Recently I was running around to buy a property in Bengaluru. With lot of options around and price range, it was very difficult to make an informed decision.
These days, nobody will spend on real estate without capital gains in mind. When it comes to capital gains, it is important to make decisions based on the best investment option from a financial perspective. Due to the lack of knowledge on the finance, we tend to just guess or take risk. Majority of the crowd I know ( including me) has no clue on how to compare two or more investment options from perspective of profitability
To fill in this gap, I registered to a course on “Fundamentals of Finance” from Guatam Kaul in coursera, which helped me tremendously to analysis options I have from a financial perspective.
There are number of factors that matters to make a final decision to invest on real estate, Like –
- Ready to occupy/under construction
- Payment schedule
- Possession date
- Reputation on builder to stick on to schedule
- Interest rate
- Rent anticipated ( In case of investment )
- Tax saving etc.,
How do we factor in all of these parameters and make an informed decisions among the numerous options around?
Certain decision has to be made before coming to the financial comparison. Like – City, Area to invest, Builder segment, Budget, Size
Once these are done, look for options around and collect the information given above. There is a financial model called NPV ( Net present Value ) using which you can actually find out the financially better option
Here is the excel for the calculation and with few of the options I had considered ( Data in it is an year old )
https://drive.google.com/file/d/0B4N200WmhdivLWRjWTJvdzJZQnM/edit?usp=sharing ( Download and use, just viewing in the pop up does not clearly shows information )
Feel free to download and use it to your benefit as you wish. If you find out any flaws in the excel, please leave a comment.
About the excel:
It has 5 properties compared with different features –
- Mantri under costruction pay out pre-emi ( Builder will payout interest part till the completion of the project ) which is accounted in the calculation
- Mantri ready to occupy which will start earning rent from day 1
- Other under construction with varied hand off time
The last column ( NPV ) provides you the information of “What is the current value of the investment, if the property is sold after n number of years”. For example, if NPV in 5th row is 10 Lakhs – It mean, after 5 years if you sell, you will become as much financially capable if you were have 10 Lakhs today.
In order to achieve the provided NPV, you should sell your property at a price of “Capital Value” + “Capital on Interiors” on that year. That looks like a big number but considering inflation/real estate capital growth, it is quite achievable. This number looks big number, but the current value of the investment is much lesser considering inflation and the interest you have paid.
While making the decision, look for the highest NPV over the horizon of investment with in your budget
Analysing the data:
Surprisingly, some of the properties are not having a positive NPV for years together. These should not be purchased if the purpose is investment. For example, Sobha city is having negative NPV. The payment structure is not considered here, that can mostly be ignored as you would pay 90% pretty quickly.
Some other option has a positive NPV right from the first year.
About my decision:
I decided for Mantri ( 1305 ) based on the positive NPV right from year 1. Other option could have been Mantri (1740) but the capital is high for me to afford. The Pre-emi payout in the whole investment calculation is making a big difference.
Your feedbacks are very much welcome, please leave comments on your thoughts and if you find anything wrong the calculations. If you are in need of any special kind of requirement while comparing the options, please leave a comment, so that I can help you to customise the calculations to meet your requirement.
I am not marketing for any builder here. This is just my personal thinking around real estate investment decision. I also not responsible for any damage caused using the information provided.