9 out of 10 Real Estate Investors are Loosing Money! HOW?
How Builders get Rich by Selling you Flats?
This post is based on our Real Estate Consulting snapshots. Recently I was given an Evaluation whether to Rent or Buy a Flat. People go with Residential Flat due to main reason: Lower Cost, Higher Security than Individual House.
Rule No. 1 of Investment
Never lose the money!
Instead, You should put money where it Grows!
Rent vs. Buy
Now let us Evaluate the process of Rent vs. Buy. I will keep it simple.
Imagine following is a Moderate Luxury Flat Buying Cost Rs. 70 lakhs for a 2BR. The community is good & secured. The Registration & Brokerage costs will add another Rs. 10 lakhs to the Total Buying Cost.
On top of that there will be Ownership Costs every year like Utility, Taxes, Association Fees etc. – Let us take this as 1% of the Buying Cost.
You can also Rent the same at Rs. 20 Thousand per month including all Maintenance costs. Which one you will opt for?
Your Total Cost involved is:
- 80 Lakh Buying Cost
- 1% Yearly Owning Cost
You are Entitled to get an Appreciation of 5% per year.
(Inflation Average is 4%)
If you rent the same Flat you will be paying Rs. 20 Thousand in Rent.
This makes the Rental Yield at 3%
(India Average is 3%)
No-Risk Investment ROI
Let us consider that if you put the Buying Capital in another No-Risk Investment ROI you are getting around 10%!
On buying your total yield will be Appreciation % + Rental Yield % – Owning Cost %
= 5% + 3% – 1%
The No-Risk Investment ROI is 10%
So you are making Loss of 3% by Buying!
Buying is Loss!
Renting is Profit!
Opportunity Cost of Capital – How much Money is Leaking?
If you consider putting the Buying Capital in No-Risk Investments you will generate an Income around Rs. 8 Lakhs per year. You can Pay the Rent easily with Rs. 2.4 lakhs & put the remaining Rs. 5.6 Lakhs in High Risk High Returns investments like stocks/mutufalfunds which can give average 20% ROI compounded.
So you are loosing around Rs. 8 Lakhs per year!
So where is the Money Going?
Your extra money is going to the Builder! The builder is charging High Cost for the Flat!!
Let me show a simple calculation on how builder generates profit.
- Builder buys a plot & divides with 100 or more Flats
- Plot appreciates & Building depreciates
- Each Flat will have a Construction rate of Rs. 2000/sq ft
- So your Flat Construction Cost is Rs. 20 Lakh
- Each Flat will have a Land Cost being shared usually 0.5 cents per Flat
- So you can add another Rs. 10 Lakh (moderate market price)
- Each Flat will have a Common Area Construction
- So you can add another 5 Lakh
- The builder will be acquiring Bank Loans for the construction on 10% Interest
- So add another 3 Lakh to it
- The builder will be hiring Celebrities to market the Flat to you
- So add another 2 Lakh to it
THE TOTAL COST TO BUILDER IS ONLY Rs. 40 LAKHS!
The same Flat is being sold to you at 80 LAKHS
(the calculation is same for all builders – They put 2X of Cost OR 3% of Rental Yield whichever is Maximum – you can check with any builders & they follow the same – I work with Real Estate Builders so I know)
So now you understood why you are at Loss by Buying a Flat!
It also answers why you only gets a Meager Appreciation in next 5 years as you are Buying at a Premium cost.
If you add Loan to it, the Loss will be More even with Tax Savings deductions too.
So the Builder & Government is building Housing at your cost! 🙂
Why Buyers continuously makes mistakes?
Buyers are mostly Not Professional in Real Estate, but Builders are!
Buyers don’t Invest in Learning or Hiring Consultants, but Builders do!
Buyers take Emotional decisions, not Logical ones!
Hence they make wrong financial decisions making Loss of Capitals!
Remember Rule No. 1: Never Loose Money
Hope you enjoyed this Rent vs Buy article & You learnt how 9 out of 10 Real Estate Investors are loosing money!
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Author Chief Advisor | SEBI Certified | MBA | PhD