Sukanya Kumar - RetailLending.com
With 6 or 7 digit monthly pay-package and loads of perks which generate an envious amount of surplus cash, one has to be inclined towards investing in property market in India today. Every weekend, big flashy full-page advertisements by the developers in the property section of the newspaper attracts the eyes of the family too. Friends call on weekends for a group-visit with family to check out the ones with attractive schemes and if the sales guy at the builder's office is good at his presentation & persuasive enough, you land up buying a property!
Now, you always want the best. Hence, the want of a higher floor, garden-view, an extra bedroom, a patio, planter-box on the deck, big club-house in the complex..... a little better than what you bought earlier and way better than what your colleague just boasted about buying last week, is what you book. Isn't it?
Most probably, you try to explain to yourself after buying it, as to what was the purpose of making that high value purchase. Hence you now start thinking rationally.'My office is far away from this newly acquired home, my child is already settled in the school & wife has her friend's circle. Hence, this new buy wasn't definitely for self-use.' What else, now you have the ANSWER. 'This buy was for an investment.'
Easy answer to suit yourself, isn't it?
Now, let me ask you a few basic questions.
Q1: What other investments do you have & what is an average return you are getting from them?
Q2: Why did you buy an under-construction apartment which will take three years to be ready to occupy for an 'investment'?
Q3: Why did you buy a 4 crore worth home when at the moment you have only about a crore to invest?
I possibly know your answers too:
A1: "I generally invest in Mutual funds through SIP-s, bonds & FD-s. I'm a medium risk-taking personality and if my investments give me an average return of 14-15%, I am happy."
A2: "I just liked their concept. My friend bought it too & I think the builder is good."
A3: "Why not? I can always take a Housing finance. Any bank will give me a loan!"
My dear 'investor', none of your answers justify your buying that property. But now that you have bought it already, I will try to see that you make some profit out of it. I am listing down some DO-s & DON'T-s hereunder:
DO
DO #1. Negotiate a deal with the builder on the floor-rise and premium facing rates. Though these are some of the USP-s the builder has, it really doesn't cost him anything. If you try, you may strike a bargain there. If it doesn't work, try to come 4/5 floors lower to save a few lacs. Trust me, it will matter when you sell/rent out. Nobody will pay you that much extra to be on the 15th floor. The 10th floor guy will sell/rent at the same price you will.
DO #2. Restructure your payment schedule instead of agreeing to the standard one. While booking the builder is interested in the sale & if you are not asking for something which they really can not accommodate, they will. Remember, the later and the smaller amount you pay at the beginning your cost of fund will be lower & you can defer interest-bearing borrowings like loan from banks, relatives, parents etc.
DO #3. Check if CC(Commencement Certificate) has already been received on the particular phase, tower & floor. No bank will give you loan without CC in place but you are liable to pay the builder as per agreed schedule of payment.
DO #4. Check which lenders have already approved the property(your specific block, floor etc.). Double check with your Mortgage Adviser/banker directly. Sometimes, the builder wouldn't know the exact status so well. And without this, your payment plan could really get stuck.
DON'T
DON'T #1. Borrow immediately unless you are opting for an overdraft kind of loan which enables you pay nil interest too.
DON'T #2. Opt for a Pre-EMI(interest payment only) option as the project may get delayed and your cost of acquisition will keep jumping leaps & bounds every month towards the possession. Let me explain how. Say, you have taken a sanction of 2 crores and drawing down a 15 lac tranche' from the bank in March. If you opt for Pre-EMI, then your simple interest will be levied on 15 Lacs till you draw down next. When you draw again in say, May, of 15 Lacs more, your interest payment will now be on 15+15=30 lacs. This means you have drawn (30/200)*100=15% of your loan amount. Like this, once the project is about to be ready and you have already drawn down 95% of the loan, i.e., 1.90 crores and your simple interest(Pre-EMI) is around 1.90 Lacs a month, this isn't going towards principal repayment at all. So, for every month's delay in the project, your acquisition goes up by 2 lacs. If the project gets delayed by 6 months, you shell out 12 Lacs extra!! Imagine, where will your profit come from!
DON'T #3. Delay your payments unnecessarily to the builder. The penal charges once accrued, will make your wallet lighter when you take the possession. No amount of being surprised or defiance will help. Please understand that the sole reason the builder sells it to you at a cheaper price during inception is to get the money from you quickly to avoid external borrowing. So, he will be just, if asking for delay penalty.
DON'T #4. Panic if the prices have really not appreciated as much you expected. If the property price appreciates by 60% in 4 years, i.e., 15% p.a. you should exit. This has actually given you the same return on your MF/Bonds etc. So, this wasn't really a greater investment, but you saved yourself. If it is lesser than that, then you may have to keep biting it for longer & hold on for a couple of more years. In the scenario when the same project is having further phases & new towers still upcoming, you can look at it in two ways-(A) Bad way--'How will I sell when my builder still has so much of stock left?' & (B) Good way--'Since the builder has already pegged his price and that is considered the 'market rate', I can safely sell at a 100-200/- per Sq. ft. cheaper and exit. I don't have to justify the cost.'
So, final formula is simple. If : Y1 or Y2 > X, then your investment was just.
Legends:
Acquisition Cost(X)=Cost of the apartment+Bank interest & processing cost+Time cost(as against the other investments)+Your worry-time
Benefit(Y1)=Tax benefit+Future security+Rental income
Benefit(Y2)=ROI(Return on Investment) via Sale proceed
At the end, my view is, do not make a property purchase decision in a haste. There are multiple concerns to be addressed before you want it to be called an 'Investment'. May be, in my next article I will write about it too.
Till then, happy investing !
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