Those Who Believe Investing in House Will Fetch Perpetual Rental Yield is the Very good Investment Idea - True Facts...

Those Who Believe Investing in House Will Fetch Perpetual Rental Yield is the Very good Investment Idea - True Facts...

By Mr. B. Padmanaban, CFPCM,
Certified Financial Planner, Chennai.

Many feel that real estate investment is a great investment and one of the important reasons are, we can get rent as long as we are holding that property. Yes, but at what rate???

First of all, when somebody sells real estate they can not enjoy all the growth it generates and 20% of the growth will go for the capital gain which many do not aware.
Those who know of all those things, will not bother much on this.

I met one of my friends, and he told me about one of his investment he made and I will explain the same here.

He bought a land in Chennai outskirts in 1998 for Rs. 4 lac and subsequently he spent Rs. 3 lac in 2002 and construct a house and he is telling me if I sell I will be getting about Rs. 60 Lakhs and moreover it fetches Rs.10,000 as rent.

 According to him it is one of the best investment and many of his family members also believe the same. Their mindset is not planning to sell in the near future and they would love to receive that Rs.10,000 as rent and incremental rental yield as the year goes by.

 ₹ 4,00,000
 ₹  6,52,189
 ₹ 3,00,000
 ₹  3,00,000

 ₹  9,52,189
Present Value ( @ 15% growth)
 ₹ 59,55,247
Current Value Expected 4 house
 ₹ 60,00,000
Rental Yield
 ₹ 10,000

Sensex on 6th January 1998
Sensex on 6th January 2017
Number of Years
CAGR for the last 19 Years
If I apply 2% dividend Yield
Total return at index level is

Let us assume as per his expectation the property can be sold for Rs. 60 Lakhs. If they put the same money in a  balanced fund assume it generates only 12% per annum he takes only 9% which is Rs. 45,000 per month. 
B. Padmanaban,

The remaining 3% is growing with principal. Over a period, the principal also grow much better than the real estate growth. Investors are very emotional and happy for Rs. 10,000 because it is their preferred investment and never felt that they are losing so much.

I have taken Sensex data during the same period and Sensex has delivered 11% and if we add the dividend yield 2% then it comes to 13% and I applied 13% growth from the day it is invested in real estate. If we look at the mutual fund investment it is more than double than the Sensex returns.

They can part sell and they can take more money if they need and that is not possible in real estate and those rental is taxable and here it is not.

Last, but not the least, whenever we want to take some decision which determines our future investments, we need to spend good amount of time. If we look at the data without any emotion we will fortunately make the right decision! Unfortunately bigger decision are taking very quickly.,

Mr. B. Padmanaban, CFPCM
Certified Financial Planner


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