Aiming to own more than one property has its share of anxieties. By Balaji Rao
Human lives are full of dreams, goals and aspirations. We want to enjoy every luxury and comfort that is available on the earth. In the course of a normal life that usually starts from the time one starts earning, perhaps, 24 or 25 years of age, the weaving of dreams and adding goals goes on for another 35 to 40 years. In due course, some goals gets upgraded while many new gets added to an already existing long list of goals.
One of the biggest dreams or goals of human beings is to own a house. The glow on the faces of the owner/s on the “house warming” day or “gruhapravesham” ceremony conveys the message of achievement and satisfaction.
Given the fact that the costs of property has risen at a healthy pace of about 15% per annum over the last couple of decades, investing in this asset has been on the rise and nobody seems to bother about such escalations. For every price there are buyers/investors. The innumerable offerings by numerous builders and developers is a mirror for such push and pull attributes that is based on demand to own real estate.
One of the main reasons for such a phenomenal growth of this asset can be attributed to the fact that people want to own more than one property, either by way of empty plots/sites or built houses/apartments.
The need to own multiple real estate assets has almost become an insatiable thirst coupled with, perhaps, greed which probably is to ensure that they would feel more financially secure with multiple properties across locations.
EMI factor
While only a handful of people would have the capability to own more than one property, the real problem arises when a middle class family decides to own an additional property. It is a fact that almost 90% of investments are done with the help of a bank or financial institution by way of taking home loans, and the repayments could range from 10 years to 30 years.
For a loan quantum of Rs.20 lakh for a period of 15 years at 10% interest rate the EMI would work out to Rs.21,492. And if the income of the family is Rs.60,000 p.m. over 1/3rd of the income goes towards the repayment commitment.
Besides a home loan, it is quite common that people would avail car loans, consumer durable loans and personal loans which also would be contributing to the outflow.
Under such strained circumstances it would impoverish the family if another property is purchased. Individuals should refrain from such lure to own multiple properties and look beyond real estate and seek other investment opportunities to invest.
Annual returns
Real estate is not a liquid asset and also is not tax-friendly. Moreover, the annual rise or returns on investment will not be consistent and in many circumstances it could not even beat inflation. Even the rentals, if the investment is done to achieve monthly income, may not be enough to meet the EMI outflow. In the same example of Rs.21,492 EMI, the rental income should match with this outflow which is very rare and may not compensate the loan repayment requirement. Such commitments could lead to financial stress which should be avoided.
One has to grow organically by way of a good asset allocation of investment portfolio instead of having concentrated exposure to single asset.
An asset bubble of the size of U.S. subprime in India could erase all the notional gains. Prudence is important before investing in a second property.
This article was originally published on www.thehindu.com dated May 15, 2015
Source: www.thehindu.com