First off all remember the thumb rule for commercial property as Location, Location and Location. So, commerical property and residential property needs to be delinked.
Now we move ahead to the Rental income which is one aspect and its returns may not match the other instruments' rate of return. However, the premium you get after selling this property?? That also need to be factored. It's appreciating every year. However, this may vary from location to location.
Donot go by the prevailing rate going on in the market as what you get at the time of selling will show the real returns. If someone is taking their homes as their real estate investment then that's a big mistake. Real estate investment needs to have similar research to markets. It should be delinked from emotional attachments like my house! The landlord in whose flat one of our clients was staying in DLF new town heights sect 86 Gurgaon, sold two flats in this society recently - Rs 1.15 cr 1800 sq ft. Ask any property dealer- he will quote 1.6 cr for the same flat. The market price of this flat was 95 L in 2015-16. You come to know the real cost when you try selling the property and realize that there are no takers for the so-called market price
Another thought process suggests that a normal property value rises by at least equal to the return on government securities! Compare it with SGBs. The government gives 2.5% annually. But this is not the entire return on investment. The gold prices itself are expected to rise. Properties can be one of the best ways to invest if selected post-due diligence. You have an income and create appreciating assets.
The flats in Dwarka expressway and new Gurgaon have escalated by about 10% in 10 years. The property cost of a 400 sq yds on the main road in Preet Vihar has actually depreciated by 20% in the last 15 years. Yes..so can't generalize that it will give good returns everywhere ..just like you can't generalize that all mutual funds will give good returns even in long term.
A few points can be considered below to counter the above argument:
Rental returns are almost always much lower than what has been projected in this creative. Various aspects of real estate:-
1. Typical residential rental returns across the country are in the 1.5-2.0% range. The costlier the property, the lower the returns. If you're getting more, you're plain lucky.
2. The creative does not take into account the tax on this rent. After the standard deduction, put tax also as per your tax bracket – 30% for most members of this group.
3. Do not look at the rise in property values in the past few months. Real estate has not moved during the period 2013 – 2021, but rather the first half of 2022.
4. If you've got great returns on your property during this period, again it is luck. Most likely it was due to a special one-time event occurring like a highway or IT park etc having been announced or coming up, or things like that which really cannot be attributed to your property-picking skills.
5. Rebate under 24(b): You get a 30% (as per your tax bracket) advantage but limited to 2L max a year. Seems good? What about the rest 70% of the interest that you pay and it needs to be added to your house cost?
6. If the property were to rise at G-Sec rates regularly – is like if wishes were horses….never happens linearly like this.
1. Typical residential rental returns across the country are in the 1.5-2.0% range. The costlier the property, the lower the returns. If you're getting more, you're plain lucky.
2. The creative does not take into account the tax on this rent. After the standard deduction, put tax also as per your tax bracket – 30% for most members of this group.
3. Do not look at the rise in property values in the past few months. Real estate has not moved during the period 2013 – 2021, but rather the first half of 2022.
4. If you've got great returns on your property during this period, again it is luck. Most likely it was due to a special one-time event occurring like a highway or IT park etc having been announced or coming up, or things like that which really cannot be attributed to your property-picking skills.
5. Rebate under 24(b): You get a 30% (as per your tax bracket) advantage but limited to 2L max a year. Seems good? What about the rest 70% of the interest that you pay and it needs to be added to your house cost?
6. If the property were to rise at G-Sec rates regularly – is like if wishes were horses….never happens linearly like this.
Caution
Senior citizens should avoid Real Estate particularly for those close to retirement or after retirement. It's slow, long term. Losses if any are huge and involve lifetime savings. The risk is high. It was good in black money days. They have gone as of today.
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