An analysis

Final 978 views 9 replies

Vikash Maheshwari

learner

6358 Points Joined January 2010

Many of us believe investing in properties and real estate is a sure shot money doubling way where in you can double your investment in a few years as the demand for real estate is growing more than ever before and people have a lot of disposable income.

Let’s do a small analysis to find out which one Which is better..

Buying a property by taking a loan Vs investing the money in FD/RD

Before we begin..a few disclaimers…this discussion is purely from a financial point of view.I am not going to bring in any emotional or psychological aspects.And in the end it’s for you to decide which is better.Also a few assumptions:

A ready possession flat is brought on load for investment purpose and will be sold after 5 years at double the cost price.

Cost of the flat: Rs.50 lakh

Down payment(20%): Rs.10 lakh

Loan amount: rs.40 lakh

Expected monthly rental income(35 of flat value):Rs.15000 pm

Investor’s tax bracket:30%

Sale value of the flat after 5 years:Rs.100 lakh

Outflow of money

Down payment:Rs.10 lakh

Stamp duty,registration(approx:6%):Rs.3 lakh

EMI @ 10% (for 20 years):Rs.38601

Total EMI out flow after 5 years:Rs.23,16,060

Principal repaid in 5 years:Rs.4,07,902

Balance to repay:Rs.35,62,098

Returns

Sale of flat:Rs.100,00,000

Upfront payment and stamp duty:Rs.13,00,000

Rental Income(60 months):Rs.9,94,613

Tax on rental income(after decuctions):Rs.198,923

Capital gains tax @ 20%:Rs.4,00,000

Repayment of principal:Rs.35,92,098

EMI paid in 60 months Rs.23,16,060

Principal:Rs.4,07,902

Interest:Rs.19,08,158

Tax savings on interest paid Rs.5,72,447

Net inflow after 5 years:Rs.37,59,979

When money is invested in FD/RD

If the same money which was paid in down payment and stamp duty Rs.13 lakh been invested in FD @ 10% and open a recurring deposit of the EMI amount of Rs.38,601 for 60 months @ 9%,the amount that would have accumulated would have been:

Initial amount:Rs.13,00,000

Simple interest on initial amount @ 10% on RD of Rs.38,601 pm:Rs.650,000

RD principal in 5 years:Rs. 23,16,060

RD simple interest in 5 years @ 9%:Rs.529,798

Tax on both interest income @ 30%:Rs.353,939

Net inflow after 5 years:Rs.44,41,919

So in purely financial terms ,we can clearly see that investing in FDs/RDs give almost Rs.7 lakh higher returns. What do you think…??

Replies (9)

prithhis

student

144 Points Joined May 2009

Interesting analysis thanks

swapnil

C A final

121 Points Joined October 2007

Originally posted by : vikash maheshwari
	Many of us believe investing in properties and real estate is a sure shot money doubling way where in you can double your investment in a few years as the demand for real estate is growing more than ever before and people have a lot of disposable income. Let’s do a small analysis to find out which one Which is better.. Buying a property by taking a loan Vs investing the money in FD/RD Before we begin..a few disclaimers…this discussion is purely from a financial point of view.I am not going to bring in any emotional or psychological aspects.And in the end it’s for you to decide which is better.Also a few assumptions: A ready possession flat is brought on load for investment purpose and will be sold after 5 years at double the cost price. Cost of the flat: Rs.50 lakh Down payment(20%): Rs.10 lakh Loan amount: rs.40 lakh Expected monthly rental income(35 of flat value):Rs.15000 pm Investor’s tax bracket:30% Sale value of the flat after 5 years:Rs.100 lakh Outflow of money Down payment:Rs.10 lakh Stamp duty,registration(approx:6%):Rs.3 lakh EMI @ 10% (for 20 years):Rs.38601 Total EMI out flow after 5 years:Rs.23,16,060 Principal repaid in 5 years:Rs.4,07,902 Balance to repay:Rs.35,62,098 Returns Sale of flat:Rs.100,00,000 Upfront payment and stamp duty:Rs.13,00,000 Rental Income(60 months):Rs.9,94,613 Tax on rental income(after decuctions):Rs.198,923 Capital gains tax @ 20%:Rs.4,00,000 Repayment of principal:Rs.35,92,098 EMI paid in 60 months Rs.23,16,060 Principal:Rs.4,07,902 Interest:Rs.19,08,158 Tax savings on interest paid Rs.5,72,447 Net inflow after 5 years:Rs.37,59,979 When money is invested in FD/RD If the same money which was paid in down payment and stamp duty Rs.13 lakh been invested in FD @ 10% and open a recurring deposit of the EMI amount of Rs.38,601 for 60 months @ 9%,the amount that would have accumulated would have been: Initial amount:Rs.13,00,000 Simple interest on initial amount @ 10% on RD of Rs.38,601 pm:Rs.650,000 RD principal in 5 years:Rs. 23,16,060 RD simple interest in 5 years @ 9%:Rs.529,798 Tax on both interest income @ 30%:Rs.353,939 Net inflow after 5 years:Rs.44,41,919 So in purely financial terms ,we can clearly see that investing in FDs/RDs give almost Rs.7 lakh higher returns. What do you think…??

jabardast !!!!!!!!!! but you need to find such property in or very near to cream location of the city...

else this hypothesis will backfire..........

ek baar fir Idea zordaar hai boss............

brijesh

article

33 Points Joined September 2014

Hello friend, You have amazingly analyzed it,but few points which I would like to bring to your notice are:- You have calculated cap gain on the amount of rental income minus tax...but thats not where capital gain is calculated, the HP of 50lacs will be indexed and the cost of acquisition will be deducted from there on,the amount which u get will have a capital gain on that... Applying cap gain on rs 8lac is wrong instead...that will be your inflow of money which u get via rental income...on top of that...if u keep investing that rental income every month for 5 years,your value(net including the amount that rd of rs 15k every month will generate will be higher than net value of rd) is higher than that of your analysis from the RD scheme..

brijesh

article

33 Points Joined September 2014

Even I used to analyze investing in RD with mutual funds,life insurance policies,etc...but as I studied and cleared IPCC I got some of my basics correct which now makes me find the loopholes in your article... Waiting for you to give your analysis on this updated version of mine now..

Vikash Maheshwari

learner

6358 Points Joined January 2010

Thanks Brijesh for ur valuable input...but i havenot calculated CG on rental income...CG is caluclated on sale of capital asset...

Sale value:100

COA:50*1024(2014-15)/632(2009-10)=80(approx)

gains=20

CG=20% of 20=400,000

Also this is a very high level analysis...hence we have to work on assumptions....

brijesh

article

33 Points Joined September 2014

But certainly,9lacs of income subtracted by 4lacs of CG plus the interest accumulated on this 9lac for 5 years will be approx 4-5 lacs...so even after computing and comparing with RD,investing in HP will be a better deal

RENU SINGH

✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩

21627 Points Joined March 2011

Good to see u after long time

and informative post ...... But still I'm on investing property side.

Guest

but can you tell will this analysis is helpful for those people who dont have their own house, and want to buy a flat. you are considering everything for investment purpose, which means the family has already having a good house but what about others? is investing in RD is really beneficial rather than purchasing a flat?

example:

if we dont buy house and invest in RD/FD then where can we live? we have to take another house on rent basis. we need to our expenditure for living elsewhere. its our outflow.

i assume, that 7 lacs saving will be equal with the rent which we have to pay if we dont buy house. so both options come to equal position.

brijesh

article

33 Points Joined September 2014

@ karan: He clearly mentioned that it was for investment purpose,and that means that the. Person is well settled and he is interested to make out money by investing,in my view HP will have an higher impact of gains than RD, etc... @ vikash: awaiting for your reply and analysis?