Real Estate always comes with its share of costs. Once you take into account the costs of owning real estate,
even with a few benefits, the overall return in most cases hasn’t been great over the last decade.
Our Expert has analyzed the happenings and
Following is the ROI proposition if one chooses to invest in real estate and looking to get returns through rental income.
Case-1 (Without Loan): Person has purchased plot in cash and has built the house from his own savings, No House loan taken.
Assumptions: Following table shows you the assumption taken for ROI calculations when Investor has not taken house loan.
| Real Estate Independent House Assumption | |
| Country | India |
| State | Karnataka |
| City | Bangalore |
| Area | Outer Area |
| Plot Size (Sqft) | 1,200 |
| Sqft Land/ Plot Rate (INR) | 4,000 |
| Plot/ Land Cost (INR) | 4,800,000 |
| Registry & Other Charges | 10% |
| (A) Total Cost to buy Land/ Plot | 5,280,000 |
| Construction Cost (Per Sqft) | 1700 |
| FAR allowed (Assumed) | 2.5 |
| Construction Area (Permissible Sqft) | 3,000 |
| Construction Area (Actual Built Sqft) | 2,600 |
| (B) Construction Cost (Architectural) | 4,420,000 |
| (C)Interior Cost approx. 16% of (B) | 707,200 |
| Total House Cost (A+B+C) | 10,407,200 |
| Maintenance Cost and Property Tax Per Month | 3900 |
| (D) Total Maintenance Cost Per Year | 46,800 |
| Home/ Mortgage Loan If any | 0 |
| Interest Rate | 8.50% |
| Loan Repayment Term (Years) | 15 |
| EMI Payable | 0.00 |
| (E)EMI Paid Yearly | 0.00 |
| Total Amount (Loan and Interest) Paid | 0.00 |
| Total Interest Paid | 0.00 |
| Total % Interest Paid | 0.00 |
| Rental Rate Per Sqft/ Month | 8 |
| Rental Income Monthly | 20,800 |
| Rental Income Yearly | 249,600 |
| Return On Investment for Real Estate – Independent House Proposition – Without House Loan | |||||||
| Yr | Cost Details | Amt Invested | Income Details | Amt Receive | Return | ROI % | |
| 1 | Total House Cost (A+B+C) | 10,407,200.00 | No Income on 1st Year | 0.00 | -10,407,200.00 | ||
2 | Total Yearly Cost (D+E) EMIand Maintain | 46,800.00 | Annual Rental Income | 249,600.00 | 202,800.00 | -98% | |
3 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 267,072.00 | 220,272.00 | -84% | |
4 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 285,767.04 | 238,967.04 | -68% | |
5 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 305,770.73 | 258,970.73 | -55% | |
6 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 327,174.68 | 280,374.68 | -44% | |
7 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 350,076.91 | 303,276.91 | -36% | |
8 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 374,582.30 | 327,782.30 | -30% | |
9 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 400,803.06 | 354,003.06 | -24% | |
10 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 428,859.27 | 382,059.27 | -20% | |
11 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 458,879.42 | 412,079.42 | -17% | |
12 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 491,000.98 | 444,200.98 | -14% | |
13 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 525,371.05 | 478,571.05 | -11% | |
14 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 562,147.02 | 515,347.02 | -9% | |
15 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 601,497.31 | 554,697.31 | -8% | |
16 | Total Yearly Cost andMaintain | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 643,602.12 | 596,802.12 | -6% | |
17 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 688,654.27 | 641,854.27 | -5% | |
18 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 736,860.07 | 690,060.07 | -4% | |
19 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 788,440.28 | 741,640.28 | -3% | |
20 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 843,631.10 | 796,831.10 | -2% | |
21 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 902,685.27 | 855,885.27 | -1% | |
22 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 965,873.24 | 919,073.24 | 0% |
23 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,033,484.37 | 986,684.37 | 1% | |
24 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,105,828.27 | 1,059,028.27 | 1% | |
25 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,183,236.25 | 1,136,436.25 | 2% | |
26 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,266,062.79 | 1,219,262.79 | 2% | |
27 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,354,687.19 | 1,307,887.19 | 3% | |
28 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,449,515.29 | 1,402,715.29 | 3% | |
29 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,550,981.36 | 1,504,181.36 | 3% | |
30 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,659,550.06 | 1,612,750.06 | 4% | |
31 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,775,718.56 | 1,728,918.56 | 4% | |
32 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,900,018.86 | 1,853,218.86 | 4% |
Conclusion: One can easily understand that if investor invests in real estate through his/ her own savings and plan to get return through Rental Income, it takes almost 23 years to get positive ROI.
In this case, investor purchased plot and then did the construction through his/ her own savings.
Advice/ Solution: Client First Asia tries to resolve this problem and will suggest that Investor shall do Value Investing like Warren Buffett has done in last 40-50 years and grown his wealth to approx. USD 86 Billion growing at rate of 20% compounding.
Case-2 (Without Loan): Person has purchased plot in cash and has built the house by taking home loan.
Assumptions: Following table shows you the assumption taken for ROI calculations when Investor has taken house loan at current home loan interest rate of 8.5% and pays in 15 years.
| Real Estate Independent House Assumption | |
| Country | India |
| State | Karnataka |
| City | Bangalore |
| Area | Outer Area |
| Plot Size (Sqft) | 1,200 |
| Sqft Land/ Plot Rate (INR) | 4,000 |
| Plot/ Land Cost (INR) | 4,800,000 |
| Registry & Other Charges | 10% |
| (A) Total Cost to buy Land/ Plot | 5,280,000 |
| Construction Cost (Per Sqft) | 1700 |
| FAR allowed (Assumed) | 2.5 |
| Construction Area (Permissible Sqft) | 3,000 |
| Construction Area (Actual Built Sqft) | 2,600 |
| (B) Construction Cost (Architectural) | 4,420,000 |
| (C)Interior Cost approx. 16% of (B) | 707,200 |
| Total House Cost (A+B+C) | 10,407,200 |
| Maintenance Cost and Property Tax Per Month | 3900 |
| (D) Total Maintenance Cost Per Year | 46,800 |
| Home/ Mortgage Loan If any | 6,000,000 |
| Interest Rate | 8.50% |
| Loan Repayment Term (Years) | 15 |
| EMI Payable | 59,084.37 |
| (E)EMI Paid Yearly | 709,012.48 |
| Total Amount (Loan and Interest) Paid | 10,635,187.23 |
| Total Interest Paid | 4,635,187.23 |
| Total % Interest Paid | 43.58% |
| Rental Rate Per Sqft/ Month | 8 |
| Rental Income Monthly | 20,800 |
| Rental Income Yearly | 249,600 |
| Return On Investment for Real Estate – Independent House Proposition – With House Loan | |||||||
Yr. | Cost Details | Amt Invested | Income Details | Amt Receive | Return | ROI% | |
| 1 | Total House Cost (A+B+C) | 10,407,200.00 | No Income on 1st Year | 0.00 | -10,407,200.00 | ||
2 | Total Yearly Cost (D+E)EMI and maintain | 755,812.48 | Annual Rental Income | 249,600.00 | -506,212.48 | ||
3 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 267,072.00 | -488,740.48 | ||
4 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 285,767.04 | -470,045.44 | ||
5 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 305,770.73 | -450,041.75 | ||
6 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 327,174.68 | -428,637.80 | ||
7 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 350,076.91 | -405,735.57 | ||
8 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 374,582.30 | -381,230.19 | ||
9 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 400,803.06 | -355,009.43 | ||
10 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 428,859.27 | -326,953.21 | ||
11 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 458,879.42 | -296,933.06 | ||
12 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 491,000.98 | -264,811.50 | ||
13 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 525,371.05 | -230,441.43 | ||
14 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 562,147.02 | -193,665.46 | ||
15 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 601,497.31 | -154,315.17 | ||
16 | Total Yearly Cost andMaintain | 755,812.48 | Rental Income with 7%Net Rise with Inflation | 643,602.12 | -112,210.36 | ||
17 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 688,654.27 | 641,854.27 | ||
18 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 736,860.07 | 690,060.07 | -18% | |
19 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 788,440.28 | 741,640.28 | -14% | |
20 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 843,631.10 | 796,831.10 | -11% | |
21 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 902,685.27 | 855,885.27 | -9% | |
22 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 965,873.24 | 919,073.24 | -7% |
23 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,033,484.37 | 986,684.37 | -6% | |
24 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,105,828.27 | 1,059,028.27 | -5% | |
25 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,183,236.25 | 1,136,436.25 | -4% | |
26 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,266,062.79 | 1,219,262.79 | -3% | |
27 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,354,687.19 | 1,307,887.19 | -2% | |
28 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,449,515.29 | 1,402,715.29 | -1% | |
29 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,550,981.36 | 1,504,181.36 | -1% | |
30 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,659,550.06 | 1,612,750.06 | 0% | |
31 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,775,718.56 | 1,728,918.56 | 0% | |
32 | Total Yearly Maintenance | 46,800.00 | Rental Income with 7%Net Rise with Inflation | 1,900,018.86 | 1,853,218.86 | 1% |
Conclusion: One can easily understand that if investor invests in real estate and takes home loan to get return through Rental Income, it takes almost 32 years to get positive ROI. Rather bank earns from you and investor end-up paying almost 44% of interest for the loan amount in 15 years.
In this case, investor purchased the plot and then did the construction by taking bank loan.
Advice/ Solution: Client First Asia tries to resolve this problem and will suggest that Investor shall do Value Investing like Warrant Buffet has done in last 40-50 years and grown his wealth to approx. USD 86 Billion growing at rate of 20% compounding.
In addition to this Client First Asia suggest that an investor shall never take loan until an emergency occurs. However, taking loan at the interest rate of 2-4% per year can be considered for good ROI proposition but banks/ lenders don’t offer such rate as to avoid their own revenue proposition.
*Above ROI proposition has been prepared by considering all possible factors and prevailing market rates. It has been prepared by one of the Global Director of Client First Asia (Catering value investing services to India and UAE) who is Certified Financial Planner from CII, UK and has Award in Introduction to International Wealth Management by CISI, UK.
