Real estate prices are on the rise now. Even after the recent interest rate hikes, demand for home loans hasn’t died.
Since an own house often comes with a lot of emotions, we are not debating whether to buy your own house or stay at a rented place.
But any real estate purchase beyond your own house becomes an investment. And we want to discuss if real estate makes sense as an investment anymore.
Estimated read time: 3 minutes and 40 seconds
Buckle up, here we go!
Let’s say you already live in your own house, and now want to buy another property just as an investment.
Now, you would expect two types of income from real estate investment.
- Price appreciation of land/property
- Rental income/yield
And combining these two gives you a total return on investment (ROI). So, first, let’s discuss these two returns separately.
1. Price appreciation of real estate in India
In India, based on data shared by RBI, in the last 12 years, the average return by price appreciation in house prices was around 10%. But when you look at the last 5 years, the returns were just 3.4%.
It is important to note that this is India’s average return, and the return varies across cities. RBI’s House Price Index tracks home prices in 10 Indian cities. You can check the data here.
There isn’t enough data on real estate prices before 2010. We know the prices increased in the long term, but at what rate? We don’t know. So, it’s hard to prove that real estate gives an average of 10% or more returns in the long term.
Also, it is difficult to predict future prices. We all have heard stories about people investing in land in some areas and building a lot of wealth from it. But for that to happen to you, either you need to be lucky or an expert in selecting the right location at the right time.
Because we have seen people selling their real estate investments at a loss because they chose the wrong location at the wrong time.
2. Rental income/yield from real estate in India
Apart from price appreciation, rental income can help you increase your total returns from your investment.
We measure rental income in terms of yield. Rental yield is calculated by dividing the annual rental income of a property by its purchase value.
It is one of the most common methods to calculate the ROI of a property.
And when it comes to India, India has a low rental yield when compared with other countries.
On average, the residential rental yield in India is around 2 to 3%, and the commercial rental yield is 5 to 7%.
Note – We know you can use your land or property to generate many types of income. But since most people choose to rent it out, we are focusing on rental income.
Tax benefits on real estate investments in India
Real estate investment has some tax benefits. When you take a home loan, you can get ₹2 lakh deduction under section 24b on interest payment and ₹1.5 lakh on principal repayment under section 80C.
But when you buy a second home on a home loan, deductions under section 80C on the principal amount of the loan are not available to you. You can only avail of the tax deduction benefits on the interest component.
Also, rental income is taxable. You can deduct the rent your tenants pay from the amount you spend to get the home ready. This includes all the maintenance charges, repair costs, the cost of installing new parts or fixtures, etc.
And you also get long-term capital gain tax exemption. Read more about these benefits under section 54 here.
Should you invest in real estate?
Even though there seems to be an optimistic look at real estate these days, mainly because of the massive infrastructure developments by the Government. The price increase seems to be very concentrated in a few locations.
If you come across a good deal where the buying price seems decent, a good yield can be generated, and the scope of an increase in price looks good. Then you can consider the investment.
But again, there are some more factors to be considered before investing in real estate.
First, analyse your overall portfolio. It is well diversified? Does investing in real estate make your portfolio more concentrated on real estate? If yes, think again about investing in real estate.
Second, do you have enough funds to invest in real estate? If you are thinking about taking a loan, will you be able to repay the loan without adding severe stress to your current financials? If you have less funds but want to invest in real estate, you can look into REITs.
Third, real estate investment is not a passive investment. You need to spend a lot of time on it. Even after buying and renting it out, you might need to spend time managing it. Are you ready to spend time?
After going through all those questions, you might have a clear idea of whether you can invest in real estate.
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