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Real Estate - My Hit and My Miss!!!

As we all know the real estate prices have sky-rocketed in the last 2/3 years in India. I have had a hit and a miss in the real estate.


My Hit:



I bought my flat in 2003 for Rs.1100/- per sq.ft in Valasaravakkam, a suburb of Chennai. Today, Purvankara is quoting Rs4200/- per sq.ft in the same locality. After discounting for the age of my flat, the appreciation is around 3.5 times in the last 4 years. I think I was lucky to have bought a flat in 2003. When I look back on the decision I took in 2003, I think it was a wise decision. Even while buying the flat, I hesitated to go for a big ticket loan and limited it to Rs10 lacs and 2BHK and a no-frills flat.


My Miss:


This is an example of where I really missed making some big bucks. In the same year of 2003, I was introduced by my friend to a land promoter and I went and visited a piece of land near Porur Junction. The developer was willing to sell 2400 sq.ft (1 ground or 5.5 cents) of land for Rs3.3 lacs at Rs137.50 per sq.ft. As I was looking for a flat at the same time, I decided to invest the money in a flat rather than buying a ground of land. Hold your breath, today the plot of land is selling at around Rs.950-1000/- per sq.ft (Rs20-24 lacs for a ground). An appreciation of more than 6 times!!!


Why I am writing this today?


In hindsight, I feel I could have bought both the flat and the land in 2003. I would have easily got my housing loan raised to Rs13 lacs instead of Rs10 lacs and spent the additional Rs3 lacs on the real estate land. If I had done that in 2003, today I could have sold the piece of land for say Rs20/- lacs, settled by housing loan of Rs10 lacs and left with cash to the extent of Rs9-10 lacs. That was a very wishful thinking.


What I have learnt from this incident?


1. When I took the housing loan, I never thought my salary would increase so much in the next 4 years. My salary has increased beyond my imagination in the last 4 years and now it looks stupid to me on the amount of housing loan I have. But honestly I didn't have very high visibility on how my career would progress in the next 4 years. Not many of us would have had 4 years ago, I guess, on their salaries, their progress in the career etc., So thinking too much into the future is not going to help in a great manner and the future is always unknown!

2. I am not risk averse but at the same time I dont have an appetite for high risk ventures.


3. Flats dont appreciate like land!!!!


4. If I am planning to buy a flat in the near future, I would also buy a piece of real estate along with the flat. May be, after 5 years from the time I purchase a flat, I can sell the real estate and repay the full or atleast part of the home loan.


Lets illustrate it with an example:


1. Cost of the flat - Rs30 lacs

2. Margin money - Rs4.5 lacs (15% of the property value)

3. Additional margin to meet the real estate demand - Rs1.5 lacs.

4. Total margin required - Rs6 lacs


The additional margin of Rs1.5 lacs is used for buying a piece of real estate. Lets assume that it appreciates by 20% a year for the next 5 years. At the end of the 5 years, the initial investment of Rs1.5 lacs would be worth Rs11.16 lacs. This would help us to prepay either the full or partially the home loan.


When I go for my second housing loan, I will definitely try to implement this!!!


Disclaimer:

The above illustration is based on 20% appreciation in Real Estate which is being witnessed currently. It may or may not be sustained in the future. This is not a professional financial planning advise. Therefore, I suggest that you make your own decisions or consult your personal financial planner.

4 comments:

Anonymous said...

That was an amazingly good insight. The suggested strategy seems to be very practical.

Whether the worked out math falls in plce or not I see very unlikely chances that it would go to -ve.

Anonymous said...

Hi venkat,
I have read almost all the messages in this blog of yours, inspite of the fact that I am very a impatient reader. The reasons being
1) The language used is so simple and down to earth.

2) The flow is so amazing that one cant stop inbetween once you start

3) The messages are very knowledgeable (this is a personal preference)and each one touches a different topic every time...you just cant get bored

It was a pleasure reading...

Karthik

Venkat Muthukrishnan said...

Thanks for your comments. Now I have a challenge of living upto your expectations.

Anand said...

Nice article...

Same thing happened to me as well.. I regret now that I should have gone for a higher loan when I bought my flat in 2004 . I should have gone for a land at that time.. Today I cant imagine of buying a land..