[jigar1791@gmail]

Initiating a new thread on the topic aforementioned.

Background - I'm a 31 year old IT Professional, into Logistics and Supply-Chain/Freight Management Automation Space as Account Management/Customer Success. Drawing enough (but not satisfied) to lead a comfortable present and good future investments happening!

With about 40% of my in-hand (not considering the variable/bonus component) salary allotted to Mutual Funds/SIPs and another 15% towards long-term DMAT investments, I'm still left with a buffer of about INR 50,000/- on monthly basis to spend with. Which I further divide into LIC, PPF and Mediclaim.

We belong to a middle-class typical suburban gujju household , father being a businessman and planning to wind his business down over the next 3 years. That means my responsibilities will only increase once retirement happens.
Moreover, we're expecting our 1st kid by March '22, and that as well will contribute to rising expenses.

Problem Statement :
The thought of diversifying my investment options has led me to think of a Real Estate Purchase for investment and then rent-out basis. Budget decided, locations and other factors considered, we've narrowed down to a 2 BHK in an under-construction complex, amounting to about 1.1 CR.
We can manage the initial down-payment amount to around INR 40 Lakhs, which will leave a loan liability on me against the outstanding INR 70Lakhs. Checked with banks, current interest rates on home loans are at around 6.5-6.8%. Calculations for a loan outstanding of INR 70Lakhs on a tenure of about 30 years works out to INR 45,000/- at 6.7 %pa, and my plan is to have the flat rented-out on immediate basis upon possession. That shall bring my rent to EMI ratio at 60%, and I plan to foreclose the loan outstanding in about 10 years.

Solution thought of :
Reduce the current SIP outflow by 50%, to about INR 22,000/-, stop DMAT purchases/share trading, and that leaves me with a livable in-hand savings of about 90,000/-. Out of which, INR 45,000/- will be towards my EMI and that still leaves about 45,000/- in hand to manage other sundrys (calculations are at current fixed component of my CTC, not accounting for either the variable bonus OR the annual increments/hikes from switching over).

Reservations :
1. Will investing in a property by reducing monthly SIP outflow a good option to diversify my savings bucket? Investment horizon - 25 years. As and when I see an increase in my income, I'll accordingly raise my SIP commitments.
2. Experienced folks/elders are of the opinion to invest more in stock markets as Real Estate will not be growing as much as stock market will.

Is it wise to go for the plunge? Are my corrections of any sense for us, salaried income folks?

[Iyencar]

As a new dad myself I would say wait until the baby is here before making any large purchases like a flat. The expenses of raising a baby are going to be significantly higher than anything you’ve probably budgeted for. Keep the cash liquid for now since you’ll very likely be back at the drawing board. Once you get a fair idea of the monthly outflow you can decide accordingly. Good luck!

[Saanil]

Hi Jigar,

I am not a financial advisor and do not have any expertise in real estate. I would advise you to drop the idea of investing in an under construction flat. It seems that you are drawing an attractive salary and want to invest your surplus savings. Based on my limited experience, rental yields in Mumbai are not favorable and buying an under construction flat is always risky. Since your time horizon is so long and you would like some recurring income, I would suggest investing into safe fixed income instruments while continuing with your equity oriented SIPs.

There are two big changes which are happening in your family 1) your father retiring and 2) You becoming a father. In such a scenario, I would suggest you to focus on stability in the next 3-5 years to see how your household situation changes in terms of expenditures and income.

You have put forward your calculations but also factor in some worse case scenarios. What if you lose your job after buying that under construction flat? Will you be able to manage the EMIs?

[irdevanand]

Originally Posted by jigar1791@gmail

we've narrowed down to a 2 BHK in an under-construction complex, amounting to about 1.1 CR.

First of all our congratulations and best wishes for the best news in house. Coming to the topic - the UNDER CONSTRUCTION part bothers me. I would wait or look for something that is ready to be occupied right now. Too many stories of flats not getting delivered on time. Not worth the headache and definitely not the right time.

Regards
Dev

[ranjitnair77]

I'm not sure if buying a residential property and then renting it out is the best option out there. Usually commercial properties offer better rental yields but they tend to be more expensive.

Here's another approach. Have you looked at REITs (Real Estate Investment Trusts)? This is a relatively new thing in India but is a very familiar mechanism for extending your portfolio into real estate in more developed economies. This gives you the necessary diversification, gives you rental yield in the form of dividend and you can invest in significantly smaller chunks without taking on debt. It is far more liquid than a physical asset if you need to exit. Of course, in a REIT you don't own an actual physical asset that you can touch and feel so that's the mental adjustment you need to make. On the flip side, these are professionally run setups so the chance of shady outcomes is very low.

There are REITs India at the moment: Embassy, Mindspace and Brookfield. All of them commercial. Here's an explainer video.

https://www.youtube.com/watch?v=AwVgXt_MivE

[sen2693]

I am not a financial advisor and take everything I say with a pinch of salt, but do ask yourself these questions as a way of evaluation for your decision -

1. You are buying a 1.1 Cr worth of apartment with a 30 year loan. For 70L, I am assuming the interest to be paid would be around 25-30L. So overall apartment cost would be around 1.4 Cr. So, after 30 years, do you think the value of that apartment/land would be 1.4 Cr + (rate of inflation)? The value has to be more than the aforementioned figure for you to make any gain out of it.
2. I have heard rental yields in India are low, even around 3-5% in some places. You should calculate what is the rental yield in your area. The formula to do so can be found on internet. See if the rental yield makes sense to you for your money or if you can get better returns elsewhere. Also cost of ownership adds up like painting house, regular repairs , maintenance etc. Not everything of these is paid by tenant.

25 years is a long horizon for investing in stock market. Generally, if invested smartly, you can make 12% CAGR on that. But please do your own research on this.

[dragonfire]

Under construction apartments appreciate quickly by the time you take possession and continues to, for a couple of years. Then it stagnates. Now with a surplus supply of apartments new buyers opt for new apartments unless the old ones have a USP (closer to particular establishments etc). You will essentially be looking at a crore and half blocked with no returns except the meagre monthly rent, a good part of which you will be spending on apartment upkeep and on income tax. You can do the math and you can see that in the long term even the most conservative kind of investment will give you more returns than a rental apartment. If you don't plan to live off the rent (which obviously is the case here) and real estate is the only sector you intend to invest, then buy some land somewhere with some potential and keep it long term.

PS: I have an apartment given on rent and the above observations are from my personal experience.

[Shreyas_H]

Your returns on this property after 10 years will probably not even cover the interest you will pay over this time. Plus liquidity is a major issue, plus the possible issues that come with under construction properties.

Steer clear!

[SmartCat]

Originally Posted by ranjitnair77

There are REITs India at the moment: Embassy, Mindspace and Brookfield. All of them commercial.

REITs are a good idea. It is equivalent to buying commercial property with a couple of mouse button clicks. Gives you the best of both worlds - stocks & real estate.

PROS:

- No mimimum investment. You can start with Rs. 300 investment via your stock broking account.
- No hassles typically associated with real estate (Eg: property taxes, maintenance, finding tenants, liquidity etc)
- REIT does not seem to be very volatile. REITs are somewhat stable even during a stock market correction. Most investors in REIT are in it for the long term. Speculators are missing in action.
- 80% to 90% of cash flows (rentals minus expenses) are paid out as dividends every quarter. Current "rental yields" are around 6% to 8% per annum.
- Like real estate (and stocks), there is capital appreciation for long term investors.
- Like a stock, there is business growth too. Rent can be increased, new buildings can come up on existing property and so on. REIT can take a bank loan and/or raise equity to acquire new property.

CONS:

- Primarily focused on office space for IT sector. Any downturn in IT sector can result in falling yields
- Not enough data on long term performance of REIT as an investment in the Indian markets.
- No "touch and feel" of a proper real estate investment.

Stock code for REITs listed on NSE:

EMBASSY-RR (Bangalore folks, if you want to own a part of Manyata Tech Park, buy Embassy REIT! )
MINDSPACE-RR
BIRET-RR

For those interested in foreign real estate investments (via REITs), you can choose from these REIT mutual funds:
https://www.valueresearchonline.com/...-regular-plan/
https://www.valueresearchonline.com/...-regular-plan/
https://www.valueresearchonline.com/...-regular-plan/

[huntrz]

Lots of investing advice on internet from parties with vested interest in equity products advise against real estate and accordingly lot of followers for that throught process. But real estate is best hedge against inflation and unlike gold(which is also a hedge) it can provide capital appreciation along with some liquidity in form of rent. However invest in realestate with a very long term view as the sector is cyclical. Also don't look for quick buck by investing in prelaunch type offer only to sell in 4-5 years. Based on my understanding go for the property with best location as that will guarantee rentability. Land will be better in terms of appreciation and hedging but illiquid and prone to disputes. There is an excellent video about contrarian view on buying vs renting by Ajay Bagga on youtube. I would recommend to watch that as its kind of unbiased in my opinion as he talks about the returns and nature of realestate as an investment. India is a land of huge population and due to shortage of housing realestate will continue to appreciate specially in urban areas.

[AirbusCapt]

Originally Posted by jigar1791@gmail

Initiating a new thread on the topic aforementioned.

Background - I'm a 31 year old IT Professional, into Logistics and Supply-Chain/Freight Management Automation Space as Account Management/Customer Success. Drawing enough (but not satisfied) to lead a comfortable present and good future investments happening!

==========
Reservations :
1. Will investing in a property by reducing monthly SIP outflow a good option to diversify my savings bucket? Investment horizon - 25 years. As and when I see an increase in my income, I'll accordingly raise my SIP commitments.
2. Experienced folks/elders are of the opinion to invest more in stock markets as Real Estate will not be growing as much as stock market will.

Is it wise to go for the plunge? Are my corrections of any sense for us, salaried income folks?

Jigar since your in Mumbai, i have a word of caution for you. The rental rate versus property price ratio is the worst in Mumbai, you will be glad if you returned a 2.5/3% rent on your property cost. This is about half the annual rate of inflation, so overall a losing proposal. Even if we take a notional appreciation of 2% per annum on property prices, it's still below the inflation rate.

Your SIP and other schemes would be fetching atleast 8/10 % returns so putting that money into property doesn't make financial sense. Also you are looking at an under construction property on which you have no control over. If there is any delay in possession your plans will go haywire.

Plus your calculations are extremely tight, with only 45K to spend after emi and all savings, you may be hand to mouth at the end of thr month, have you factored unforseen expenses like car /home repairs, health expenses etc? Where is you buffer of atleast 6 months of expenses incase you have a job loss? I suggest you think long and hard before you take the plunge.

[androdev]

I used to live in a rented house, I taught my landlord about stock market, now we both live in a rented house.

[gupta_v_kr]

Rental yields in Mumbai range around 2-3%. Taking a housing loan to invest in real estate will give you a negative carry where your interest outgo will be much higher than the rental income. Such investments make sense when the price of real estate appreciates more than the interest rate every year and you gain from the leverage. However, such scenario looks unlikely for the Mumbai housing market in the coming years. Also, as others have mentioned, buying an under-construction property comes with its own set of risks such as indefinite delays. Ideally, you should continue investing in SIPs and make investments (would strictly advise against trading) for the next five years to increase your corpus. Post a few years, you will be able to make a bigger down- payment on the house. Overall, given the uncertain times it is better to stick with liquid investments rather than illiquid ones even if you have a long-term time horizon.

[Thermodynamics]

Our generation typically blamed previous generation that they did not invest in real estate which has grown multifold. Next generation will blame us for Investing in this dumb instrument that didn't beat even a FD, is illiquid and for the loan burden they have inherited.

This is because the earlier real-estate boom was driven by inflation, salary hikes and depreciation of INR. Today, our economy has grown enough that inflation is in control, INR is holding strong, Salary hikes are approaching a saturation point because of closing wage-gap between us and advanced countrues. Classic example is your case itself, cant imagine drawing the same kind of savings in Europe/US.

So, looking at macro economic factors the already inflated real estate prices would not yield better returns than a FD. I would recommend you to stick to Mutual funds SIPs. As pointed by many members above, REITs yield better rentals, they are liquid and you don't have loan gravity.

[RachhaMan10]

Originally Posted by androdev

I used to live in a rented house, I taught my landlord about stock market, now we both live in a rented house.

Apologies for the below bad joke
did he lose his house by shooting in the dark?

Originally Posted by Thermodynamics

Our generation typically blamed previous generation that they did not invest in real estate which has grown multifold. Next generation will blame us for Investing in this dumb instrument that didn't beat even a FD, is illiquid and for the loan burden they have inherited.

Exactly stop treating house as an asset you want to dispose off when its at the peak, its very hard to do that.
House is a place to live, if you own it you will have the feeling of ownership else if rented out its just a necessity. Nothing else will change.

Originally Posted by jigar1791@gmail

With about 40% of my in-hand (not considering the variable/bonus component) salary allotted to Mutual Funds/SIPs and another 15% towards long-term DMAT investments, I'm still left with a buffer of about INR 50,000/- on monthly basis to spend with. Which I further divide into LIC, PPF and Mediclaim.

Coming to the financial aspect of owning a house vs renting and investing in stocks; there are many articles explaining renting and investing yields much better results. Real estate appreciates 3-5%, Stock market gives 10-12% on an average.
If you already own a house and not paying any rents blindly invest in the stock market, but if you are paying rent things may get bit complicated to take a decision.
Eg in Bangalore if you want rent out an decent 3bhk apartment it will cost you around ~25k which turns out to 3L per year, include tax savings it will be ~4.5L. Also there is hike of ~10% in rents every year.

In my case I just turned 32 and I brought a house two years ago as my dad pushed me real hard to invest in a house rather than paying rent. I was not exactly convinced with the idea but brought a house at the end.
But I feel that he is right now, owning a house has a multifold considerations it saves ever growing rent, saves a bit in tax and importantly it gives you an experience of ownership/belongingness.
Once a wise man said (my dad, only in the context of house buying) "Your salary/savings will increase but EMIs are constant", so you can gradually increase your contribution towards SIPs/Stock market.
So I have tried to divide my savings between Home loan EMI, Mutual funds, Pension schemes and miniscule amount in stock market as it requires lot of homework.

Finally, I would like to borrow the mantra of stock market "Diversification"
we should not only diversify investments in stocks but also across every investment opportunity. Buy one house, invest in stock/mf/SIP, contribute to NPS and pension schemes.
Heck this is a car blog and car is one of the most depreciating asset but we all buy and adore cars! My friend once gave me a 30min lecture on buying a car vs investing in Stock market and using Ola/Uber

Disclaimer: My dad is a retired Bank manager and has been doing stocks since 40 years, he has seen highs and lows of it. Most of his friends have portfolios worth in crores!