Residential real estate comes with a lot of operational cost. If you plan to do a real estate purchase by taking a loan, it could turn up very bad due to high interest rates in India and lower rental yields. Which make the net cash flow equation upside down. Residential real estate investing in Bangalore have a lot of issues, so they can turn up really bad if you are not aware of them. Before we go deep into deciding the verdict on real estate investing in Bangalore, let’s first clear some concepts.
WHAT IS REAL ESTATE
Real estate refers to property consisting of land and any physical structures or natural resources that are permanently attached to the land. Such as buildings, houses, and trees. It encompasses both the land itself and any improvements made to it. Real estate is a tangible and often valuable asset that can be bought, sold, rented, or developed for various purposes.
There are several key categories of real estate:
- Residential Real Estate: This includes properties designed for people to live in, such as single-family homes, condominiums, apartments, and townhouses.
- Commercial Real Estate: Commercial real estate consists of properties used for business purposes, such as office buildings, retail stores etc.
- Industrial Real Estate: Properties that are typically used for manufacturing, distribution, or storage purposes. Examples include factories, warehouses, and distribution centers.
- Agricultural Real Estate: This category includes farmland, ranches, and other agricultural properties used for cultivating crops or raising livestock.
- Vacant Land: Land that has no structures on it is considered vacant land. It can be left undeveloped or used for future construction or agricultural purposes.
For understanding the residential real estate market in Bangalore we will specifically go through residential real estate and won’t focus on other types of real estate categories.
First let’s go through how your investment in real estate can make you money.
HOW RESIDENTIAL REAL ESTATE INVESTING MAKES YOU MONEY
There are only 2 ways you make money through real estate.
- Through price appreciation: Price appreciation is the actual worth/price of the property going up by time.
- Rental Yield: You can give your property on rent to the tenants and expect some rent out of it.
Average rental yield in Bangalore is close to 2-5%. For a very good real estate investments it can go as high as 8-10% and can go as low as 1-2% for bad investments.
PARAMETERS THAT CONTROLS THE PRICE APPRECIATION AND RENTAL YEILD
- How close your property is to major crowd attractors like shopping malls, metro lines, highways, office areas and lakes etc.
- How posh is your society and how many amenities are being offered by staying there.
- How good is the demand to supply ratio, if more customers wants to rent you can negotiate the rent.
- And a lot of other parameters…
Now coming to the main question, why residential real estate investing in tier 1 city like Bangalore could turn out bad.
Residential real estate market in Bangalore is over inflated with very low rental yields and low price appreciation. Making the overall cashflow negative.
WHY RESIDENTIAL REAL ESTATE INVESTING IN BANGALORE IS A BAD IDEA
There are 2 ways you purchase a real estate, we will take both the cases and do a technical analysis of the both
1. TAKING LOAN FROM A BANK
Let’s say you paid 20% down and take up a loan for 80% at 10% per annum interest for 15 years, and you purchase a newly constructed apartment. Now assuming the cost to be 1 Crore (for simple calculations).
Rental yield you will get out of this will be 2-5 lakhs, on a positive note let’s take 5 lakhs.
Price appreciation we will take 5%, so that will compound at 5% CAGR.
Now you will make 10 lakhs for the first year, but wait we have to minus the EMIs also and don’t forget inflation. for the loan specifications above you will be paying 85,968 EMI and consider 6% inflation so your price appreciation balances inflation (assumption).
So are putting 5 lakhs rent in your pocket and paying 10 lakhs in EMI yearly, so your net cash flow is negative even with a good rental yield.
Not to mention a flat is not much worth even the apartment complex gets older, so after 20-25 years it will become really hard to find someone willing to purchase it. Any other liquid investment mode will give you much better results.
2. PAYING EVERYTHING DOWN
Even if you pay everything down, you are making close to 10% yearly (adding both price appreciation and rents). So you are beating inflation by 4-5%, and net profit you are making is 4% annual. It is not bad if you have a lot of capital and you just want to preserve your capital and balance your overfall portfolio but for someone who is putting all his money in real estate it is not advisable.
Stock market give 13-15% annual returns which beats inflation by 9-10% and compounds your capital much better.
Here we have not included the operational cost of owning a real estate ie. furnishing, repairs and other secondary costs.
ConCLUSION
In area like Bangalore (tier 1 city), property prices are already inflated a lot so you can’t expect exponential price appreciation or great rental yields. you can make 10% yearly through your investment, which is not bad.
But if you are parking your money for so many years in a non liquid asset hoping to double every 4-5 years. We are very sorry to tell you but this is very unlikely to happen in a real estate of Bangalore.
We suggest only to invest if you already have a big portfolio and want some risk management and diversification, considering you can pay everything down without any loan it is good but in all the other cases residential real estate investing in Bangalore is a bad idea.
Commercial real estate is complete new field and can be a good investment idea though.
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