Why Real Estate investments fail in India
Real estate has traditionally been the Indian investment Darling #1. Why?- Gets better returns than any other investment!
- Even Cash Flow by giving your property out on rent!
- Your investment is safe - Land prices never come down!
- Property prices were up 25% in 2005. This is less than the stock market, which is up 66%.
Note: Home loans are now around 8.5% per year, upto 85% leverage. Shares get about 12% p.a. and 50% leverage, but still beat the real estate market on returns. - The cash flow argument is flawed, and I will describe why later.
- Prices peaked in 1994-95, after which there was a steep fall. Recovered only in 2003.
Cash Flow Analyis
If you've read Robert Kiyosaki's "Rich Dad, Poor Dad" series of books, you'll appreciate that Cash Flow is an important thing to consider. That means your cash outflow should be less than your cash inflow. But the model fails miserably in India! Let me explain. If you're a fan of Rich Dad, Poor Dad, please also read http://www.johntreed.com/Kiyosaki.html.Enter the Real Estate Calculator
I built a BIG excel sheet that'll help calculate your cash flow and analyse your real estate investment in India. Here's the set of parameters it takes:
Most of the parameters are obvious, and I've put in pretty much everything one would need. (Only the green coloured boxes
are editable).
Note that I have put in sensible values - a 45 Lakh house rents for Rs. 25,000 per month (maximum), and rents
go up by about 6% a year. Property values increase 10% a year over a 20 year period (historically). Remember: I expect you
to buy a house, give it for rent and pay rent in another house. (If you stay in the house you buy, or if you already own
a house and don't have to pay rent, the cash flow returns are significantly worse)
What's the result?
- You are cash flow positive only after the seventh year. That means you will pay out more towards expenses than you make as income, until SEVEN years after the loan.
- If you accumulate losses then you are cash flow positive only after 12.5 years.
Opportunity cost
This hasn't considered that you could, instead, put the invested money in the bank and get about 6% for your money. Let's do the cash flow calculation after considering tax exemptions on home loans, interest in the bank (and tax on that) as well. How much?
Not very good as you can see.
- On average, you make 3 Lakhs less per year.
- After 20 years, you lose 53 Lakhs in adjusted cash flow.
Capital Appreciation
So the deal with real estate is Capital Appreciation. What does that give us?
Much better - but you notice that:
- Returns are best in the first three years: between 30 and 40%
- After ten years, you're down to a 20% return.
Download the Real Estate Cash Flow Calculator
You can get it here. Yeah, it's free and all that. Terms:1) Don't distribute this as your own stuff. Give me credit where it's due.
2) Use at your own risk. Don't blame me if this doesn't work for you. It's worth what you paid for it.
3) This could be fiction or a figment of my imagination. You can comment if you like, but you have no grounds to sue me.
Comments
Please send me comments, suggestions, flames and all. I would love to hear what you have to say. My Blog entry has a comments section where you can send in your thoughts. (I should add something to my site, but I'm too lazy).