Own House vs. Rental: Navigating the Real Estate Maze of Investing, Profits, and Pitfalls

Buying land or apartment has always seemed like a safe bet for many Indians. We often hear stories from our neighbors about buying a piece of land for a small amount years ago and selling it for a much bigger sum. The problem is most of us don't really understand how this whole real estate investment thing works. It's like a mystery because no one has really taught us about it, especially when it comes to the details.

 

Let's take a practical example to grasp how it works in real life. Imagine investing your savings in an apartment and exploring what you could potentially gain after 30 years, right around the time you might be thinking about retirement. Let's explore a couple of scenarios for purchasing an apartment. One involves it being a place to live, and the other scenario focuses on using it as an investment for rental income.

 

Mr. Ram purchased a 2-bedroom apartment in Bangalore in 2014 for his residence, and here is the initial breakdown of his investment:

 

Own Contribution: ₹16,15,995

Home Loan: ₹38,67,832

TDS: ₹46,894

Registration Charges: ₹3,61,964

Home Interiors: ₹11,78,583

The total initial cost of the apartment is ₹70,17,268.

 

Own Contribution        = 31,49, 436

Loan Amount               = 38,67,832

 

Now, let's analyze whether it is a prudent decision to stay in a rental house for 30 years by depositing your capital 31,49, 436 in fixed deposit account or to buy an apartment outright with same capital and live there for the same duration.

 

When opting for a rental house, several considerations come into play. A capital of 31,49,436 is placed in a fixed deposit account for 30 years, earning an average interest of 5.90%. During this period, you enjoy residing in a comfortable place with an annual rental increase of 4%.

 

On the other hand, using the same capital of 31,49,436 to purchase an apartment involves applying for a 38,67,832 home loan at an average interest rate of 8% per annum. Additional factors include accounting for annual maintenance costs for the apartment, a property depreciation cost of 5%, and the inclusion of capital gains tax if you decide to sell the apartment. On the income side, the amount saved from not paying rent is placed in a recurring deposit account. The future value of the property after 30 years is determined by incorporating a 6% annual appreciation in the market value.

 

The profit and loss projection below serves as an eye-opener. When you own a house, initially, you begin with a negative balance due to the costs incurred for interior work and registration, amounting to nearly 15 Lakhs. However, within 4 to 5 years, you achieve breakeven, and the longer you hold the property, the more your profit accumulates.

 

In contrast, on the rental side, the capital you have parked in the fixed deposit undergoes a significant decrease as you use it to cover your monthly rent. It vanishes in 4-5 Years. Ram will make roughly 10 times of the profit on above his capital value.

In the real estate market, fluctuations are common. Ram made his investment when prices experienced a decline, but comprehending these shifts is challenging as real estate values aren't measured on a day-to-day basis like the stock market. If you were to purchase the same apartment during an upward trend, your breakeven point would typically be delayed, and the profit from owning the house would be comparatively lower than in the previous example.

Moreover, when it comes to liquidating real estate assets, the process is not straightforward. If you haven't selected the right location or a reputable builder, the risk tolerance increases significantly.