Saturday, June 17, 2017

EMI Jhatka...

A man chooses to buy a house for investment.

House value 1.25 cr

Loan amount 1 cr

Interest rare 10%

After 5 years the value of the house is say 1.6 cr based on 5% compounding

He decides to sell it.

While closing his loan he has to pay up approx Rs 1.5 cr

So his total cost turns out to be

Rs 5 lac registration

Rent 25 lac initial amount

It all equals to Rs 1.8 cr

Against this his house fetches Rs 1.6 cr

Les capital gains would be say approx 3 lac

Add his rent income approx of Rs 15 lac

Add tax saving 3 lac

Total income is equal to 1.75 cr.

So in the end he incurs a loss of Rs 5 lac

If the house had appreciated at even 10% he would be left with a profit of Rs 20 lac

So between 5 lac loss to 20 lac profit is what he makes

On the other hand had he invested the 25 lac in an Equity mutual fund and had done a SIP of Rs 1 lac (approx EMI amt) he would have earned Rs 1.6 cr

(Assume Equity returns of just 12% in this period.)

Net profit would be 1.6 cr less

investment of 85 lac
( 25 lac + 1 lac SIP for 60 months)

= to 75 lac.

He could also earn tax rebates in ELSS schemes upto 2.5 lac taking his earning to Rs 77.5 lac

Now compare Rs 77 lac profit with Rs 2 lac loss or at best Rs 20 lac profit.

Even a bank FD would have provided a net profit of 40 odd lac

Next time think a 1000 times before saying house investment is smart thinking.

The equation will only get worse for longer periods of investing.

Without taking a loan if one were to invest in a house then at best case scenario the returns from the house may come close to that of a mutual fund.

But remember that is without taking a loan.

How many people ever buy a house without taking a loan.

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