPF too ..
Manish
The article can be rated as good considering that it has been written by a person who is not a finance professional. Purchase of real estate is a hard core finance decision which has so many non financial angles. I would suggest the following aspects to be included-
(a) Angle of personal tax planning- sec. 80C benefit, long term capital gains benefit, interest on home loan deduction etc.;
(b) All proprties are not the same like gold or FD. Certain properties can fetch higher returns. In some one can lose money also;
(c) Property is relatively illiquid asset as compared to gold, FD or share. It has more maintenance cost also. However it has more prestige value. It provides credibility to an individual particularly who is in business or profession.
I am glad you found the article good
your points are valid .. however after new tax code comes into picture , the tax benefit will go away ..
Manish
Good article, you’ve given the investor some points to think about before investing in real estate. But I think some points go in favor of real estate too
You can always rent your house, so investing in a house becomes equivalent to investing a good growing company which gives dividend too.
The trend in India has been that property rates almost always grow over time which makes it a safer bet.
Also the appreciation in property varies from place to place and at many places you can have very good returns on your house.
It’s safer to invest black money in a house than in stocks.
The negative points
Buying a house is more cumbersome.
Maintenance is high as compared to stocks.
It’s not a liquid investment, one may have to sell it in loss if he/she needs money urgently.
Overall I think stocks are better over house for investment if you use some common sense while buying stocks.
In fact at this moment I think a housing bubble is building, builders are building more houses than the demand, we may see the burst in may be 3-4 and definitely in 5yrs. But whether the prices will then become less than today I don’t know, may be you can say something on this.
Overall if one want to buy a house for investment I would say buy it at the outskirts of your city, there you’ll find cheep houses and overtime as the city will grow the price of your house will appreciate more than those in the main city.
P.S. I am not an expert in either real estate or stocks, these are just my views which may be completely wrong.
Anon
You have good points ..
As you pointed out the process of buying House and overall work you have to do is tedious , So if one if ok with that they can look at buying Real estate . But I would personally prefer mutual funds (not stocks) and other simple instruments like ETF’s or Gold Etf to grow my money . Real estate for personal purpose of living will be used by me , not as investment .
A brilliant master piece article by you Manish
Thanks
im very much impressed abt this article..keep going manish………:)
Manikk
Thanks for your appreciation
Manish
Hi Manish,
Your articles are superb. Personally, I have invested in land (with some of the money that I had earned). I am also of the opinion that the house market will burst in the next three or four years and I could possibly buy at that time, when I have a good amount that can be paid as down payment. Moreover, with such a poor infrastructure (not even roads are available), I wonder why the prices are so high for a house in an apartment when you don’t get to own neither up nor below the apartment.
Raman , Let me post the new article on clarification . I have to agree that customer service is really bad .. but dont feel bad at your money going .. they will get back soon . I have talked to the company representatives and they are sorry for this . the huge response and traffic has just messed up their system and they are working on it .. I would suggest that you expect some delay from them in reply and over all process .. but dont get a feeling that you are cheated or your money is wasted ..
Wait
Manish
I dont know about RESIDEX or any other mathmatics. But If i can afford a house for residential purpose today it is best.. The EMI you pay is equivalent to your HRA (for government employee.). and after 5 years your salary will be as good that you dont care about the EMI you are paying this looks like free. This I can say after watching more than 100 people take home loan from my office around 2003-2004 now the prices of the same house is triple. I dont calculate what CAGR it has given but roughly 6 years back if i managed to buy a house with Rs. 8000 EMI now I have to pay Rs. 24000 EMI..which is not possible to afford..
I dont understand who is buying these houses far away from the city wit a price of 50-60 lakhs.. Even if u add your transport (petrol for the car) it comes to be a good amount.
I am seriously thinking to buy a residential house but…. the prices are too high and location is 15km from my office… I dont know what to do in such situation.
Ravindra
We have not at all said here that its not a good idea to buy real estate . We are just talking about the returns . Any time is best to buy a flat if you are considering to buy it for living purpose .
Manish
Interesting article by Manish. I would like to relate little amount of life philosophy in to this discussion. The basic living of all human beings in this earth revolves on three primary needs 1. Food, 2. Dress 3. Shelter. Rest may be varying between needs & wish list. All the earnings made are either spent (for the needs & wishes) or saved. In simple words, if X is the income and Y is the spending and the balance Z is the savings or deficit. Now, the trend is emerging in a different dimension to the savings in the form of investment and the investment has taken a diversion by creating a dept, leverage whatever way it may be called.
As long as the investments are made out of the savings of the real income and not based on future income or by creating dept or any other form of speculation, then real estate will be the safe and secured form of investment and will yield highest return logically as it is a spending converted into a saving and as an investment too. Any other speculative investment on real-estate will be unsecured to the highest order and will yield the least return as it is really a spending.
Philosophically, no other investment can beat a need based real estate investment (spending)
Regards,
Ram
Good one .. thats was a nice point and discussion .
As far as people understand the fine line between their need and wants , what he does is fine .
Manish
Hi Manish,
i just happened to visit this site while reading articles on the money quest and please take my sincere appricitaion for writing such a useful and all those things which people do not think of or rather do not want to think, as it goes nobody wants to apply Common Sense the rare commodity, am a charetered accuntant based in pune and dealing with major IT cos and their employees and have been advising them on similar lines what you have started here i,e. its great and all the very best will surely like to call you sometime and meet also
regards
rishabh parakh
director
moeny plant consulting
9890274207
Hi Manish,
i just happened to visit this site while reading articles on the money quest and please take my sincere appriciation for writing such a useful and all those things which people do not think of or rather do not want to think, as it goes nobody wants to apply Common Sense the rare commodity, am a charetered accuntant based in pune and dealing with major IT cos and their employees and have been advising them on similar lines what you have started here i,e. its great and all the very best will surely like to call you sometime and meet also
regards
rishabh parakh
director
moeny plant consulting
9890274207
rishabh
Thanks for the appreciation . Yes I agree with you that the biggest issue is that people do not want to try to think at all . Its not that complicated as people think
I will mail you my number.
Manish
Thanks Rishabh
I will contact you on your cell
Manish
hi,
going by what you mentioned should we mean that one should not buy a flat by taking loan but then what should we do am working in an mnc earning around 8 lacs p.a. can you pls suggest me what should me my appraoch as dont take loan but what abt hike in property price and later on it would be difficult for me to buy that pls help
Nilesh
Note that I have never mentioned that “You should not Buy Real estate” . The only point the article tries to make is
1. Real Estate returns in long term is good , but not as great as they may seem to be
2. Dont take loan more than what you can comfortably afford
You can definately buy a flat if you can afford it . Make sure the EMI outgo is not more than 40% of your take home salary . Apart from that make sure that you buy your first home for purely living purpose . Dont look for 3-4 BHK which you can not afford . Better settle for 2 bhk , whose EMI you can afford even if you have to take a slight salary but tomm .
What is the cost of Flat these days which you are looking for yourself . Which city ?
Manish
hi Manish,
but my worry is that everyone is telling me to buy the flat in pune as prices are rising and later on it would be difficult to afford one so going by the popular choice i am looking for a 3 BHK flat costing around 45 lacs and atleast 30 lacs of loan req for that so is it feasible to wait for another 4-5 years in that case how do i cover my self for the rising real estate prices, am in a dilemma, pls suggest
thanks
nilesh
ok , This is classic case of Buy Vs Rent situation . the first question you have to ask is do you need 3 BHK ? Cant you do with 2 BHK ?
A person should buy the first house considering affordability . I know the temptation of buying 3 BHK because after 4-5 yrs its prices may double , but if you buy a 30 lacs Rs BHK house to day it will double to just 60 lacs and not upto 90 lacs incase of 3 BHK . Seems like a loss of 30 lacs
We should gradually move in our life for everything . Take a smaller flat first which seems enough for you and which puts your cash flows in control . you also have other stuff like regular child education , other amenities in life which you have to meet . Taking a high cost house which will put a lot of pressure on you which is more than what you can/should take is dangerous . it will be mentally painful thinking about “what if .. what if” … things .
Other thing is Real estate over long term shall not beat Equity . So what ever you put as EMI in Real estate, you can always invest the same money montly in some good balanced fund or Debt oriented Mutual funds if its 5-6 yrs and some good Equity diversified funds if its more than 10 yrs. The money will grow at better rate or atleast same rate .
So the main point is, the first home you buy should be for pure residential purpose and not as in investment per se . Later in life upgrade to a higher cost one . Need first , luxuries later .
Its tough seeing other friends and mates buying costlier things than you and then profiting from it more than you , and it may seem like you are not the bad side . But you will atleast not be broke with thing turn ugly.
Just like everything in life , taking logical decisions is painful, so is in your case
Did I do just bakwaas or was it helpful ? I am not sure if I even answered you .
Manish
hi thanks for the details its very useful but my query still remains unanswered, even if i decide to take 2bhk question is shud i wait for 3-4 yrs and then buy it with lesser loan or take loan now and pay emis. you said that you can invest the proceedings in MF etc but i dont hv 30 lacs to invest thats why needing loan and i can accumuate 10 lacs by redeeming investments and gold. so in this case do you advice keep residing in a rented flat at 9000 p.m. and whatever savings i generate invest in MF etc and then accumulate some wealth ver 3-4 yrs then buy a flat but then what abt the price of that time how can i cover for that or do you mean that investing in MF etc will provide me the same return as real estate so as to offset this can you pls show some light with examples as this is the case with almost all the indian employees, i dont whether i have been able to explain you properly or confused you pls suggest
thanks for putting up so much time
Nilesh
I have to come up with the comparision on Buy vs Rent . Will happen soon . Regarding your query in particular we cant/should not time the market in real estate . Obviously prices will rise in future too .. but then you have your savings in hand and that will also grow with the coming time if you invest it wisely
Manish
sorry one more thing taking home loan gives me two benefits for prinicipal and ineterest pay and the oppurtunity cost of loosing this apart from incurring rental exp
I understand your situation and concern of buying a house. No matter any product gives great returns but having own house is a different experience and piece of mind.
But make sure it won’t ruin your life by make some intelligent/patience decision because home is a hard asset.
1. Distinguish your need by want. Ask your self Do I need 2BHK or Do I want 2BHK?
Many youngsters in big cities are opting single BHK as less cost, short family; even if parents/friends visit…it will be a short visit…
2. Are you planning to settle in the same city think after 20 years?
3. If your EMI is for 25 years, How are you sure of income for 25 years. what is your preparation.
4. Any loan, formula is
50% is your down payment and 50% loan
and EMI should not cross 40% of your net take home
5. They are always people who are bankrupt, who need money urgently ….you can negotiate better deal.
6. Keep looking for better deals and do home work…quality of work/locality/papers….taking delayed good decision is better than quick bad decision.
7. No investment is worth if your peace of mind is disturbed.
Srinivas
Very nice points from your side
. I liked 5th point ? Do you have good experience in Home buying thing . Would you be interested in writing your experience , some points on this topic , we can guest post it on this blog 
Manish
I have learned from others mistakes. Many of my friends having taken loan and each are facing different problems. That made me to read and understand more on this.
Most of the people feel friends are buying home, home prices will increase in future…they feel left out and hurry for the same without doing home work and suffer for rest of their life.
I would like to share my experience and come up with an article. I will start writing it from today itself. I will take few days to cover all points.. we can guest post it…
.
Thank you
Srinivas, those are really valid points and each point holds a importance. In my case, I am living abroad and earning quite satisfactory amount. I already own nice home in pune but because of social pressure( or you can say as comparison with my friends who are buying homes) I was feeling as if I am not doing anything…and was worried that I must act and buy some flat as soon as possible. But after reading this article I strongly thing that I should do enough homework about my need Vs. other available investment option. In other words I was disturbed with the feeling that I want to do proper investment.
Your last point opened up my eyes. “7. No investment is worth if your peace of mind is disturbed.”
thanks for that
god bless u
Amol W
Amol
I agree , the 7th point is the essence of everything . We do financial planning for peace of mind and not for getting 2-3% higher return than anyone . Financial planning is not a way of going ahead compared to some one else . its an exercise to find out everything about yourself . its you vs you .
manish
Nilesh
wait for the analysis , I will do it in coming days .
I found one such analysis here…
Take a look
http://www.rupeetalk.com/case-study/rent-vs-buy/To-live-on-rent-or-buy-a-home.php
Nice analysis ..
I will also come up with something in some weeks
Manish
hi i own a flat in vashi which is worth 60 lakh outright. i have no loan on it now i bought it for 18 lakh in 2003 .
i hear all this realty crash coming in usa and world economy going in turmoil….
i follow peter schiff and gerald celente on you tube…
if US goes down it have bad effect on our economy as well so
i was thinking may i sell this flat buy other flat say in panvel for 26 lakh ( same 921 sqft area)
and put my 30 lakhs in fd in three different bank on monthly income plan at 7% for two yr .
invest that monthly intrest in gold via etf .
wait and watch how things turn out ..
m i making too much speculation ….
whts u r view on this ?
Kamlesh
I think you should go with your plans , but i have different reasons . My main point is diversification . If this home of 60 lacs for residential purpose and you should not do anything and just keep living there . however if its for pure investment purpose , then i would suggest sell the property in Vashi and reinvest in property at panvel and then invest rest of the money somewhere else like GOLD ETF’s , equity funds , FD . The idea is to spread it in different things so that the impact of some thing doing bad does not kill the returns . The risk would come down doing this .
The main thing you have to look while selling the real estate is the value . Make sure that the amount you are paying for panvel flat is right . It should have potential for rising .
Manish
hi thnx for ur advice.
i must tell u this is the only house we have.
actually i m confused coz this house is situated in prime location and my family is reluctant to move. they say we will never b able again to buy house at such location…
as a middle class i dont feel the need to stay in such a pricey house…..
but they dont understand mkt dynamics… they r from those generation where u buy a property and hold on to it forever…
whts ur view on realty estate in near term?
can it crash like 30-50% in 2 yr… if economy really goes bad…
Kamlesh
If economy goes bad then definately Real estate prices will tumble by 30-40% . Real estate in india is anyways over valued .
How ever if you are staying in that house and comfortable with it . then then better not leave that place, stop calculating your profit and loss incase market goes up and down . Regarding second house i would say take a home loan and invest , this is because you want to specualate on prices which is again dangerous .
Manish
hi Manish,
whats your main business like are you advising cliens on financial planning if yes whats the procedure and how much would you charge
Nilesh
I mailed you personally .
Manish
Dear Manish,
Nice and simple calculations in the article, however, sorry to add not practical and far away from real life price movement in Realty Sector. Consider the following:-
1. The property prices are Arbitrarily Inflated but have you ever been able to find/get under priced property?
2. Look for the price difference in all the major cities over the last 10/20/30 years and you know what I mean.
3. Like equity, real estate investments are for long term too.
4. The example of Infosys story is just a solitary amongst 7000 tradable shares however; there have been hundreds of infosys like examples in realty sector.
Raju
The gist of the article was not to discourage the reality investment . I am in favour . I only stressed on two points .
1. Dont get yourself in a over pressured situation . Buy what you can afford.
2. Rerturns from real estate are hyped . Average returns are just great and in range of 12-20% in long run depending on the market . We can get similar returns from equity too.
Manish
Hi,
The general problem with equities is, the price corrections are too sharp and the speculation happens daily, where as in reality, this is not the case,if a piece of land is bought, it can be seen and you have the sense of ownership and we feel that we have control over it. But this can not be said about equities. I saw many listed companies going burst and out of market, we don’t know what happens to the investors!
In case of reality, even if prices are corrected, at least you know that something is still existing.
Shyam
what you said is corrrect for real estate is correct. . however what about
1. Why cant one feel ownership with equityies , just because they are in demat form ? I think thats more of psychological , dont you think ?
2. Equities have provided more return over long term than real estate so from return poiint there is no issues .
3. regarding your comment of “you have seen many companies going bust” , yes , thats the problem , but then thats the reason we diversify our investment s in different companies and asset classes
Thoughts ?
Manish
Yes, it is more of psychological, like we feel better when we go to supermarket and buy things, than say buy from a internet site..
And another thing is that, it is difficult for average investor to research on equities than say in real-estate. Mostly people will invest in the localities/areas which they know..
I agree that we need to diversify our investments.. but I still feel that the markets are not kind to average investors.. everybody gives the examples of infosys and reliance, but how many such equities are there in the market, which gave good returns over long period of time..
for an average investor, I feel gold, real-estate, PPF/NSC and may be balanced funds are much better investments than direct equities and equity funds..
what do you say??
Dear Shyam,
Fully agree with your analysis. However, will like to add the following for the majority of investors, Not Traders
1. Investments in Equities like ELSS, MFs and direct equities must be done BUT Never in ULIPs and Thematic Funds.
2. Whatever the experts on TV say or books recommend never ever invest more than 20-25% of your total allocation to Equities and linked asset class. Though they do recommend that 100 minus your age is ideal percentage for equities, BUT BEWARE, it’s their profession that need to grow on YOUR RISK AND MONEY
3. Always go for a reputed and reliable brokerage house never ever with your next-door neighbored broker or a low profile brokerage house.
if we want to invest for long period, say 15-20 years, I think it is better and less riskier to invest in sensex/nifty index funds, than in any other MFs and equities…
Shyam
hmm.. Index Funds will definately be safer , but for that long period , it would be a wise choice to invest in pure equity funds , ETF’s and Index funds will still make their place in portfolio but for lesser part , for people in their 40′s it would make sense to have more of index funds then pure equity funds .
Manish
I purchased 2000 shares of L&T in Mar 2008 for Rs 521/ today its Rs 1600/
Naresh
Great .. do you know what is the return you got , check IRR .
Manish
Hi Manish,
I am quite impressed by your article on Real estate. What I liked was the fact that you describe risk trade offs quite well, and clearly explain how leverage would be risky.
I am an NRI, and am looking for avenues to invest in India. Can we talk some time to discuss options which would make sense for me. What is your IM id ?
thx,
Mo
Mo
Thanks for the comment . My email is manish@jagoinvestor.com
I was wondering how is the RESIDEX calculated, although RE prices are down but this much in bangalore, I am not sure. I do not see that the prices of Bangalore RE have come down to 58 % of 2007 prices. Is this calculated from Apt. price, Land price, Independent house price ?
By the way I discovered your blog this weekend, and what a great job you have done. Awesome depth and breadth of information. Keep it up !!!
-Panks
Panks
I am not sure how its calculated ,you should talk to the company which calculates it . Thanks for your appreciation . Keep coming
Manish
Manish,
May I ask where did you get the data prior to 2007 ? NHB site only has the data of 2007 onwards.
-Panks
Panks
I mailed NHB for getting the data . they emailed me the prior data .
Manish
I think one thing to keep in mind while buying real estate is to be honest with yourself and have a clear mind about what are you doing. If you are buying for yourself and the prices are within your range then you should buy it and not think about some other property that might increase in value but you might not be able to stay there as it is too far. Also lot of people buy a property purely for investment but they tell themselves that we may someday live there or we may need it in the future someday but they have no intention or there is no possibility to actually live there. They are purely buying as an investment. So in such cases it is very important to be honest with yourself and be clear why you are buying it. Also as you said we should look at percentage return not absolute return and also think about risks of putting a huge amount in just one asset.
PS. I love your blog. your article about PE ratio and finding the overbought and oversold areas have been very helpful. Thank you very much. Keep at it.
Rushabh
Thanks for your views on real estate buy. Yes each one of us have to be clear with what we want , if we know what we are doing and are comfortable with it . then its a right decision (mostly) .
Manish
Excellent analysis! Since last two months I have been planning to invest in real estate in India. Your article gave me another view point. I went thru this page completely today and also most of the related links/sites given in the page. I hope you won’t mind if I send some queries on your email id.
Sanjay
Thanks , please send me the questiosn . i will get back to them soon . make sure its a general advice and not equivalent of asking to do your “financial planning”
Manish
Its really a great article. First time i have saw a comparison of real estate. Carry On Mr. Manish.
Akash
Thanks for comment , did you see any article on real estate comparision first time on any site or just this blog ?
What do you think about this comparision ? what are your views ?
Manish
Dear Manish,
Very good article. People considers real estate as low risk investment because they do not understand the risk. Also there is another risk of “opportunity lost” in other alternatives.
I would like to share my story here. Two years back I went to search a flat at Pune with 15Lakh in my pocket for the down payment. I liked one but I felt the price of 55Lakh was too much for the flat. I could sense that the builders are making huge profits. I gave up my idea of buying. I borrowed another 10L and invested 25L in one REIT. After 2 years the fund value was 54 Lakh. The flat was still available (another wing in the same premise) at sub 50L price.
I borrowed only 10L by not buying the flat, other wise I would have borrowed 40L (55-15=40). That left me with some surplus money every month and I could commit another 25L in another PE fund. Now I plan to retire after 6 years at the age of 42. If I invest the fund value (as per promised 25 IRR) after 6 years in some tax saving div fund, assuming 12% div., My monthly income will be double my present salary. I do considered time value of money.
I am so glad that I did not buy the flat!!!
Niket
Great to hear that
.. So REIT are available now ? i thought they are not present yet . Let me know at manish[at]jagoinvestor[dot]com
Manish
Jago Manish
I have sent mail for you. You look like my friend Ashish goyal, are you Ashu? And using dummy name for the bolg?
Manish,
Article is really logical and makes lot of sense to readers. My experience with real estate. To be honest I do earn very good salary per year but I myself can’t dare to buy a flat which cost be serious amount( in lacks). I already own a home but it’s social pressure from friends/relatives who suggest hard me to buy a flat but believe me I still can’t do daring on that. I really surprise how people can afford buying a flat/plot these days…the real estate prices have no discipline approach in terms of their prices rising each month/year. At the same time I feel bad that needy people can’t afford it as they could just very few years back. I always heard many middle class people saying that “home price have touch the sky only because of software people, its because they earn high and can afford it.” I personally agree with them and at the same time feel bad for that.
What I like is the sane advice by you : Buy only what you can afford. (i.e. we should not compare to others and buy 3BHK flat or duplex bungalow just because our friend has bought it.)
Very informative and eye washing article
great, thanks
Amol
Excellent, it eye opening article..
Thanx for this wonderful information…………
Anand
Thanks for your comment
Manish
Really it is mind blowing growrth.
It will be better to invest your money in Real Estates.
Best wishes
Not sure what do you mean by that ? Do you mean people should invest now ?
Manish
Hi Manish,
GREAT article and I read this at right time. I was searching google about home loan and its impact on new tax code 2011. Then I found out this article.
I own a 2 BHK flat purchased in the year 2003, and living in that at Chennai. Now its loan is getting over and I have some cash in hand. Thought of getting one more flat at chennai because of below listed reasons.
- We are interested to go for 3 BHK as we have 2 kids now.
- To save some income tax as current loan is getting over.
- Can have another asset in my portfolio.
But after reading your article I think I may turn back and think twice to invest on second house. Can you please give your insight about purchasing second flat.
If not purchasing second flat, what are best suggestions to invest the money I have. I am poor in stock market, but investing in some of the MFs and ULIP schems. Currently my age is 40 and please give your opinion on my portfolio.
Thanks in advance.
Srinivas.
Srinivas
THe best thing would be to go for the flat and give it on rent , and continue in the same house for some more years . Once the loan gets completed or gets less , you can then move to the bigger house . Just make sure that the “need of bigger house” is not self created out of Money availibility . Nothing personal but I really find it wonderful how people keep going on from 1 bhk -> 2 bhk -> 3bhk -> Villa .
Imagine If you were living in a 1 bhk today and had 1/3rd salary of what you are getting today , what would be your next move ? 2 bhk or 3bhk ? I am sure 2bhk would have satisfied your needs .
My sentence will not hold if you have your parents also with you along with 2 kids , spouse . then it can be a different issue .
Manish
Thanks a lot for your prompt and valueable reply.
But according to the article, As I understood, I am not supposed to go for second flat. Still your above reply suggets me to go for the flat and give it on rent. To add for further suggetions, currently I could able to save 2 lacs to 2.5 lacs per annum after all my exp, and saving instruments like insurance, MFs etc. What is your best suggestion(s) to me to earn good financial future.
Thanks in advance again.
Srinivas.
great Manish!
I guarantee, one day this housing bubble in india is going to blast. There needs a big correction required in real estate industry in india. God bless all buyers buying so called *Cheap* homes for investment. LOL
there is one good article(instead comments from reader). I would like to post the link here.
http://indiahousingbubble.blogspot.com/2010/03/indias-real-estate-boom-is-on-shaky.html
One of the comment posted by “Anonymous” at time 4:03 AM is worth reading
thanks
Manish,
1st of all, im a great fan of yours, so its puzzling that here i differ from you !
1. Real Estate returns ( as indicated by the data and general observation) are quite good, around 15-16% on an average. This compares well with equity where one has to invest for long term to get such returns
2. Real Estate forces a person to save. If one takes a 40 lac loan, he immedaitely puts his expenses in order and starts repaying earnestly which he would not have done if that loan was not there. So, in a way, such loans actually stretches a person’s savings habit and puts him on the saving habit.
3. Provides security. If nothing else, he would have a house to gift his children !
If someone has 4 houses, so better ! His children do not have any need to save for a house.
4. Rental returns are better than dividend returns. I think rental in a good location of a metro can easily give 5-6%, compared to 1-2% dividends return ( on an average).
5. Considering India’s urbanisation and popluation growth, I think real estate would continue to give returns around 15% easily with little/no risk for the next 20-30 years easily plus rental returns, making the total around 20%. Imagine, a 30 lac home becoming 19-20 crore by the time when one retires ! Perfect retirement plan plus all the rentals !
Real estate over 30 years is about 6-8% return – if you reduce the maintenance, taxes, etc. it should be less than National Savings certificate. So real estate is a SAVING asset, not an investment asset.
Cannot ride the booms and the dooms – you committ at a time, in a SIP you buy on booms and dooms – the best way to calculate returns is using a sip calculator. Use a SIP calculator, include dividends the index will give u a return of 21%. The gap between a 16% and a 21% over 10 or 15 years is HUGE.
Real estate taste changes – how many families BY CHOICE live in the same locality for 100 years? Not too many unless it is Defence Colony, Malabar Hill,…can name only a few. So gifting is not a great idea.
Rental returns are more or less same as dividend return. More importantly you have partial liquidity.
If properties were such a great investment the financial services industry would have bought it and given it to you for RENT. Not made you buy it. Hdfc has earned money by LENDING, not OWNING. A 30 lac home becoming 20 crore in 35 years is about 12.4% assuming you pay about Rs. 1500 a month for maintenance and taxes. If you assume painting, and repairs once in 5-6 years, the returns will be less than PPF.
Manish it is important that a big part of the population believes in real estate – it keeps rents low
Subra
Thanks for the clarification . I didnt understood well your line ” it is important that a big part of the population believes in real estate – it keeps rents low
” , What is meant by beleiving in real estate here ?
Manish
I think Subra has given a valid full stop to this article. Very much true.
Not only financial services industry, all the builders are making Flats and selling them. They are NOT interested in giving them on rent, why ?. Because they knew that it takes too much time to make a flat via. loan and give that on rent and make it economical. Subra, I fully agree with your point.
Maindh and Subra has put the point well.
The return from real estate are Not so real as being made out by real estate lobbies. One needs to see % returns on investment along with risk and liquidity.
I strongly think the good Mutual Funds has generated returns much superior to real estate.
1. The Prices being mentioned by Sellers, Builders Lobby are always jacked up and not the real one. Unlike in a MF where the NAV declared for purchase is very transperent. SEBI also closely monitors the MF industry. Is there such transparency and control on real estate…
2. Secondly, the returns I have compared over varying periods of time in various cities of various data points collected, indicate return of real estate a paltry 6 to 15 % over several decades of investment. FYI, the interest rates were as high as 18 % for a long time up to last decade.
Whereas good Mutual funds have generated returns of over 25 % per ann. over last 16 years, year on year.
3. Real estate is really not liquid. Take a case of a person who wants to sell a flat for his major health expenses, child education or such urgent need. Can the flat be sold as easily as a Mutual Fund, where you can get money in 2 days. Also, if part of the investment is to be sold, can it be done.
4. In real estate, even if one were to sell after several decades, or even a century, one would have to pay capital gain Tax of 20 %, whereas in MF, there is No tax after 1 year !
5. The risk of real estate falling like 9 pins has been seen in the US housing bubble. And India too had seen the housing bubble burst from 1996 to 2002, and in 2008 when it was at the same level for 6 and 2 years resp. What was the holding cost for those who invested in real estate 1995.
The Current so called boom seems to be of the same nature as in 1995 and 2007 and likely burst and in a big way. This can be seen from the fact that, Most of the middle class or even well paid professional can Not afford a buy a house anywhere in Bombay.
6. One needs to include the EMI, interest costs being paid out over 20 years which can be several times (2 times in just 10 years and 6 times in 20 years) the value of the initial loan amount. So for 20 lakhs, interest cost alone can be 80 lakhs in 20 years.
7. Taking the example of a 30 lac home (by the way one can not buy a decent house in 30 L with the current pricing in any metro city) .
Even taking the best return of 15% minus post interest cost (at least 9 %, likely to go up) and tax (20%) , a net return of paltry 5%. 30 lac home would become 2.65 times in 20 years (1.05 to the power of 20) net 79 lakhs. If ther is no loan and EMI at best return 15%, it would be 4. 90 crores.
While a good 5 star rated MF would be (at 25% return observed) over same 20 yrs, 30 lakhs becomes 86 times to 26. 02 crores.
x
This is 5 times (500 % !!) more than real estate. Is real estate return really better with all the illiquidity and risk ? You be the judge…..
logical explanation!
Very well written. We are now in 2010, July, real estate prices have surpassed their 2008 peak, in places like Mumbai. A 2bhk in Mulund costs between 75-80 lacs. Now the question that needs to be asked is: on absolute terms can I foresee a return of 15% in coming years. if so, then in less than 5 yrs apt in Mulund would be fetching close to 2 cr, does it makes sense in absolute sense. If it does not makes sense then why invest.
Money that used to flow to stock market, post 2008 has been diverted into land and real estate. Funds parked in Dubai and with other foreign banks have moved back into India and moved to real estate. People not sure about stocks but very sure about realty. This is called mass hypnotism…
Anindya
15% appreciation would mean flats would cost 1.5 crores after 5 yrs , if they cost 75 lacs today . Thats possible . I didnt understand exactly what you are looking for ?
Manish
He mean to say that there are lot many factors involved in the appreciation of real estate, the main reason being the builders’ cartels.
On the other hand, in your calculations, you forgot to add the usability value. If I am staying in this house, I am saving on monthly rentals, which keeps appreciating themselves. To derive real value of a house, that needs to be added (80% of prevailing rentals in that are- 20% kept aside for maintenance etc.)
Sunny
You mean to say that if a flat cost 40 lacs and they are fetching 15k rent per month , the actual worth of flat is much more as they also bring in some cash flow over the years ? But I think that should not be counted as if you want that rental income , you will also incur that some where else ?
Manish
hey manish that was a good one of your analysis
right now everyone is talking the same
i went to look out for a duplex in vadodara, they told me a rate of 42 lacs which i found it on the higher side by 30% considering the area, the appreciation and the quality, and manish you wont believe it , the next week one of my freind went to look at the same duplex and he was quoted 51 lacs
really irrational
lot if NRI money chasing some properties in vadodara
Reni
Hmm.. yea .. 45-50 lacs in vadodara looks on the higher side i guess
. You know better there. I think NRI’s wont mind getting the real estate with little extra premium also as they earn more money and are more biased towards settling back in the same place they belong to .
Manish
This is one of the best articles i ever read on this blog.One thing i would like to ask you is the way real estate prices are rising in mumbai,it would become difficult for me to buy a flat if i delay.But currently if i want to buy i would have to opt for a loan.So i am kind of confused whether to go for it now or is there any possibility that real estate price might come down sooner or later just like equities.Can you just tell me your perspective on future real estate prices in a place like mumbai where the demand is huge and there is not much space remaining?It will be great if we can have a article similar to Is gold worth buying?I
Shivang
Regarding Real estate prices in Mumbai , I can not comment on that , because Mumbai is a different ball game , which the prices are already higher , it can keep rising more time, but its not worth the money I feel , You have to look at various things like your job security , will you be working there after 20 yr from now ? Are you find with buying at Nab mumbai , outer areas and travel daily ?
You seem to not have a look at the latest article , which talks about GOLD : http://www.jagoinvestor.com/2010/07/is-gold-worth-buying-a-shocking-study.html
actually i already read that article and so i wanted to write similar artcile on real estate like is it worth buyin real estate.
P.S Is it worth buying gold was the best article i read on this forum and got great learning from it
Great to hear that
Hi
Awesome analysis !!!! but still i am not sure what to do ?
but your analysis can be justifies only if i keep investing in equities or other things and this is where the problem lies.People now a days do not have time to pan such systematic investments and thus buy a property !!!!
hope u are able to understanding by point ……..
so if i have 8 lacs today and i am planning to buy a flat in Navi Mumbai of 24 lacs by taking loan of 16 lacs what should i do ?
please suggest
also for your info my salary is 40000 per month (expenses 18000 inclusive of insurance and other costs)
please suggest as it might help lot of people !!!!!!!!
but i must day i agree with your analysis totally ……..good work
bye
tk
Ashish
If you are going to take this property for pure living purpose , then there is no much reason to think and just buy , however for investment purpose, this article applies
Manish
Excellent Work Manish.
Keep up the good work.
Pankaj
thanks for your appreciation
. Keep commenting
Manish
its a comprehensive study n analysis put up by you. i have read many of ur articles n i also want to tell all those blind guys saying just shut ur eyes n inv in real estate , money just multiplies …….. n all taht.blah blah.
but here, i would like to submit or that tracking residex is like tracking sensex or nifty. a smart mutual fund manager will have stocks from say cnx 200, 500 or even small caps. so that he outperforms whichever the index is benchmarked. similarly ther are smart players who liverage in real estate , find the right property n rite time to get in n get out of investments, doubling their investments in a yr or two…………..
Every decision has non financial angles also. What is the psychology of a person as an investor or consumer?Some people tend to review investments at very short periods.The policy does not generally work with real estate or gold or even equity. The people who advocate real estate investment have following assumptions-
1 It will save you from making wrong investment at other avenues.
2 It will save you from over spending.
3 Real Estate cannot be out of favour simply because of so much pressure of population on scarce land resources.
4 The country has legacy of putting illegal money into real estate which drives the market.
5 Owners of flats,office premises, factories feel more confident while doing business. In case of rented properties the establishment may get derailed very soon.
agree with you
Manish
I think i am in a confusion here..
I am 25 year old with a 25K salary. I am planning to take a house which will cost me all inclusive 20L. I am going for a 14L loan and the rest is paid from my savings and my fathers money. I contacted bank and they say with current interest rate the EMI would be 11K for 20 years and my monthly expenses are 10K.
I don’t expect my salary to grow in substantial amount within few years.Since i only bread earner.Do you advice me to go ahead? I would like to add my dad gets 5K as his retirement money which is put in to his health insurance ,which i feel is good for him, so no other source of income for me.
My concern is what if the interest rate grow in 2% in 5 years and my salary by 15%,i will not in better position at that time
Prabeesh
You will be in tight position , You also have to look at some other problems which can arise in between , like you can loose your job , you might not get required raise in salary in worst case suppose there is some recession , There can be a medical or any other emergency which might require you to cough up some significant amount, Also what if interest rate rise and your EMI also goes up .
You might want to consider increasing EMI (where EMI is less in start and then gradually increases) .
Manish
increase my EMI? its already for 20 years you want me to increase it to 25 years,i thought you said not to increase.
Prabeesh
No , I meant a different thing . there are some banks which have an option of increaseing EMI per year. so instead of say 20k per month EMI for 20 yrs, one will pay 10k for first yr , then 12k for 2nd yrs .. and so on .. EMI will keep increasing , so it suits people who in the start can not afford high EMI payment
Manish
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