Currently in a corner plot of 2200 sqft, Independent old house of 850 sqft fetches Rental Rs.7 per sqft near Camp road junction (1 km). House is too old and must be demolished in a year. Want to hold this property, no idea of selling now.

1. With FSI 1.5, I can construct 3300 sqft in it G+1, at 1700 all inclusive construction cost it would cost 56 lacs. It is not for own living, so multiple units of 2 and 3 BHK for rental would be the plan. Going by the same 8 per sqft, it may fetch between 20 to 25 k (if I get tenant, may get it). Going by the rental income the yield could be 3.5 to 4%. For the construction cost of fund at 10% (Bank interest), the net yield loss would be Interest out go 10% -Rental income 3.5%= minus 6.5%.

2. I can construct about only 1000 sqft Ground floor, which would cost 17 lacs, with the same rental calculation it would be same minus 6.5% outgo. However volume of loan burden would be less.

3. I can keep the house as such (locked) or demolish and keep the land as such. Use the borrowing money to buy a flat within 30-40 lacs in a good locality 2 BHK. Area could be Medavakkam or Sholinganallur or surrounding. At 5000 per sqft I can get about 600 sqft 2BHK flat. I presume I get 8 k plus as rent. Even in this option I end up in Interest 10% out go - Rental 3.5% = net minus 6.5%

4. If the present tenant vacate, doing some minor repair and renting out again looks waste of money for the old structure, so I can keep the house as such (locked) or demolish and keep the land as such. After few years construct a house with self generated funding without loan money. I have a neighbor friend as good caretaker.

Bit confused, how do you guys look at it, welcome views.
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  • I would go for 1000 sq ft GF construction.
    Aspects to consider
    Demolition costs
    Once GF is built higher property taxes as it would be on rent.
    Scope for expansion should be kept in mind while applying for initial sanction from Corporation.
    Another important benefit would be vacation by tenant and property would be back in your hands for demolition.
    Keeping old structure on rent has its won danger-in case some even partial collapse takes place.
    Take minimum loan only.
    Assess the possibility of getting more tenants and then only think of additional floors at present juncture.But definitely obtain building sanction for the total project you have in mind and then move step by step-first Gf,see result and financial benefits,then move to next step of more flats.
  • Let's say 56L Lakhs of investment in construction gives you 2.8L in annual rental that is 5% today.

    In 40 years, this investment will diminish to zero or worthless.

    How much does 5% with an annual incremental rise of 5% in rental fetch in 40 years? Roughly 68 times the investment cost assuming the rental cash flow is invested at 12% elsewhere. This is too ideal. Maintenance cost, property taxes and your personal time in this ordeal are not factored.

    What is the CAGR expected for the initial investment to match up to the 68 times return in 40 years - ~11% !!!

    If one has avenue or have reasonable confidence to make 11%, why construct, deal with tenants and make much lesser than 11% at the end?

    Moral: Spend as little as you can so as to prevent it from encroachment and try to make the returns via Capital Gains and you will come out ahead if rental cash flow is not expected to be used for personal expenditure.