33.24 How do you Evaluate the ROI of your Real Estate Investment?

Evaluating your Stock Investments is relatively easy.

• You can check out your CAGR over a 3-5 year basis, and you will have an idea of how well your portfolio is doing.
• Plus you have tons of Financial Data and Trends to look at before investing in a Stock.

But in Real Estate, this can be a little harder.
All the data are not transparent and there is more to it than what meets the eye!

In our previous newsletters, We saw that the actual average Asset Price Appreciation from Real Estate in India is:
~3 - 4%.

But we also discussed why this is the only metric to evaluate our investment.

Let’s take a deeper look:
Real Estate returns depend on 3 things

• Property Appreciation
• Rental Yield
• Tax Efficiency

Property Appreciation

• It will depend a bit on your location and the uniqueness of your property.
• But an average that you can expect would be: 3 - 4%.
• As a thumb rule, don't buy Real Estate near Airports or upcoming projects hoping that your Investment will double in 1-2 years.
• More likely than not, all that has already been factored into your purchasing price and you are paying a premium already to acquire such properties.

What is Rental Yield?

• This is the income that you make from renting out your property.
• This could be a residential business or other businesses like cafes, restaurants, etc.

Since most of us focus on residential businesses let’s stick to that.

• Tier-1 cities like Delhi and Mumbai offer lesser rental yields.
• Go check out how much rent a 2Cr property gives you. It will be somewhere near 45-50k per month. Rental yield (~2.5-3%).
  • Is this 3% good? No. But we will cover that later.
  • But with a good property, this can reach 4 - 5% easily.

Tax Efficiency

• This is the rate that can be saved using Debt Financing, Tax-saving strategies, etc.
• More than 70% of Real Estate Deals happen this way.
  

So most of the real returns are not captured in the official data.
You pay a lot of charges for your Real Estate Deals:

• 25% (Tax already paid on your Liquid Capital)
• 10% (Charges, Commissions, GST)
• Now on top of this, you are also paying 20% tax on your gains.

But if you use debt diligently and make smart tax-saving decisions.
You can make a better return on your invested capital.
Now if you put it all together.
The actual return on a Real Estate Investment could easily be >10%.

Pretty good, right?
And it’s definitely possible.

You just need to focus on getting good Real Estate at the right price.

Source

• Akshat Shrivastava's 30 days Real Estate newsletter.