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You need to remember to keep the EMI at 30% of your take home or less (Mint )
You need to remember to keep the EMI at 30% of your take home or less (Mint )

Don’t buy into the distressed home sales story

Do the math before you take the leap to the other side, away from financial assets

The full-page ads are back. So are the stories in some parts of the media where “experts" are advising you to take advantage of the low interest rates and bargain basement prices to invest in real estate. The real estate corporate brokers are pushing the narrative of aisa mauka phir kahan milega (when will you get this opportunity again). You could be an entry-level buyer wanting to “settle down" with a roof over your head. You could be an ultra HNI who has exhausted his allocation into equity, debt, gold and dollars, now has a chunk left for real estate and are looking for distress deals to soak up the cash. Or, you could be a Greater Noida survivor who is beginning to forget that nightmare and is again sniffing the wind for the next boomtown story that is unfolding next to the metro line and airport. Whatever your situation, do the math before you take the leap to the other side, away from financial assets. And if you are the average Mr X investor who plans to leverage to invest—beware! There are three categories of buyers out there—which one is you?

One, the own-home buyer. Home loan rates are indeed very low starting at 6.9%. Blend in the tax break and the effective rate drops down further (exact drop depends on tax slab, interest amount and other factors). For a person looking to buy a home to live in, who does not have the money to buy the house outright and is planning to live in the city for many years, the argument holds ground. If you are going to be buying anyway, now is a good time with rates so low and property prices still very bearish. But you need to remember to keep the EMI at 30% of your take home or less. And this will mean a larger down payment than what is possible on home loans. Also remember that these are floater rates, and if inflation rates were to go up, these will go right back up. Fixing yourself down into a fixed rate loan (if available) is a good idea but these are already in the range of 8-12% and are subject to revision if you look at the fine print of the deal.

Two, the ultra HNI asset allocator. These are HNIs who are looking at cash in hand, the distressed sale stories, the poor returns in fixed income, the liquidity driven equity market boom, and are then thinking of making a tactical move into real estate. For every one such “lion hearted ultra HNI" (as one money manager I spoke to referred to them as!), there will be 99 who will lose big time since they neither have the speculator’s nose, nor the legal and other infrastructure one needs in India to deal with a messy asset like real estate. It takes a full set-up to manage the tenants, rent, tax filings and other under-the-table pay offs to municipalities when you get into real estate as a rent-paying investment. Another planner I spoke with said that even those willing to hold for a decade will need a deal that returns 11-15% annually over the period for the investment to make sense. But it is the HNI investor’s stories that influence the next category into making a serious mistake.

Three, I-will-make-a-smart-investment Mr X. If you are thinking of buying for investment and are planning to leverage the low home loan rates, the low property prices and the “deals" that builders are again promising in large ads, you are the category of people at the highest risk in this market. The home owner will live in the home. The HNI has the money and the net worth to take the punt, but you, as the average urban mass affluent, will try and play the big game and lose. You will borrow at 7%, there is your own down payment that goes into the property. Then there are costs you forget to add—brokerage, stamp duty, housing society monthly maintenance costs, tax on rent—and the risk of loan rates going up in the future. Your rental yields are still between 1.5% and 2.5%, making the EMI cost much higher than the post-tax rent you are going to receive. I’d encourage you and your spouse to not look at the Italian marble or own jacuzzi, near the metro, your-first-10-EMIs-paid-back sales spin and remember there is no sea view in Manesar, but pull out your calculator to do the hard math. The metrics you use to evaluate your mutual fund returns should be the same for real estate, and see if the deal makes sense. I don’t think it still does.

Unfortunately, real estate investment trusts or REITs that could have been the solution for the diversification-seeking Indian investor, remains a non-starter for the retail market and even the institutional part is still nascent. The lack of a standard implementation of the Real Estate (Regulation and Development) Act, 2016, the messiness of the asset in itself and the presence of cash transactions prevent real estate from becoming a financial asset in India through REITs and then eventually through mutual funds.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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