I hope Dr. Khan finds this article useful…Arjuna seek your answers here:
Many people have been screaming about real estate as an investment. Well I have nothing against it, except that I do not understand it. Given limited brain power, I would rather not do it, instead of making a mess of the same 🙂
Let me share one real estate transaction that I saw from close quarters:
India Bulls has a property in Panvel (a suburb of a suburb of Mumbai!!).
Cost / buying price for the customer in Sep 2010 : Rs. 2200
brokerage 50
total cost say Rs 2250
the price at which one can be reasonably sure of selling : Rs. 4000 (the builder says 4400)
BUILDER’S transfer charges: Rs. 400
brokerage (assumed) Rs. 80
Net cash that you will get (over a 16 month period) : Rs. 3520
Capital Gains 3520-2250 = Rs. 1270
Cap gains tax @ 25% (short term cap gains, so you will pay at max marginal rate): 320 (rounded off)
so net gains: 3200 (cash) on an investment of Rs. 2250 over a 16 month period.
Net gains: 1270 – 320 = 950….
Not bad at all.
Right? Sure, you took the risk, made the investment and the broker still decides to take Rs. 400 – which is greater than the Capital Gains that the government of India charges…
So is realty a good investment…?
Well if you did invest cash, or if you leveraged (after all you did not have the money to do the deal)..and you made money…yes.
Did I do this transaction? NO.
I have done transactions where I have got about 10%p.a. return over the past 3 years. Not cribbing.
I have seen / done a funding transaction with a builder @ 28% p.a. – secured.
I have seen / done a funding transaction with a builder @ 24%p.a. unsecured….
but my debt transactions are rarely worth talking about 🙂 – I take too much risks.
Capital gains tax (short term cap gains so assuming 25% tax)
Source:Subramoney.com