How much can you earn you're your Real Estate investments?

Mar 09, 2017

No one can deny the sky-high returns that real estate has given in last decade or so. But there are times, when people become over-optimistic about future returns just because returns in past have been great.

Many people make the mistake of simply comparing their purchase price with current price. They forget that a property that has appreciated from Rs 25 lacs to Rs 40 lacs in 5 years doesn't mean 60% returns. But it only means 9.8% annual returns in previous 5 years.

That is not all. Most people also ignore cost of parking, preferential location charges, amenities, maintenance, etc. while calculating the actual cost of the property. Then there is also the interest component of the loan EMI that is to be added as cost. When all these costs are added, only then the buyer will arrive at the actual cost of the property that should then be compared with the current price to derive real returns.

Also, not many people get very high returns from properties as this is a general perception. Projects get delayed, stalled or cancelled leading to big financial losses to buyers.

Many people invest in property to generate rental income. But rentals are typically between 2-4% of the property value. Since bank deposits too give 7% kind of returns, the rentals alone are not sufficient to justify investment in property. The real gain happens when property appreciates in value.

But there is this non-financial factor that plays a very important role in property investments. Real estate has emotional value for most people. So people tend to overlook the financial aspect of the investments at times. And this causes lower-than-expected returns from property that leaves a bad taste in investor's mouth. So if you are planning to invest in property, make sure you carry reasonable expectations from your investments.