Real Estate Investment – Part 7 of How to invest into anything?
- How to Invest into Anything? An Intro..
- Saving & Investing into Gold
- Saving and Investing into Gold-Series 3-How to Invest into Anything?
- Bonds,CDs and Bank Deposits build First Wealth..SR 04 of How to invest..
- Zero Coupon Bonds – World’s Best Investment Product (Part 5 of New Series)
- Zero Coupon Bonds (Part 6 ) – Planning everything with Zero
- Real Estate Investment – Part 7 of How to invest into anything?
- How to Trade Stocks & Indices? – How to Invest.. series
Ref: 09-034A of 1st November, 2009 Scribd PDF Download
I am skipping three important chapters on Bonds – Treasury, Municipal and Corporate (Fixed Income and Convertible Bonds) which are really useful to practical investors, especially wealthy ones who do not have risk appetite after a few years, and would settle for more secured yet reasonable returns. I am postponing, not skipping them because there has been demand from retail investors in popular column of this blog Confused Mind, Clear Answers.
REAL ESTATE – the name conveys it all. It is “real” that is touchable, feel able (Indian English) and enjoyable on day to day basis. It is “physical”., not paper assets except its derivatives that destroyed America such as CDO (Collateralized Debt Obligations), CDS (Credit Default Swaps), REIT (Real Estate Investment Trusts), Mortgage Pool, Warrants of shares of Real Estate Companies etc.
Howsoever the high may be the price; the Investor in Real Estate has one consolation – which the investment will never go to zero (except in derivatives as above). It can be held for long term, for passing heritage from one person in the family to the other descendants. He is often wrong, especially when he leverages his investment by borrowing from the banks, relatives, home financiers, moneylenders and friends.
Gone are the days when the people used to invest into Real Estate only from own savings. Today, Opium (or Other People’s Money) or others’ lending becomes our capital. We have come to a stage when one can comfortably say “If I earn, it’s all mine; If I lose, it’s all yours”.
The World’s riches men have made major fortune in real estate. AND the world’s leading bankrupt persons lost everything in real estate. The Real Estate therefore makes or breaks anyone anywhere.
It is therefore important that we know the every little thing behind the real estate to make us rich and richer, not poor and poorer. Any investment made carefully has chance of making money in 70% of the cases. An ordinary investor is never in command of external factors, that takes away 30% what we call risk.
Any long term investment in good assets of whatever kind always makes money, is another rule of investment. The real estate automatically become long term investment because it can not be bought and sold like a stock or in day trading exercise EXCEPT in a city like Hong Kong, my city, where the Chinese people eat, drink, lunch, dine or breath only real estate and race course.
Following are the most important long term investment, some physical or real and others abstract.
- Own Education – Abstract
- Family – Parents, brothers, sisters etc – until one marries (Abstract)
- Family – Wife or husband, Children – after one’s marriage until Children marry(Abstract)
- Family – Wife or Husband after the marriage of the children (they get separated or what we call in stock market language – Spin Off – Abstract yet Real
- Job or Business – Real
- Home, Office, Land – Real
- Car or Scooters, Motorbike – Real
- Bank Deposits (3 years and above) – Real
- Bonds – Real
- Stocks of really good companies bought at market crash time. – Real
In short, after one’s own education, only Spouse (wife or husband) become real long term investment that comes to help at any time even when a person loses everything or at deathbed. It is important therefore to choose the career carefully (while educating) or while selecting a life partner.
Second Best is “Real Estate” – our Home. Owning a home is a dream of everyone in every country– in America, it is known as “American Dream” that went sour of late. Even one has gone on a costly holiday and stayed at best hotels, he feels comfortable when he returns home – Home, my Sweet Home. There is no pleasure like coming back to one’s own home from wherever he was.
How to Buy Real Estate? Where to start? Residential Home
Its a million dollar question. The answer is very simple. Start from buying Home for self use. Never try to buy own home for investment purpose but for real self use. When one buys his own home for dwelling purpose, to marry and then build family, he develops tremendous attachment to that asset, and never feels like selling unless there are very compelling reasons to do so. It automatically becomes a long term investment. Following are the basic rules to follow while buying own home.
- Type of Usage
- Commercial Property:
- As a rule, commercial property rise much faster than residential or agricultural assets. They also tend to fall last. The reason is; the commercial property is meant for business which has earning power. The owner can afford to pay more if the business is good.
- Residential Property is of following types with features:
- Luxury Property – always on rise for several years. They are relatively stable because the owner has holding capacity in the event of downturn of overall property market. Prime properties are always best to invest. If your purpose is an investment, and fairly for large value (Over USD 500,000 or more) and not necessarily own personal use, prefer prime property. They are liquid, rise fast in value, fall slowly and give the owner a unique status.
- Upper Middle Class Property: They have more liquidity. Most of the owners are high salary earners from executive or semi executive cadre. Or they could be middle order businessmen.
- Lower Middle Class Property: These are generally Mass Housing Projects. They look good for first few years but then begin to crumble due to poor maintenance. In country like India, where the concept of “cooperative society” is popular, the property is managed by the group of owners who are always cost conscious. The owners generally do not contribute much to the proper maintenance. There are always differences or squabbles. As result, the property deteriorates fast. They fall fast in bad times but rise slowly even in good times.
- Agricultural Property:
- Very few are interested in this property. The farmers everywhere are poor, so the value of the property rises at slowest pace.
- However, one has to read the farm produce prices and its trend for next few years. Of late, the food prices are seeing strong upswing with the result that the yield rises very fast. The value also rises at fastest pace.
- In such property, the presence of Water and suitability of land for tilling purpose are most important factors for selection. No water, no value for such property. However, little imagination could bring in stupendous profits. More on this later.
- Location
- Country: Buy where you are going to live for at least 10 years.
- City: Buy in that city where you will be living
- Suburb: Buy where you have place of business or job (even if it is transferable).
- Select the location between two cities or two districts of same city, which are expanding outwards. For instance, if the district or city is expanding north, and neighboring district/city is developing south, it is preferable to buy somewhere in between, provided the location is within same municipal limits.
- If the nearby road is less than 30’ wide, better buy the unit one block inside. It often happens that when the city start developing, the roads are widened. If you have bought unit just touching the road (what they call “road touch property”), it may be subject to compulsory acquisition by at least 10 feet to 25 feet. If you have bought the unit one block inside, it will automatically become “road touch” with the result that its valuation will improve instantly whereas older one will lose.
- Real life example: I bought one large piece of land (5.5 acres) about 500 feet inside the main road, Due to expansion of new Airport, the main road is now truncated and the inside road touching my land will be developed into a High Way. I will lose about 10’ to 15’ – about 0.125 acre, but I will be compensated @Rs 500,000 when my acquisition price only a year ago was Rs 245,000.
- The adjacent plot was just sold for Rs 900,000/acre for some industry. In other words, my investments will more than treble in less than 18 months.
- Locality
- Select safe, secure and developing locality. Avoid mature locality which has no room for growth. Newer localities are better planned and have room for growth, so your investment has chance of growth.
- Ensure that there is enough power, water and other sanitary facilities.
- Ensure that there are banks, post offices, telephone facilities and most importantly School and colleges facilities. (Real life example: In NRE Complex in Navi Mumbai, India, the prices never rose for 7 years, in fact they fell. When the prestigious school Delhi Public School opened near its front gate, the home prices started climbing, rising nearly 5 times (500%) in 7 years from all time low)
- d. Ensure that there are some industrial estates in less than 20 kilometers (10 miles) peripheral area.
- The industries bring in prosperity. They create jobs or income, and also increase the travelling population. The people from other towns or suburbs travel to this city for job or other gainful employments.
- A city with real industries (with employable labors, not automatic plants relying on less labor and more on automated machines) enables greater rise in capital value than others. (Real life example: The prices in city like Surat rose faster than Baroda in Gujarat, India because Surat was having labor oriented industries such as Textiles and Diamond, whereas Baroda was having automated plants like Petrochemicals – IPCL).
- This is often a difficult proposition to follow, because 1 out of 50 cities have industrial estate.
- Use this rule as last but avoidable requirement.
- New Constructions
- Prefer new constructions to old one, because the priorities of people have of late changed. The people ask for more telephones, broadband, piped gas, lifts and recreational facilities etc. Old ones have no infrastructural support to adopt the newly demanded facilities. Further, residential complexes have better appeal than others.
- Swimming Pool and Club Houses are not must requirements. They merely increase the monthly maintenance charges and cause higher capital outlay (developers add these assets in Gross Built Up area in a country like India. The real utilizable area is often 35% less in high rise buildings.
- Older constructions with purely residential homes are acceptable if they are built in last 5 to 7 years. Still, they do not match the price performance of new constructions above.
- Prefer gated community (in country like USA) than independent homes for family security reasons. The crime rate in gated community is less (such as kidnapping, sex crimes, robbery or theft) than independent homes (unless there is private security arrangement). The people invariably buy homes for family security first.
- Car parking facilities
- As far as possible ensure that the Residential Home Estate has affordable car parking facilities.
- Car and other vehicles like Scooters, Motor bikes have become a necessity, not symbols of luxury. Those who buy home can afford to buy cars or other two wheelers.
- If there is no covered parking, make sure that the open parking facilities are available.
- In some estates, the cost of car parking facilities (say in Hong Kong) is almost 3 times the cost of the car itself. In India, it is almost equal to cost of car itself.
- This is avoidable proposition, if one intends to live in big city or suburb with ample public transports such as buses, trains, metros, auto and taxis and ferry. (Example: in a city like Hong Kong where I live, the public transportation facility is so efficient that one need not have expensive car unless it is a status symbol -in most cases)
- Valuation
- This is often very difficult part. This section applies to Residential and Commercial sector, not Agricultural where the preferences are different.
- An investor normally expects 6% yield on his investment. This has come down to almost 4% due to prolonged lower interest rates world over. I will stick to 6% as a general rule.
- If an investor expects 6% yield, it means that he expects to earn 6 on his investment of 100 (in any currency). That is if rental yield is 6% per annum, the capital value could be 100. In other words, if monthly rent is X, the annual rent will be 12X. If the yield is 6%, the capital value will be (100*12X )/(6) or 16.33 times the annual rental value (ARV). or say 16 times ARV
- If the market is super bullish, then the expected yield is 4% and in that case, the capital value could be 100/4 times or 25 times the annual rental value.
- If some one demands more than above as his Sale Price (your purchase price), then you would be overpaying.
- The best bargain, usually in bear market, is 12 times the Annual Rental Value. If it is 8 times, then you will never lose money (in 99% of cases)
- Say, you are able to get a monthly rent of 10,000, the Annual Rent will be 120,000. The possible capital value on 6% yield basis will be 16 x 120,000 = 1,920,000 on approximation basis. OR it will be 192 times of monthly rent. For simplicity sake, use 200 times the monthly rent.
- Often, the broker or seller quote overstated price for properties on sale,. You can not go to Architect to have valuation all the time – it costs money. How to find the nearest value in such cases? Here is the answer – check the monthly rent for similar property in same building or area with similar location. Multiply 200 times, and you get the rough numbers to start the negotiation. The reason for using Rental value is that the seller or his broker may inflate the sale price, but would be honest in telling you the correct rental value. An unwritten rule in real estate is that the “Rent Never Lies”‘. When you know the realistic rental value in the locality where you intend to buy the property, you will have nearly correct sales value based on above stated formula.
- If the location of said property is prime in that area with good view (mountain or sea view), you may add a few hundred thousands more.
- Exercise-1: You want to buy a home in good location. The seller is demanding 3,000,000 (3millions). The annual rental value for similar property is 12,000. The Fair value comes to 16 times Annual Rental or 200 times monthly rental or 2,304,000. If the interest rates are lower in your country, to say 3% to 4%, then the valuation will be 25 times Annual Rental Value or 300 times monthly rental or 3,600,000 which is well above offered price. But this is a top valuation model.
- Exercise -2: If you are an investor and not actual user, you can work out the possible future value based on expected interest rate in future. Based on those rates, work out the possible future value. If the rates go higher, the valuation goes down, and if the rates go lower, the valuation goes higher.
- These are the rough diamond tools. Once you use them frequently, the seller/broker would be surprised how you arrived at fairly good price of the offered property. Once they know that you are clever, they will sit down with serious negotiation if they want to sell.
The next installment on this subject will be on 11th November, 2009.
Please visit Scribd to have PDF downloadable version of this article.
Anil Selarka (Kalidas)
Hong Kong, 1st Nov, 2009 Article Ref No: 09-034A
- Commercial Property:
Link to this page
Dear Kalidasji,
this article has been an eye opener for me. I eagerly await your subsequent articles in this series. Meanwhile I have a specific query. I have an option to buy one of two plots of land in Bangalore. I plan to construct commercial office/shopping space there.
1. Plot-I is in the western part of the city, 4200 sqft, and west facing on a 80 ft road. This is away from software corridor but well developed area. Carpet area may come to 2600 sqft. Expected rent is 30-40/sqft.
2. Plot-II is in the eastern part of the city(popular software corridor), 2200 sqft, south east corner on a 60 ft road. Carpet area may come to 1300 sqft. Expected rent is 40-55/sqft.
If both these properties satisfy the guideline of cost being less than 12 ARV which property would you recommend?
What are the other fundamental considerations and pitfalls in investing in commercial real estate?
Thanks,
Sharat,
San Jose, California
Sharat
15 Jan 10 at 4:23 AM
Your site is very nice, very useful for me , I bookmarked your blog
private bus services
2 Dec 09 at 1:24 AM
Dear Kalidasji,
When you going to publish next installment of article “Real Estate Investment” ? I am waiting for the same.
-Ramesh, Mumbai, India.
Kalidas Says …. Monday, November 30, 2009
I will be publishing within next 3 to 4 days. I will focus more on articles or news event and analysis than replying general or inquisitive enquiries from the readers.
I hope that the readers will appreciate this change from 1st December onwards.
Ramesh
29 Nov 09 at 11:48 AM
Dear sir ,
I am not able to see any posts under CMCA Nov series .
I hope this is some problem with my internet connection and we have not lost the posts to any hacking etc .
sachin ,pune,India .
Kalidas Says …. Sunday, November 29, 2009
Something has gone wrong with the site. The comments and comment box has disappeared from many posts although they are very much there in the database. My site manager is working on this, and will get this issue fixed soon.
sachin
28 Nov 09 at 2:05 PM
Kalidas ji,
Iam following your posts since 2007 (moneycontrol.com) and oberved that most of your farsighted statements have become true. Whether it is stock market or Gold.
Should we book profit in gold now or wait for some more time.
Thanks and regards,
Raju
Kalidas Says …. Friday, November 27, 2009
Reminder: To get reply, please append City and Country name to your signature invariably.
Gold rally has just started. Based on current situation, I have raised the gold price target to $ 6400 in 2 years UNLESS the US authorities act on the line suggested in my book Sub Prime Resolved.
Smaller target is $1500 (2 months) $1800 (4 months) $2400 (8 months) $3000 (12 months) and $6400 in 2 years.
At the moment, the gold is worth accumulating until $ 1235. This is the first leg of rally.
Raju
26 Nov 09 at 8:28 AM
Kalidas Ji,
I’m a Newbie.
I had 1000+ Shares of Satyam and I sold the same on 15% profit. Now I’m sitting on cash and will get some more cash(2L) by Dec 1st week. Can you please help me by advicing which stock/MF should I buy on a short term.
Thanks,
Sudhi.
Kalidas Says …. Wednesday, November 18, 2009
You posted message on wrong forum. Repost your message under “Confused Mind, Clear Answers”. This post will be deleted after 3 days
Sudeesh
17 Nov 09 at 10:41 AM
Dear Mr Selarka,
I own a property at Mayfair Virar Gardens at Thane .
1BHK and am getting rental of Rs 3400pm
I paid Rs 9,00,000 Lakhs to acquire this in in Dec2006 @ 9.25% variable rate
And, today i am getting a quote of 14 Lakhs to sell it . I wanted to know if i should hold on & keep getting the rentals or sell it and invest in a 1RK @ 11Lakhs with a monthly rental of 5000 indian rupees .
Would highly appreciate your advise .
Regards
Nitin
Kalidas Says …. Saturday, November 07, 2009
You are in smaller property being bought lower middle class section. The prices of such property can not rise much, because the buyer does not have buying power. Further, such properties are normally poorly managed with lots of banians, underwears,ghagra, choli hanging out in the balcony and staircases littered with spitting of pan parag or tobacco pan chewing.
Cash the profit on old property and get into bigger one. If you do it every 3 years, you may get bigger and bigger apartments which will get you larger and larger return.
Sell it, book the profit, and buy the new one.
Nitin
6 Nov 09 at 2:42 PM
Dear Kalidasji,
Thanks for the reply. In front of you – I am not at all rich. You are rich with knowledge, wealth and experience.
I too feel it is extremely overpriced and almost all properties are lying empty – we can see it at night. Do you expect by any chance a fall and do you feel someone like me should take a place on rent? I am looking for personal use and not investment.
I have noticed even houses in Europe being cheaper than apartments here – which are not even of the same quality.
Regards,
Sanjay
Mumbai
Kalidas Says …. Thursday, November 05, 2009
If you are not resident of the Suburb you mentioned, and the purpose of investment for self use, I would do the following:
1. I would prefer Bandra, Khar and Santa Cruz in that order.
2. West side will be better than East for the time being, although chances of east coming up is very fast.
If you look around, only “East side” is developing fast, whether East side of the globe, or east side of the suburb. For instance,
- West (US, Europe, UK are declining).
- East side countries, like Asia, China, Australia, India are advancing.
- Even within India, eastern cities are having faster growth, for instance, Chennai, followed by Bangalore.
- Even within city, eastern suburbs are advancing. for instance, in Mumbai, Navi Mumbai is on massive stride of development, Ghatkopar, Mulund, and all suburbs on navi Mumbai route.
- Even within suburb, eastern side are doing better than west side.For instance, in Ghatkopar, East is developing faster than West side where I have older apartment.
- In Western suburbs, eastern side is developing faster, say in Borivli, Kandivali (Thakur Complex onwards), Goregaon and Andheri (towards Airport and Saki Naka). In Ghatkopar, 60 and 90′ road is going up faster.
- Even in the named suburb like Khar, Santa Cruz and Bandra, only Santa Cruz is developing more on east. Khar and Bandra are still west dominated.
- This is a global trend, not localized. Even within your own home, east facing room may be used more than west facing. (Sun rises in the east for the Hindua). West side is preferred by Muslims.
3. I would rent a small apartment in the suburb I want to live. I think rental cost is cheaper than finance cost at the moment. I will then scout the whole suburb and neighborhood in the morning, afternoon, evening and at night. Watch particularly crime rate.
4. Suburbs that rise (wake up) faster prosper well. Of late,however, I do not find even Barber or Tea shop opening before 7:30 AM. My theory is that if the businessmen have solid business, they will open their shops early. If there is more business around, more demand for the property.
Th property market has stopped rising. It is on consolidation mode. At the moment, save for global scene, major crash is unlikely. But it will come. If the stock market corrects too much, the effect will be felt by the properties. One has to have patience to wait long to buy the desired assets at bargain prices. if nothing happens by April, 2010, then think of buying the property at prevailing prices for self use.
Sanjay
4 Nov 09 at 11:09 AM
Dear Kalidasji,
Thanks for this informative post.
I want to ask you that do you feel property in areas like Khar/Bandra/Santacruz is very overvalued? I am looking for a 3BHK and most flats are quoting at Rs. 3 cr. Do you find this rationale?
Regards,
Sanjay,
Mumbai
Kalidas Says …. Wednesday, November 04, 2009
The property is not my real subject, although I have penned some articles with some basics. The Mumbai property is on fire due to very liberal mortgage for any amount available with the lenders. We are heading into similar situation as the western countries are currently today.
Of course, the property is extremely expensive in the suburbs you mentioned, where before mortgage financing started, the rates were Rs 3000 to 5000/sft at the most.(In Khar/Bandra).
I have strong feeling that Mumbai property is extremely expensive – quality is not so good nor the price nor the locations. Even my own 1976 apartment in Ghatkopar is valued at Rs 7,500/sft (my original purchase in 1976 was @ Rs 89/sft) and bidders are for Rs 75 lakhs for old property with no lift/elevator. Who should pay so much for old property. I am going to sell it soon.
I was talking to my son in San Diego in California, San Diego where the properties were available for USD 200,000 to 300,000 (Rs 94 lakhs ro Rs 1.28 crores) which were valued at almost twice the price before. House Area is almost 2400 sft to 4000 sft with 3 to 5 BHK, two storeyed. Extremely neat locale with full range of facilities. No slums around. To me the USA offers the best bargain value – dollar is weak, the properties are halved, qualities are at best and above all, there is law and order. No one could occupy your property beyond the agreement period. It took me 18 months to vacate the old tenant in Mumbai, India.
for NRI like us, we have choices overseas. For domestic Indian like you, the choice may be limited to city where you live.
Look at this picture. Say, you paid Rs 3 crores today. Would you be able to sell for Rs 7 crores after 5 years? Please note that if you take mortgage finance for 75% @ 10%, the interest cost alone will be Rs 25 lakhs per year or Rs 1.25 crores in 5 years. Add to it heavy maintenance @ Rs 4 or 5 per sft – one will have bleeding nose.
Due to technological advance, I now take the view that the properties should be replaced by newer ones after 15 years at the most. Broadband, piped gas, security, fitness clubs etc make the old properties obsolete. The newer younger generation like modern stuff.
Again, I am not that rich guy, so may be my views may not be appropriate. It will be better if you could contact some equally rich person as you are and obtain his opinion. It would be worth the while.
Sanjay
3 Nov 09 at 10:57 PM
Kalidas
Thanks for the reply. Am I to understand that the property prices should go down below 44 lakhs or the rental should go above Rs 24,000/- p.m.
However the scenario menitoned has not varied much over last 3 years, though there was a collapse in the housing sector last year.
Xavier
UAE
Kalidas Says …. Tuesday, November 03, 2009
My reply is very clear. Please do not prolong the correspondence. To be specific to your reply – Yes, what you stated is right. Either property price has to go lower or rental have to move higher. It is possible that the property price may come down slowly due to good market – it may not collapse.
Xavier
2 Nov 09 at 11:11 PM
Dear Kalidasji,
I had invested into 2 apartments(adjoining mirror images with Halls having a common wall)about four years ago.They are in a Premium Tower complex of Oberoi Builders in Andheri .Now,four years later,I am nearing possession of the said properties(expected in about 3 to 4 months.I have also bought into extra Garages,one for each flat.So I should soon be holding 2 Flats each of 2 1/2 bedrooms and 2 parkings(as against a normal of One per flat)
Each Apartment has costed me about 80L.
Now this tallies approx with the calculation of 8XMRV.
The rental income should start in about 6 months from now,keeping in view the interiors/other things to do once I get the possession(Have budgeted for a months further delay from builders end.
Though the value of the property today has multiplied 3 times,I do not want to sell.
Now Sir,the Question.
I have decided to Leverage both the Apartments,at about 1.8Million..(confirmed@11.8% interest p.a.) I would want to intelligently invest 70% of this fund into the Stock Market and build a Portfolio that can double in 18-24 months ideally..The plan being that the rental income will service these EMIs and the Principal ,once doubled, would the returned to the Bank..
My Questions:
1.Is it Ok to think like this?Or should this money be better invested in Property/Land?
2.What is the worst that can go wrong with this plan?
3.Do you handle portfolio’s sir?
4.Can you suggest Sector Allocation and stock allocation percentages at the appropriate time?
5.Please do send me the current Book purchase procedure.I would like to use the cheque drop facility in and around Bandra Area.
Thank you very much sir
Regards
P.bajaj
Mumbai
India
Kalidas Says …. Monday, November 02, 2009
Payment details sent to you by email. Other issues will be replied tomorrow.
Prithipal S Bajaj
2 Nov 09 at 9:02 AM
Kalidas
Regarding property valuation, could you explain the following:
The monthly rent is in the range of Rs 16,000 to 18,000/- and hence as per your formula of 200 times the flat should be valued at 32 to 36 lakhs – I hope I have understood this right ?
But the flats are being sold at 55 to 65 lakhs – how come ?? in Thane.
Secondly if the owner had purchased a flat at Rs 24 lakhs in 2003 – do you think it is only vlaued at 32 to 36 lakhs to day. Consider that there is also a loan of 18 to 20 lakhs on which there is a fixed interest of 8.5%. How will the maths work out to sell the flat at 32 to 36 lakhs after nearly 6 years.
Your clarification on my understanding would be great.
Xavier
UAE
Kalidas Says …. Monday, November 02, 2009
I have used 6% as yield when the fair rental value could be 200 times at the most.
Due to bullishness in the property market in Thane (in general in Mumbai, India), the yield has fallen to almost 4%. In that case, the capital value could be 300 times (100/4 x 12 months = 300 Monthly Rent Value (MRV).
In this case, either the property prices haveto fall or rental value to catch up with with the rising capital value. If you multiply the MRV of Rs 18,000 by 300 times, it comes to Rs 54 lakhs, close to the property value you quoted. This is on high side. The property value at 300 times do not sustain for long time.
Either of the above events could occur depending on the future direction of the interest rates. If the rates were to go lower,and the economy to get stronger, the rental value could catch up with rising property prices. If the rates were to go higher due to inflation, the property value has to fall lower to catch up with the rent.
The property prices are always dynamic, not the rentals. The rental agreement are for the period of 12 to 24 month. The Rental Value therefore remain relatively static for long period.
However, the properties are best bought when the yield is 8%. that is, when the property value are nearly 12 times Annual rental value. (12 x 12 = 144 times MRV). The absolute bargain comes when one pays only 8 times the MRV.
Real Life Example:
Last year, I got outstanding opportunity in Amravati to buy a residential apartment of 1100 sft with 800 sft open but covered terrace close to main road (only 150′ inside). The monthly rental value in that building for similar apartment (without terrace) is about Rs 5000. Therefore, the rental value for my apartment should be Rs 6000 considering open terrace of 800 sft.
200 times x Rs 6000 = Rs 1,200,000 (Rs 12 lakhs based on 6% yield)
300 times x Rs 6000 = Rs 1,800,000 (Rs 18 lakhs based on 4% yield)
Guess what? I paid only Rs 650,000 for a beautiful property. I paid cash and settled the deal within 1 month.
In short I paid 8 times ARV (Annual Rental value) or 96 times MRV. My yield comes to Rs 72,000 divided by Rs 650,000 (Cost value) = 11%. It was bought at bargain basement prices.
ADDENDUM: I forgot to add one point. When the interest rates for home loans are 8.5%, the yield has to be higher than the cost of financing. The profit does go down, if one does not get the yield. If it is for investment purpose, he will lose. If it is meant for self use, the future profit goes down.
In country like USA, the Mortgage Rates are less than 6% and yield also almost same. In India, the Mortgage Rates are high (8% to 10%) whereas the yield is low (Less than 4%). If one relies on bank borrowings to invest into home, he would be a loser in India. If he invests his own funds, the adverse effect is muted.
ADDENDUM 2:
When you bought the property 6 years ago at Rs 24 lakhs (Rs 2.4 Millions), work out the present yield based on Rs 18,000 rent. Today’s rent was Future rent in 2003.
Now the valuation is:
Rs 18,000 x A = Rs 24 lakhs
So A = Rs 2,400,000/18,000 = 133 Times the MRV
so, the property was a bargain (much less than 200 times)
Xavier
2 Nov 09 at 4:32 AM
Dear Readers,
This article is a summary. More specifics will be discussed in coming articles.
Anil Selarka (Kalidas)
Hong Kong
Anil Selarka
1 Nov 09 at 9:17 AM