[1]A house is an investment when you look at making money from it.
This is made possible either in the form of rentals or by re-selling it at a higher price. That is why in personal finance self-occupied property is never counted as an investment asset.
For people looking at investing in real estate, there are two options available. Which of these make financial sense?
1You can book a flat when the project is launched and sell it when it is complete.
* Here you have to put in a small sum as initial investment and pay the remainder in instalme-nts. The return on investment may be better.
* However, if you were to borrow to purchase the flat, you might have to keep paying pre-EMI or interest on the amount borrowed until you can sell the property. This is an expense without any tax benefits.
* You also need to keep in mind the aspect of capital gains if you intend to borrow.
That is, if the property is resold for a profit within three years of the agreement date, then the capital gains accrued from the transaction are fully taxed with no scope of tax saving.
2Alternatively, you can book a ready-to-move-in property and start getting rentals right away. These can partially fund EMIs.
* The problem with borrowings as in Option 1 can be partially negated when you purchase a ready-to-occupy flat.
* You can purchase the property with a loan and start paying EMIs immediately. Which means, both the interest paid without any limit and also the principal repaid up to a maximum of Rs 1 lakh (under Section 80C) can be claimed as deduction from taxable income.
* There are many options to also save tax on capital gains when a property is sold after three years. Until then rentals can also be enjoyed.
However, such an option has its own setbacks:
* Income earned as rental is taxable as ‘Income from House Property’
* On average, the annual rental income from the property will be in the range of three to five per cent of the value of the house.
This means, say, you buy a house for Rs 50 lakh and avail an 80 per cent loan, your EMI for a 20-year loan at 10 per cent will be about Rs 39,000.
In addition, the property will yield a monthly rent of about Rs 15,000-Rs 18,000. The rest of the EMI is a cash outflow from your pocket.
* If you have the capability of shelling out the additional Rs 20,000 from other income, or if you have a bulk amount of Rs 30 lakh, which you can invest in the property and restrict your loan to about Rs 20 lakh so that your EMI matches the rent, then the proposition works wonderfully.
* More importantly, finding a good tenant is a big task in itself.
On an average, you should expect your house to earn only nine months of rental in a year.
Assume that for about two to three months in the year the property will lie unoccupied but your EMI remains. You should have the ability to manage such an instance.
Therefore, the tax adva-ntages and the fact that you may be able to resell the property for a substa-ntially higher price after a longer period are the positives.
On the other hand, the adverse cash flow situation in such a scenario is an obvious negative.
Also, please remember that a house property is an illiquid asset.
If you are stuck with it, this can turn out to be a long-drawn out affair. Go for it, if you understand the pros and cons well enough.
Adhil Shetty is the CEO of Bankbazaar.com
Links:
[1] http://archive.asianage.com/house-copyjpgcropdisplayjpg-055