### Pune - Real Estate Returns in the last 5 years

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superczar

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Started 5 years ago

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- Nice Post, I must say. Though there are short-comings, same has been admitted by the author himself.

I wish to comment about the analysis do drawn therein (I must admit, various reference used below is general in nature and one may argue + / - for my figures based on actual data):

A. Calculation of Return from RE has to be seen from eyes of investor.

B. Lets say, broadly, return from adjusted ROI from RE was only 12% p.a. - as per claim so made - for this discussion for last 5 years and NOT 15% to 20% many people so believe.

Example: A 2BHK Flat costing 35 Lacs in year 2009 is having selling price of Rs. 61.70 Lacs after 5 years in year 2014 (Adjusted ROI = 12% p.a.) (By the way, I actually believe that prices are more than double in year 2014 from prices of year 2009. But, lets keep that aside for the moment)

C. One needs to add 'rental income' (net of tax) while calculating return. Rough Calculation shows that 2 BHK flat costing 35 Lacs in 2009 is getting rent - excluding municipal taxes & Soc. Maintenance - of 8K for first two year, 11K for next two year and 13K p.m. now. Very roughly, that should add about 2.5% p.a on an average on 'Cost of Flats so bought.

D. Conventional investments - FD, Debt etc. - generally means 100% own contribution, wherein RE investment allows investment of said 35 Lacs, wherein own contribution needs to be about Rs. 10 Lacs (taken on higher side). While comparing gains, one needs to consider gains as per conventional investment of Rs. 10 Lacs & 'Net gains after interest cost' for RE.

E. Interest cost is presumed as 10 % (though it was lesser in initial years). One has to deduct 30% IT Benefit from the same. Further, for simplification, lets treat non-payment of principal in these five years.

F. Net Interest Paid - after IT benefit - will be (70% of (10% of Rs. 25 Lacs)) X 5 years = Rs. 8,75,000/-. By adding notional interest lost on 'interest so paid), total interest cost comes to say Rs. 11 Lacs.

G. Net Rental Income 2.5% for five years (I have ignored interest earned on rental income so received each year) will be roughly Rs. 4.5 Lacs.

H. Net Selling price - after repayment of loan taken will be Rs. 61.70 Lacs - Rs. 25 Lacs = Rs. 36.70.

I. Actual Money in Hand in year 2014 against investment of Rs. 10 Lacs in year 2009 = Rs. 36.70 Lacs - Interest cost of Rs. 11 Lacs + Rental Income of Rs. 4.5 Lacs (i.e. Rs. 30.20 Lacs).

J. Gain of over Rs. 20 Lacs on investment of Rs. 10 Lacs.

L. AT-LEAST 200% Returns in last five years. Even adjusted ROI should be around 25% p.a.

Now, Adjusted ROI 25% p.a. - for five years - is quite good. Isn't it????

Further, as compared to Bank FDs wherein IT 30% needs to be paid each year, in above case, IT 20% needs to be paid on selling price less 'Indexed Cost of Buying' (even if assuming one does not reinvest in RE) that too at the end of five year. Differential gains is much higher if compared to conventional investments of Bank FDs.

Apologies in advance, I missed something basic! Please enlighten!CommentQuote0Flag - Not really

To begin with , the original post was to try point out the basic fallacy of comparing how prices have risen in the last few years directly with the rate increase for new launches

The example you have quoted in reality returns 16% (which is not particularly bad BTW) but is on the basis of the assumption that the investor entered and exited and does not take into account the typical illiquidity of RE

If however you were to take into account the fact that

a) Once you decide to exit, you need to do so in the first 4-5 years to actually be able to leverage your loan (the sooner the better)

b) Unless you sell at a discount to the market rate, it may take months or in some cases years to actually close the sale

and the 16% ROI starts looking a lot less lucrative

The example uses a simplified model which assumes

a) An annualized EMI/Rate reduction instead of monthly

b) a rental income starting at 10K in 2009 with a 10% increase every year (very unlikely as the house would typically not find a renter for the entire period )

c) 30% tax break on the Interest paid

d) 30% of rental income spent towards maintenance/property tax/other maintenance

PS: For the sake of disclosure, I myself am heavily leveraged on RE and thus should technically try spread bullish sentiments ;)CommentQuote1Flag - You may have made some mistake in calculations. ROI from investor's perspective is around 13% to 14% for above example.

Also flat bought on 1/1/2009 at 35 Lacs. If sold with 12% PA increase after 6 years on 1/1/2015, the price will be close to 70 lacs. Check your calculations.CommentQuote0Flag - Don't think there are any errors, the calc is simply based on the in and out cashflows for each year and XIRR on excel

BTW the the current price number is based on the unnegotiated rates published on commonfloor for properties on sale (Refer to the sheet in the first post)CommentQuote0Flag - OK. That's fine if you don't see errors in calculation.

I just want to bring the following points to your notice from your above example so that you don't keep thinking that your XIRR is 16%.

1. If selling price of a flat bought at 35 Lacs is 61.7 Lacs after 6 years, then the YoY increase in property price is only 10%.

2. In that case, from buyer's point of view, his net gain (XIRR) should be in the range of 11 to 12% (based on net cash flows during the 6 year period.)CommentQuote0Flag - You are right, there is a Calc error (I chose the wrong column for Interest Tax adjustment on the outflow)

The XIRR will be 9.9% if you take the interest outflow on actuals

However based on the premise posted by Amit (Post #2) where he has adjusted the interest outflow by 30% to account for the Tax savings

If you were to reduce the EMI outflow by 30% of the interest component, the Net return comes to 13.6%CommentQuote0Flag - I think you missed 3 cash outlfows while calculating net cashflow:

1. Principal component of EMI for each year

2. 30% Tax on rental income for each year

3. LTCG taxes at the end

If you consider the above, your XIRR will come in the range of 11 to 12%.CommentQuote0Flag - Originally Posted by superczarNot really

.................................

a) Once you decide to exit, you need to do so in the first 4-5 years to actually be able to leverage your loan (the sooner the better)

b) Unless you sell at a discount to the market rate, it may take months or in some cases years to actually close the sale

and the 16% ROI starts looking a lot less lucrative

The example uses a simplified model which assumes

a) An annualized EMI/Rate reduction instead of monthly

b) a rental income starting at 10K in 2009 with a 10% increase every year (very unlikely as the house would typically not find a renter for the entire period )

c) 30% tax break on the Interest paid

d) 30% of rental income spent towards maintenance/property tax/other maintenance

.................................

PS: For the sake of disclosure, I myself am heavily leveraged on RE and thus should technically try spread bullish sentiments ;)

One, one needs to count the fact that there can be vast differences among same size flats of same society due to many reasons (i.e. exact location within Society, Vasstu - many believes, interiors / furniture, air, light / Leakage / Seepage etc.). Given base data has many limitations, which to be fair, author himself points out some of them (& list can be added there).

But, then, additional grounds like - 'discount to be given while reselling' should not issue for limitation issue for calculations about adjusted ROI from RE. Such issues are always there for any RE investment per say.

As myself said, even various figures taken by me - can be argued both ways (+ / -) and resultant return will differ for any changes so made. For example, from your calculations, I can argue that prop. tax / maintenance cannot be 30% of rental wherein NestSeeker2 will demand IT to be paid on rental income.

Now, coming back to calculation sheet of yours, I request revised sheet after taking into account concerns for NestSeeker2 about some cash flow are not considered by you & others and also below concerns of mine:

A. It seems to me that you have taken period of investment of six years (resale after completion of six years from date of RTM buy) while resale value of Rs. 61.70 Lacs was only after 5 years (presuming adjusted ROI 12% p.a.). As you see, interest outgo / rental income is of 6 years in your sheet)

For further clarity, I have presumed that flat was purchased in Nov, 2009 and sold / to be sold in Nov, 14. Lets stick to the 5 year calculation please.

B. For sake of simplification, one needs to avoid considering LTCG 20% in calculations as investor has option of re-investment in RE wherein no IT needs to be paid. From ROE so derived, one can always deduct 20% considering possibility of non further investment.

C. To take into account NestSeeker2's concern about IT to be paid on 'rental income' which is 30% (70% of rental income - after standard deduction available in IT less property tax) and my concern about high maintenance cost considered by you in your calculations, lets stick to cost of (IT + Maintenance + Property Taxes) = 30% of gross rental value. You may keep basic rental of yours as a base.

See, effort here to know real ROI to an investor in these five years - based on general / non-controversial assumptions and not to support bull or bear. For that, trying to take mean of all possible costs and gains, to the extent possible.

If I missed anything, please add and share revised calculation sheet please. Thanks!

PS: For the sake of disclosure, I myself am reasonably leveraged on RE. And I am neither bull nor bear but wishes to be good investor - in RE or otherwise. And, for that, these calculations & resultant understanding matters a lot! :bab (16):CommentQuote0Flag - Check out for correct calculation methodology.

http://nanafadnavis.blogspot.in/2014/10/calculating-rate-of-return-of-real.html

The author has assumed a increase in prices by approx 13.5% and a rent yield of 2.94% resulting in a irr of 20% on maximum leverage and tax rate of 20%.

The returns in the case mentioned above, assuming maximum leverage should be min 15-16 %

Conceptually speaking

Return on 20% (own invst) 12%

Return on bank loan 80%= 12-7 (tax adjusted bank int) 5%

Return on cash invested will be the total of both.. With the denominator being cash invested... It has to be higher than 12%.CommentQuote1Flag - ^^ The calc on the link you posted is a highly simplified view which does not take into account several factors including Tax adjustments on EMI, cost of purchase/sale other than stamp duty, property tax, maintenance, occupancy (you cant expect a house to be rented out for the full duration),

Uploading the updated sheet, you can adjust the purchase/sale price and your own assumptions on the individuals tax bracket, and the occupancy rate of the property

You can update the assumptions in Column A and B most of which are self explanatory

The dates and purchase/sale prices are based on one of the examples in the first post - Dyansty Wakad which yields a return of 13%CommentQuote0Flag