Is Buying a House on Home Loan a Good Investment – Analyzing Profitability and Appreciation

In India, owning a house is a cherished dream for most people, driven by emotional and financial considerations. While many aspire to buy their dream home directly, financial constraints often lead them to invest in an affordable property with the hope of selling it at a profit to fund their ultimate goal. However, the majority of people in India rely on home loans to purchase a property. This article explores the profitability of investing in a home with a home loan and the appreciation required to make a profit.

Understanding the Total Cost of a Property:

To determine whether you have made a profit or loss on a property investment, you need to calculate the total purchase cost. Builders often market properties at the base price, but the actual cost is much higher. The total cost of a property can be divided into four parts:

1. Money paid to the developer (base price, PLC charges, other charges, possession charges, GST for under-construction properties)
2. Money paid to the government (stamp duty and registration fees)
3. Incidental charges (lawyer fees, BBA, convenience deed, broker’s commission for resale properties)
4. Cost of funding (home loan processing fees, pre-EMI interest for under-construction properties, EMI for ready properties)

Example Calculation:
Let’s consider an example of buying an under-construction house with the following details:

• Size: 1,000 sq ft
• Base price (including PLC): Rs. 8,500 per sq ft
• Basic cost: Rs. 85 lakh
• Other charges (car parking, club membership, EDC, IDC, GST): Rs. 1 crore (excluding stamp duty, registration, and possession charges)
• Loan: 80% from the bank, 20% contribution (10% at booking, 10% at final installment)
• Payment plan: Construction-linked plan
• Home loan interest: 9%

Calculating the total cost of the house in this example, including down payment, possession charges, stamp duty, registration, pre-EMI interest, and incidental charges, amounts to approximately Rs. 1.10-1.13 crore.

Appreciation Required for Profitability:

To earn a profit on this property within a year, you would need a 20-25% appreciation on its all-in price. The percentage may vary depending on the property value, as the cost of registration and pre-EMI interest also increase with higher property prices.

Holding Property for Long-Term Gains:

If you decide to hold the property for 5-10 years, additional costs such as the cost of upgrades, EMI payments, and major repair work should be considered. The total cost of the house after 5, 10, and 20 years can be calculated by adding these expenses to the initial possession amount and considering the outstanding home loan amount.

To achieve breakeven (including the cost of sale) in this example:

• 5 years: 51% appreciation required
• 10 years: 80% appreciation required
• 20 years: 109% appreciation required

These calculations help you assess whether the property at a particular location is likely to appreciate enough to generate a profit when you decide to sell it.

Impact of Rental Income:

If you are buying a property as an investment and plan to rent it out, rental income can change the profitability equation. In residential real estate, the rental yield is typically between 2% and 3.5%.

Assuming a monthly rent of Rs. 20,000 that increases by 10% every year (a hypothetical scenario), the rental income would be:

• 5 years: Rs. 14,65,000
• 10 years: Rs. 38,00,000
• 20 years: Rs. 1,37,00,000

However, these figures are optimistic, as they do not account for additional expenses such as maintenance costs, repair costs, brokerage commissions, and vacancy periods.

Key Takeaways:

1. Clarity of objective: Determine whether you are buying the house for end-use or investment.
2. Down payment vs. home loan: Buying a house with a down payment increases the probability of higher profits, while investing with a home loan requires a long-term perspective.
3. Rental income: If buying a house as an investment, renting it out can change the profitability equation, with rental income becoming a significant portion of the initial investment over time.
4. Verifying growth stories: As a homebuyer, it is essential to verify the growth stories presented by builders and brokers and understand the calculations involved in evaluating a location, project, property, and sample apartment.

Conclusion:

Investing in a home with a home loan requires careful consideration of the total cost, appreciation potential, and rental income. While owning a house is a dream for many, it is crucial to assess the profitability of the investment based on the location, project, and long-term market trends. By understanding the calculations and factors involved, homebuyers can make informed decisions and work towards their goal of owning their dream home.