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Analysing Buy vs Rent For Residential Properties : Impact on Property PricesBy hope, Section Gurgaon Real Estate Property
I stay in Gurgaon and some weeks back I decided to look for a property for purchase in one of the prominent building in DLF phase - II under pressure from Family. The going price quoted to me was about Rs 90 lacs which meant that after paying stamp duty and some basic expenditure on the House (like woodwork) it would have cost me atleast 100 lacs to make it liveable. Looking at the property rate, I started thinking does it really make sense to buy a property at such high prices today or does it make sense to rent the same out. The rental charges at which the properties dealers were willing to rent out were between 25,000-30,000/month (different than they quote in newspapers).
So I started doing a little calculation as follows: If I decide to buy a property on loan (assuming I don't have stash of money floating round with no avenues to invest), my expected opportunity cost would be as follows: Buy The Flat
Cost of the Property : Rs 100 lacs
Rent the Flat
Net Savings per annum in : Rs 5.26 lacs Some assumptions have been made like there is no tax rebate on rental available to the person which would have made the situation more favourable for renting. Also some figures are rounded off to convey the basic message. I was shocked to see the potential saving every year I can make, if I decide to postpone the decision to buy the property for one year. The critics of the analysis will say that the properties is not purchased for Rentals but also for the future price rise. So I decided to do a one more analysis of WHATIF the property prices were to rise by 10% in one year and whatif it was to fall by 10% in one year, before I decide to take the decision to BUY the property after year one. 1. Price Rise of 10% in one year - If I decide to buy the property after one year and the price has gone up by 10%, I would have lost ( 10% of 100 lacs less 5.26 lacs of savings in Rent vs Buy in year 1) - Rs 4.74 lacs only. 2. However if the prices were to fall by 10% in one year, I would have stand to gain (10% of 100 lacs +5.26 lacs in savings) or Rs 15.26 lacs. That is very healthy potential gain for a salaried person. There are two variables now:
1. Some may argue that the rentals will go up substantially over one year. However given the occupancy rates of the inhabited buildings currently and expected supply of new houses in one year, it is anyone's guess that whether it will go up as much to bridge the gap. Rentals in my place have actually remained stable or come down by 5-10% in last 3-6 months. Historically, we have seen that rental yields on Residential properties tends to remain stable within a range of 4.5-5% of the property price as compared to about 3.25-3.5% (post maintenance charges) today in Gurgaon. This calls for a strong correction in the coming year with upward movement in Property Rentals or Reduction in property prices or both. What will be the expected trend, I have my own views and you can make your own.
I am happy to get into a debate with other learned people on an alternate analysis of the situation. Let me warn that the analysis is from the perspective of a buyer for actual usage and someone has said that this is the community which sustains the price in the end.
Analysing Buy vs Rent For Residential Properties : Impact on Property Prices | 15 comments (15 topical, 0 hidden) | Post A Comment
Analysing Buy vs Rent For Residential Properties : Impact on Property Prices | 15 comments (15 topical, 0 hidden) | Post A Comment
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