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POSTED BY ON January 24, 2013 7:44 pm COMMENTS (4)
Hi Manish,
First of all my heartful thanks for such an excellent site. The site is really a eye opener into the world of investment. I was going throug all the article’s from few days..
First i am making my LIC’s paid up this year…
Well i have a Typical Question where i am not finding the answer for it:
I have an apartment, its current cost is around 25 lakh. It’s around 10 year old.
I am getting the rent from it is : 6500 Approx: 78000 per Year.
If i am saling it, and putting the money in fixed deposit, i will get around 230000 per year.(RI- 9.25 per year)
I have also calculated that if i am keeping the money for 25 year @9.25 interest per year i am making around 3 Crore.
Now my crore rupee Question is: Is my apartment whose current cost is 25 lakh will become 3 crore after 25 year from now?
I am really confused i sould sale it now Or keep it.
I have no emotion attached to the property as other people( Like it’s my own home).
I am thihing purely in terms of monetary value.
So, please suggest me what should i do…
Thanks and Regards
Gopal
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Dear Gopal, there can not be a clear cut future value for your apartment. So many factors ‘ll play roles. On a conservative estimate, you calculate @ 9% growth rate.
Thanks
Ashal
Dear Gopal, there are 3 faults in your calculation.
1. What about LTCG tax liability on the sell proceeds of your house? Your actual money ‘ll be less than 25L Rs. due to impact of LTCG tax.
2. The impact of Tax on FD interest Due to which, your actual money ‘ll be far less thann what you are thinking.
3. The ROI ‘ll not remain same for next 25Y. You may lock in now for a max. term of 10Y. Beyond this there ‘ll be rate revision at the time of renewal & believe me at that time, the new Rate ‘ll be lower than the current one.
So back to original question, should I sell?
Well, if you are going to invest in Eq. you may get far higher return than what you were calculating (although wrongly) in your FD investment. To sell or not to sell ‘ll be a personal choice.
To decide mathematically, if your sell price is more than 30 times multiple of your yly income you should sell. This 30 times or higher multiple indicates that your rental yield is very poor & it’s time to sell. In case your multiple is 20, it means, rental yield is very good & you may keep earning rent.
Anything below 20 multiple, please keep the house intact as it’s a very sound income generator.
Thanks
Ashal
Dear Ashal,
Really thanks for your insight into the matter.
Could u tell me what will be the absolute value of an apartment which costs 25 lakh, after 25 years. As it’s an apartment it will have definitely some deprecation.
Thanks and Regards
Gopal
Dear Gopal,
The first question to ask is why sell it? only for investing as you have suggested?
You have a source of passive income which will increase at about 5% each year.
You can even consider renting it to a doctor as a clinic or a small firm and get higher rent.
Such a solid source of income is rare for someone young which you can utilize in many ways.
Of course selling and investing in many ways (not in Fds!) will beat the increase in value of the house by a comfortable amount.
For a 25 lak property to grow to 3 crore the annual interest rate should be 10%.
Equity investing can beat this comfortably.
Why do it? If you have other sources to invest (salary?) then this makes a great source of passive income