In India, it's a fact that everyone wants their own house, even if someone does the calculations and chooses to live on rent, there are many benefits. So, is buying house on home loan a good investment? As everyone dreams of having their own home, primarily from the emotional perspective, but very few people can afford their dream home directly. That's why they invest in a property they can afford.
Because in India, there's a belief that real estate gives good returns, they expect to make a good profit by selling such property. But another fact is that very few people in India can afford to buy a property outright, so many people invest in a home through home loans.
Buying property now is a very good investment, but whether investing in a home through a home loan is the right option or not, today I will discuss with an example. You need to see how much your property's rate will increase, then only you'll profit on your property.
Plus, a particular property will also help you financially, and if you're thinking of selling a house, it will help you in calculations, understanding whether you actually made a profit on this property or if you incurred a loss.
Now, to understand whether you've actually made a profit or a loss by investing in a property, it's important for you to know how much that property actually cost you, meaning what was your total purchase cost.
Now the builder usually marketed the properties at a base price, and there's appreciation shown on that. But in reality, the total cost of the property is much higher. You can divide the total cost of a property into different parts.
Firstly, the money you pay to the developer, secondly, what you pay to the government, thirdly, the incidental charges, and fourthly, the cost of funding. Now, you give the developer a base price, plus an HSI charge, plus other charges, plus position charges. Now, if you want to know how many hidden costs are involved in buying a property, we have already written a detailed article on that which you can refer to.
Apart from the builder, you also pay the government in terms of time duty, registration, and agreement at the time of possession, and even when you tweet a conveyance. Besides, there are many other incidental charges such as lawyer fees, commission for making a conveyance lead, and if you're buying from a resale bank, broker commission is also involved.
Then comes your cost of funding, which includes home loan processing fees, premium interest. If you're buying under construction, and if you're buying a ready-to-move-in home, your EMI starts immediately. Now, let's calculate all these costs with an example.
Suppose you buy an under-construction property where only the structure is ready, and the size is 1000 square feet. Its base price, including PLC, is 8500 per square foot, so your basic cost is 85 lakhs. Above this, you'll have additional charges like parking, club membership, IDC, GST, and when you add all these up, the total cost comes out to be one crore rupees, which includes stamp duty, registration, and position charges.
The amount is not included. If you're taking an 80% loan from the bank and contributing 20% from your side, you're paying 10% at the time of booking and 10% at the time of the final installment, which will come at the time of your possession, and the rest of the funding will be without any delays.
Your payment plan is construction-linked, and your home loan interest rate is 9%. If the structure is completely ready, then 70% of the payment will be immediately due. It means from this, you contribute 10 lakhs since the beginning, and the remaining ₹60,000 is dispersed.
A one-year par EMI interest of ₹540 will come, which is 30% of the remaining payment. If the time of position comes, then now let's check this entire example once for calculation. How much did the total cost of this house come to?
So, first, you contributed ₹10 lakhs in down payment, then from the time of position, you contributed another ₹10 lakhs plus you contributed ₹540 thousand annually for one year, which were charges of a position.
After this, you got stamp duty registration done, which we have mentioned at 6% on the best value which was the agreement value of 85 lakhs, so it came to ₹510,000 for you. After this, what is the registration charge of ₹15,000? It means lawyer fees, home loan processing fees, we have listed all these charges around ₹20,000.
This can vary from state to state or depending on your home loan's retirement profile. We have also calculated a basic amount, so basically, you paid ₹32,85,000 in one year, and your entire outstanding home loan is ₹80 lakhs, so 80 lakhs plus 32 lakhs mean your total house cost is around 1 crore 12,85,000. Basically, all these charges can differ slightly from state to state.
It can vary slightly every year, meaning you can adjust it according to your calculations. But, even in this specific example, if you observe, the difference won't be more than two to three lakh rupees. It means this house will fall somewhere between a hit and a miss for you. Now, if you assume profit on this particular property in one year, then you need to add another 20 to 25% on top of the Warren price, so with this, you'll achieve a profit of 10 to 15%.
Here, we are talking in percentages, not in absolute values, because if you're buying a property worth two crores and you increase it by 20-25 lakhs, then these percentages will only be around 10 to 12%. But, if your registration gets delayed, your pre-EMI interest will also increase. Now, interestingly, if you compare it with the builder's marketing, the builder's base price was set at 8500 per square foot, meaning starting from 85 lakhs onwards.
There's a big trick within this range because your actual price is almost 30% more than the base price. Now, many people would say that they should buy a property at the time of a fresh or new launch and send it before the position comes.
They keep a close eye on the windows for locking, closing, or transferring charges, which leads to a decrease in your profit. If you want to know what locking, closing, or transferring charges are and what other terms are involved, I've already made a detailed video on this.
Plus, if you want to understand how the prices of a property increase from new launch to position and how builders narrate an appreciation story to you.
You can also refer to the complete understanding of how property prices increase. If you think the price of this property is going to increase and you should hold onto it, then you need to consider how much appreciation you need in the next 5 or 10 years to send this property at a profit.
Let's calculate it once. Now, if you hold onto this property for 5 or 10 years, there will be additional costs involved. So, first, let's consider the costs that we've already incurred and paid for the on-time position, which is 3,25,000. Now, in addition to this, there will be the cost of upgrades.
If you're buying a new house, you'll install some modular kitchen, some water-proofing, and some permanent fixtures. Here, we are only adding the cost of permanent fixtures, meaning the things that you can't take out and when you sell it, the new owner will get it along with the property.
In this example, we are not adding the cost of items like sofa, geyser, as you can take these out. Only the modular kitchen and permanent fixtures will be added here, so people can spend as much as they want. Let's make it nominal, around 3,00,000 rupees.
You've taken a loan of around 30 lakhs. The interest rate for the home loan is 9%, so it will be around 43 lakhs if you pay it off in five years. If I pay it off in 10 years, you will pay around 86 lakhs to the bank. And if you complete my entire loan in 20 years, you will pay around 1 crore 73 lakhs.
Next, you need to include the cost of repair, meaning any minor repair expenses you've incurred will need to be included. But here, we are not including the cost of maintenance because either if you're living in it, then that's your living expense.
If you've given it on rent, then that amount will be adjusted from the rent. So here, we'll only include the cost of minor repair, which we have considered zero in this example. So, it comes down to how much you have spent on this house so far.
If we add these miscellaneous items, then we have spent a total of 79 lakhs in 5 years, 1 crore 22 lakhs in 10 years, and 2 crores 8 lakhs since we started. Now, we need to consider the outstanding home loan amount because if we save this house at this stage, whatever money we get will have to be paid to the bank first before settling.
So, if we pay for 5 years, we still have an outstanding home loan of around 71 lakhs. In 10 years, it's around 57 lakhs outstanding, and in 20 years, let's say we have completely settled it. So, here our total cost of the house comes out to be: in 5 years.
If we calculate its cost, the story tells me it's a loss of 1 crore, in 10 years, it's a loss of 1 crore 79 lakhs, and in 20 years, it's a loss of 2 crores 8 lakhs. Basically, in 5 years, we need 51% appreciation, in 10 years, 80%, and in 20 years, 199% appreciation to break even.
Now, here in the total cost, we have added 1% AR, so achieved breakeven, and this basically is our cost of sale. Whenever you think of selling the house, you'll have to pay some commission to a broker, so we have added this cost of share here.
So, achieved breakeven, but this is the whole day's story. This calculation will help you understand how much appreciation you'll get on this particular location in the next 5, 10 years, so that when we try to sell it, we make a profit.
If we had bought the property without a home loan, this story would have been around 1 crore 5 lakhs to 1 crore 6 lakhs. But due to taking a home loan, this property is currently at a loss of around 1 crore in 5 years.
So, would the rate of this particular property in this particular location be around 16 to 17 in 5 years for me to make a profit? You'll have to calculate this yourself. So far, we've only talked about capital appreciation, but if you're buying a property for investment, ideally you won't be idle, and you'll put it on rent.
So, if we add rental income to this, will this equation change a bit? Let's calculate it once, but before you do that, you need to understand that residential real estate generally has a 2% to 3.5% rental yield.
This means if you invest 1 crore in residential real estate, you'll get around 2 lakhs to 3.5 lakhs annually in rent. If we continue with our example, if we start getting a rent of ₹20,000 from One Sea Mist, our property, then this rent will increase by 10% every year, which might not actually happen; it's just an assumption.
Because if someone stays in your property for three to four years, they might request you to freeze the rent for a couple of years. Every property has its own saturation level. For example, there's a saturation level for the locality, a saturation level for a point once it's reached there, the rent doesn't increase much.
But for calculation purposes, we're assuming that the rent there will increase by 10% every year. If you earn rental income on this property within 5 years, you'll earn around ₹14,65,000, around 38 lakhs in 10 years, and 1 crore 37 lakhs in 20 years. Secondly, there's appreciation here too because whenever you rent out your property, you have additional expenses.
There are various costs involved, such as maintenance costs, repair costs, and the cost of hiring talent for repairs. Before a new tenant moves in, you'll need to repaint the property, and there may be several repairs to be done.
You'll also need to pay a commission for hiring talent, and often, your property might remain vacant for some time, so the rental income won't be too high, but it won't be too low either.
We haven't considered taxation benefits you receive when taking a home loan, so we have left that out. We can get confused with this entire calculation. First, your objective should be clear, whether you're buying this house for personal use or for investment.
Secondly, if you're buying a house for payment on installments, there's a high probability of making a substantial profit. However, if you're investing in the property with a home loan, you'll need to think long-term because initially, the interest component of the EMI is higher, and the principal is lower.
This means you'll need significant appreciation in a short time. But if you're ready to hold the property for the long term, the possibility of profit coming down is much lower.
Next, if you're buying a house for investment, ideally, you should put it on rent. Rental income changes the entire profit scenario. Finally, it's up to you to verify the builder or broker's growth story, so you need to know all these calculations yourself. You need to understand how to evaluate a location, a project, a property, or a sample apartment, and how to check construction quality before buying the entire house.
In the process, various documents are involved, and you need to check which papers come at the watch stage. What are the terms and conditions of stage B, and what is involved in the cost seat? If you want to know more about all these, I have already made detailed videos. You can refer to them to become a smart Mumbai investor.
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