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Let us Calculate profit from a Real Estate Investment after 12 years.

One of my Client had invested as a second house in  real estate and given me the task of calculating the profit from it. Let us calculate the Profit from a Real Estate Investment for last 12 Years. He purchased a two bed room flat at Bhubaneswar  at a cost of  Rs 12 lakh. In the year Dec 2004.The details of the costs are given below.

Flat Description                               : Two Bedroom flat

Super Carpet Area                           : 947 SQ

Purchase Year                                   : Dec 2004

Cost                                                      :  Rs: 12 Lakhs

Stamp Duty                                        : Rs 70000.00

Other Builder cost                            : Rs 40000.00

Possession                                         : Aug 2005

Given on Rent                                   : Sep 2005

Loan Amount                                    : 10L from a renowned Private bank

EMI Started                                       : Dec 2004

Pre EMI Interest                               : Rs 72000/-

Loan Outstanding                            : Rs 6.48lakh ( Tenure 20 Year Loan)

Interest rate                                      : 11.1% FRR(Vary with 9.45%-14.75%)

EMI                                                    : Rs 10036/-Pm

Rent                                                   : Rs 7500/-Pm(from 4000/- to 7500/-)

Now he wants to know if I sell it now for 45 Lakhs   how much will get as profit form the above Real Estate Investment  after tax which is yet to sale.The house is on sale for last six months.

Net Profit Calculation from a Real Estate Investment in bhubaneswar:

Total Cost of purchase(Rs):

House cost                          :               12,00,000.00

Stamp Duty                        :                 70,000.00

Builder cost                        :                  40,000.00 (Transformer, Society etc)

Pre EMI Int                        :                  72,000.00

Puja & Others                    :                   18,000.00

Total                                      :                14, 00,000.00

Now take the Sale Value as mentioned above 45,00, 000.00(as on July 2016)

For Last 12 years Out go

(In Rs)

  1. Own Contribution for the flat*                              :                4,00,000.00
  2. EMI Paid till date                                                     :               14,10,000.00
  3. Rent lost due to delay(Till date)                            :                 1,10,000.00
  4. Upkeeping Contribution(Till date)                       :                 4,90,000.00
  5. Property Tax                                                               :                    50,000.00
  6. Commission (S.Brokerage) will give                     :                    90,000.00
  7. Bank Loan Outstanding                                           :                 6,48,000.00
  8. Gain Tax Outgo after(Indexation)                          :                 2,86,000.00
  9. Society Charges(new Membership)                       :                    25,000.00

Total                                                 :            35, 09, 000.00

(#Tile Faber for parking, Boundary Wall, Color, Water pump,Elect, Society Annual Festival charges ETC):

*Everything included (Stamp Duty,Pre Emi,Other buider cost Etc)

Cash In Hand he will get after sales

Sale Price                                                             :           45,00.000.00

Less

Brokerage                  90,000.00

Loan                       6,48,000.00

LTCG Tax:              2,86,000.00

Society :                   25,000.00                        :               10,39,000.00

NET cash in hand                                             :             34,51,000.00(Tax Free)

 

Net Profit : Sales Value -NET cash in hand(will get after last 12 years)

= 45,00,000-35,09,000

= Rs 9,91,000(Will get if he sales the house with 45,00,000/-

Income Tax saved for all these years                     :             45,000.00

Rent Received all these years                                    :           5,10,000.00

Total profit: 9,91,000.00+45,000.00+Rs 5,10,000.00=Rs 15,46,000.00

You may differ on certain points but the calculation made with context to my client’s query. One needs to get a air idea of calculation even if the said house has been appreciated for more than 3 times.

Had he invested any other asset class other than real estate, then the calculation will be as follows.Let us calculate the same as

On a safer side please take investment  by giving equal weightage to both equity and debt

Portfolio mix:     Debt: Equity       (50:50)                                   ROI : 10.20%(approx on a Safer Side)

Invested in the year 2004                                     :                     4,00,000.00

Value as of now (July 2016)                                 :                   14,80,845.00

Taking EMI as SIP                                                 :                   27,21,151.00

TOTAL                                                                      :                   42,01,996.00

Less Tax outgo (Approx)(For Debt)                   :                       50,000.00

Net (T Free)                                                             :                    41,51,996.00

Cost Incurred:

Invested(one time) =                                           :                     4,00,000.00

Actual Sip Investment(Rs Rs 10,030.00)        :                18,44,348.00

Net profit        :  Rs 39,51,396.00 –  Rs 18,44,348.00 =   19,07,648.00

AS a matter of fact  all these years he has given more in Emi and getting less in House rent so I have calculated the EMI he is giving now  Rs 10,036/- as a funding for monthly investment.

Now the question arises

  1. Sales Value of the Flat is determined as told by the broker till it is sold.
  2. He has given advertisement for Sale for last 6 months.
  3. The said house may or may not be given a loan because the documentation for home loan has been changed drastically.
  4. The investment is highly illiquid and asset tick size is very quite large.
  5. In the above calculation, I have not calculated the opportunity cost as it is difficult to determine without knowing the data points.
  6. For first timer those who do not own a house can go for it but for investment purpose it is unfavorable for my client context.
  7. The above calculation does not apply to each and every house out there.It is specific to this house and Bhubaneswar city only.
  8. One would get the fair idea of net profit one get after 12 years of investment.It is only long term.
  9. The property has appreciated around more than 3 times.
  10. Always look for houses where your will increase more than three times to recover your cost.
  11. There are houses also where it had appreciated many more times.
  12. Above calculation will not hold those who stay in their houses not for investment.

Summary: You need to calculate the amount of profit you get from your Real estate Investment.Each and Every Real estate investment is not bad.You need to calculate the future projection and see your time horizon and should be able to project the future value of it. If you are unable to do so then do not go for it.If you are planning to stay there it is absolutely fine if you are a first timer.Any investment you do in life remember if you are giving your precious time and invest your hard earned money it should be able to manage your expectation.After getting more than three times from the investment he made, he seems to lose it to bank and to other causes.Investment should not be made with loan from the bank.Your profit is being sucked by the home loan.the existing home loan buyer did not get any concession from the bank.

Give your suggestions and feedback so that i will be encouraged to write on these topics.You can reach me at vsswealth@gmail.com

Categories: Real estate advisory