Real Estate Return on Investment Proposition – Independent House

real estate article (1)

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
CountryIndia
StateKarnataka
CityBangalore
AreaOuter Area
Plot Size (Sqft)1,200
Sqft Land/ Plot Rate (INR)4,000
Plot/ Land Cost (INR)4,800,000
Registry & Other Charges10%
(A) Total Cost to buy Land/ Plot5,280,000
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 Month3900
(D) Total Maintenance Cost Per Year46,800
Home/ Mortgage Loan If any0
Interest Rate8.50%
Loan Repayment Term (Years)15
EMI Payable0.00
(E)EMI Paid Yearly0.00
Total Amount (Loan and Interest) Paid0.00
Total Interest Paid0.00
Total % Interest Paid0.00
Rental Rate Per Sqft/ Month8
Rental Income Monthly20,800
Rental Income Yearly249,600
Return On Investment for Real Estate – Independent House Proposition – Without House Loan
YrCost DetailsAmt InvestedIncome DetailsAmt ReceiveReturnROI %
1Total House Cost (A+B+C)10,407,200.00No Income on 1st Year0.00-10,407,200.00

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
CountryIndia
StateKarnataka
CityBangalore
AreaOuter Area
Plot Size (Sqft)1,200
Sqft Land/ Plot Rate (INR)4,000
Plot/ Land Cost (INR)4,800,000
Registry & Other Charges10%
(A) Total Cost to buy Land/ Plot5,280,000
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 Month3900
(D) Total Maintenance Cost Per Year46,800
Home/ Mortgage Loan If any6,000,000
Interest Rate8.50%
Loan Repayment Term (Years)15
EMI Payable59,084.37
(E)EMI Paid Yearly709,012.48
Total Amount (Loan and Interest) Paid10,635,187.23
Total Interest Paid4,635,187.23
Total % Interest Paid43.58%
Rental Rate Per Sqft/ Month8
Rental Income Monthly20,800
Rental Income Yearly249,600
Return On Investment for Real Estate – Independent House Proposition – With House Loan

Yr.

Cost Details

Amt Invested

Income Details

Amt Receive

Return
ROI%
1Total House Cost (A+B+C)10,407,200.00No Income on 1st Year0.00-10,407,200.00

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.