Is The Rent Paid Money Down The Drain?

Written by Suresh Sadagopan

If one wants to avoid getting entangled in the emotional aspects of real estate investing & make financially sound decisions , it is imperative that these real estate myths be recognised & dismissed. In this info-bite, we will debunk a fondly held myth in respect of property investment.

Let us take the case of Amit who wants to buy a three bedroom home that is priced at Rs.2.8 Crores. Amit is willing to pay Rs.1 Crore, from his own sources.

However, when that money is invested in that home, he would be losing a potential interest income of about Rs.7.5 Lakhs. He will also have to take a loan of Rs.1.8 Crores over and above that ( assuming he can service that ), he would again pay about Rs.15.3 Lakhs as interest on it ( assuming 8.5% interest on home loan ). That means his combined outgo/ notional loss would be about Rs.22.8 Lakhs. As the years go by, the loan exposure would come down, but only glacially at first. So, for the first several years, the interest component would be quite high.

This interest amount if added over a 20 year period would be Rs.1.95 Crores. The present value of this money today is Rs.1.12 Crores. Amit is hence not paying Rs.2.8 Crores. The cost of the home would actually be Rs.2.8Crores + Rs.1.12 Crores ( present value of the future interest amounts ), which is Rs.3.92 Crores!’

Had he simply rented the place for the entire period ( with an 8% increase year on year ), the Rs.1 Crore would be intact and will compound over this period. Also, if he invests the same amount as EMI after deducting the rent along with the original Rs.1 Crore, it would amount to Rs.10.35 Crores after a 20 year period’.

This way, Amit would be completely free of liability, could move anywhere in his career takes, the liquidity will be intact, the lifestyle is not crimped and he could buy a home at an appropriate time later on, as his savings would have built-up by that time.