have never understood the passion that seems to envelop people when they talk about equity. Their eyes gain that faraway wistful look as they contemplate the returns they could make.
I, for one, was never a die hard fan of the stock market.
I prefer a more reliable and stable, yet lucrative, return.
Property! That is more my cup of tea.
Think I'm being naïve? Let me give you five reasons why I think property is a great investment.
1. Stability!
I detest volatile investments.
Share prices go up and come tumbling down. I hate putting my hard earned money through a roller coaster ride. And, I also don't like the notion of waiting for the next bull run to sell and make a profit on my stocks.
I want some stability where my investments are concerned.
Property prices rise over time. They are not as volatile as equity and a gradual upturn in trends is inevitable.
And I need not concern myself with family squabbles and management ownership and the detrimental effect that may have on my share price (imagine the sleepless nights of investors who had heavily invested in Reliance).
Nor do I have to worry about a blue chip no longer being a blue chip. Remember Century Textiles or Bombay Dyeing? What about HLL once considered the bluest of the blue-blooded breed?
On the other hand, property is stable. It appreciates in value gradually and steadily.
In the long-run, real estate is always profitable.
2. Invest and let be!
The problem with investing in shares is that one has to consistently monitor the investment.
How is the sector faring? How is the company faring? Are profits increasing? Is the competition eating into its market share?
Ditto with mutual funds. Is your fund manager sticking to his investment philosophy? How is your fund faring against the rest?
Not so if you invest in property in an area which shows promise. In such a case, you just let your investment appreciate.
3. Surprise! The tax man smiles too!
You get no tax breaks for investing in shares. But you do get them when investing in property.
When you take a home loan, the principal (actual amount you borrow) repayment you make is eligible for income deduction under Section 80C.
Incidentally, registration and stamp duty -- if covered in the home loan -- fall under this limit.
Let's say that your taxable income is Rs 90,000 and you repaid the home loan principal of Rs 40,000. Your taxable income drops to Rs 50,000 (Rs 90,000 - Rs 40,000).
There are no sub-limits within this section; you can utilise the entire Rs 1,00,000 exemption for home loan principal repayment deduction if you choose.
Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.
Let me explain with an example.
Salary income: Rs 3,50,000
Interest payment on home loan: Rs 1,60,000
Taxable income = Rs 3,50,000 (income) - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000
One of the golden rules of investment is that when demand exceeds supply, the price goes up.
More the number of investors that want to buy your stock (high demand), the higher the price you get on your shares. If no one wants to buy your shares, you may have to lower your price considerably to get someone to buy it.
Ditto with property. Real estate is in demand and always will be.
With India's burgeoning population and growing middle class, real estate makes for a great investment.
There are two ways you can make a return on this investment.
One is by renting it out so you get a regular flow of income.
My neighbour in Hyderabad had purchased his apartment for Rs 16 lakh (Rs 1.6 million) and now charges a rent of Rs 8,000 per month.
Real estate consultants Cushman & Wakefield have recently stated in a report that a four bedroom apartment of 3,000 square feet has been rented out at Rs 2,75,000 per month. Of course, this apartment is in one of the most prime locations of South Mumbai (Cuffe Parade) and boasts of a spectacular sea view.
The other way by which you can make a profit is by eventually selling it.
In most cities, you will get an appreciation of at least 7% to 10% per annum. Of course, if you were fortunate enough to buy the property years ago, you would make a killing if you sold it now, when property rates are steadily rising.
The risk of investing in property is low. In the worst case scenario, the rates will climb slowly but it is highly unlikely that they would fall.
The problem is that it demands a huge investment. That is where the home loan comes in with the tax breaks.
What's more? Interest rates are at an all time low. So you can get a loan for around 9% per annum.
All you need to put down is the downpayment. Let's say you are buying an apartment costing Rs 10,00,000. You will be asked to put a downpayment of around 10% - which works out to Rs 1,00,000. The balance will be funded by the home loan company.
Now you will have to service the loan every month. That will mean an Equated Monthly Installment (the fixed amount you pay every month towards your home loan) of Rs 8,000.
Look upon it as a forced savings with a tax benefit.
And, while the EMI stays constant, if you do rent out your home, your rentals will increase over time (along with your salary and the value of the property). In this way, the EMI becomes a smaller percentage of your total income.
5. The choice is wide
If you are working in one of the metros where property prices are beyond your budget, think of a smaller town or city.
For instance, Census 2001 identified around 50 cities in India with a population of over 0.5 million. These were broadly classified as urban or semi-urban centers. Within a decade, this classification should include around 65 cities.
Instead of only looking at an apartment or a construction, you can even consider land. If you buy it in an appropriate area, it could appreciate at a minimum of 15% to 20% per annum and could go up to even 50% per annum if you really get it cheap.
Where land is concerned, look at the outskirts of the city and at localities which have great potential for development.
The problem with buying land is that you do not get tax benefits on the loan and you cannot rent it out (as you can in an apartment).
So keep this as a second option. Buy an apartment first to get the tax benefits and land if you have surplus cash.
One of the options
Even if you are not considering buying a home to live in right now, you must list property as one of the investment options.
The problem is that people buy property only when they are sure they want to live there. If you look at it as an investment, then you will not be too particular about buying it in a specific city.
When you are ready to actually buy a home, then you can sell this initial investment and put the money into your new home.
Or, you can just rent it out and use the money to help you service your EMIs.
Either way, you win!
Illustration: Dominic Xavier
