Investment in real estate remains a most profitable proposition in India, Particularly in the National Capital Region (NCR) of Delhi, which is growing at a feverish pace. Overall, the returns on long term, say around 15 years, are almost 15% compounded annually. These kinds of returns are hard to come by from any other asset class.
However, people say that the prices in Delhi or Mumbai have gone up very high and any investment at this level would not fetch good returns. But if you see the past records, in the long term, the high-price level gets evened out and the overall returns remain high.
At present, interest rates have started softening, which will improve the buyers’ capacity to borrow for purchasing houses. But, this may push the property prices further up from the present level, which is already considered to be high. Therefore, if you want to buy a house for personal use or for investment purpose, experts feel it is not advisable to wait for prices to correct. It will be better to make a long-term investment, if you want to invest in property.
Rentals in the NCR have soared markedly in the last couple of years. If you take the rental income into account, the net investment made by you to buy the house is even less. For example, if you buy a house for Rs 1 crore, your EMI at the present rate of interest — around 10% on 20 years’ repayment period — will be Rs 96,502. Out of this, Rs 83,333 will be adjusted against the interest of the principal for the first month and the rest Rs 13,169 will be used to set off the principal amount. So, for the next month, the principal will be reduced to Rs 99,86,831 against Rs 1 crore at the beginning of the loan. Therefore, the interest for the next month will be reduced to Rs 83,224. And hence, only Rs 83,224 will be used from EMI to pay the interest and rest Rs 13,279 will be adjusted against the principal.
In this way, the interest burden will keep on reducing, which will enable the larger portion of EMI to be adjusted against the principal amount. At the end of the fifth year, you will have paid only around Rs 10 lakh from the principal. But this will bring down your interest payment from your EMI to Rs 75,014 as against Rs 83,333 at the beginning of the repayment period. This will help increase the principal repayment to Rs 21,488 by the end of the fifth year.
Annual rental of an apartment has gone up to around 3% of the capital value, against 2.5% of the capital value a couple of years ago. This means that an apartment of Rs 1 crore will fetch around Rs 25,000 per month or Rs 3 lakh per annum in rentals. This will reduce your interest burden substantially. In the first year, at 10%, your interest burden on a Rs 1 crore loan would be Rs 9,92,552. If you adjust the rental income, the net outflow on account of interest payment will be only Rs 6,92,552. This will bring down the effective interest rate to 6.92%.