[fache89]

There is a thumb rule one must always keep in mind with any investment.

Safety, Return & Liquidity.

In any investment, you can have any two. Not all three

While Stocks give you good returns and are liquid, they are not considered safe.

Bond, Real Estate and FD are safe and give returns, but they are not liquid.

Also remember --

Return of the Capital is more important than Return on the Capital.

[xway]

There cannot be a generic formula in deciding something like this.

The scenarios and investments depend on many factors like current situation, income, committment, existing investments, risk appetite, future plan and many other factors.

So, there is nothing that one size fits all.

Many have made millions in real estate and share markets and similiarly many have gone bankrupt too.

My 2 cents here -

- Current share market is highly overpriced, so wait for correction or another opportunity.
The extremely high valuations does not make any sense to invest. For very long term you can buy blue chip companies.

- Do not put everything in shares, balance it out with real estate, gold and fixed deposits.

- Real estate is good hedge against inflation, and prices are only going to increase. Even a depreciating expense like Cars costs have increased drastically, who imagined getting returns from a car.
I will give you an example where I went to buy a plot, now after 2 years it is still unsold but prices have shot up by a whopping 50%, so now I cannot buy it anymore.

- Inflation is not rightly shared by government, the current number is too high (above 12%) and it was shooting with fuel prices rising every day, see the price of dal, gas, petrol, cooking oil which all have more than doubled in last 2 years. Same is the case of freight, cement, services, steel.

- Current interest rates have been kept artificially low imaging interest rate on loan is 7% but inflation over 12%.
If you are in reverse scenario and putting 1 crore in FD, you will get 5 lacs as interest (nett 4 lacs after taxes), but value of this 1.05 crore will not be even 95 lacs, effectively giving negative returns after inflation adjustment.

Now you can take a call for yourself.

Ideal would be to keep 30% real estate 30% shares 30% nps ppf fds and 10% gold.

Try bringing the EMI close to one third of your savings and you can take the plunge.
If the EMI is lessened by making more down payment than it would be a good idea.

[androdev]

IMHO, the very lack of liquidity in real estate investment is its greatest strength. Mere mortals like me can not put money in stock market and wait for 30 years without "touching" it. Being active is a terrible thing and it is very difficult to be inactive when everything is a click of a button with so much dopamine rush. Even if I am inactive, there is always some higher purpose that forces me to cash my stock portfolio. I am not the type who would have a dreamless sleep knowing there is some 50L sitting in my demat account :-) Even if I have everything I need, I would find some friend or stranger who is in need.

This whole "demat" stuff is like metaverse to me. I am not the type to live in a studio apartment and enjoy my mobile app screen showing a thriving portfolio. There is a reason all our parents and grandparents loved real estate and jewellery - because you can actually enjoy them and pass on to the next generation who would be immensely thankful for the gesture. Maybe art, classic automobiles and other collectibles also qualify but real estate and jewellery is just everyday stuff. Unlike the metaverse of demat accounts - these things (house, farm, jewellery, art, cars) enhance life (not just your generation) in ways you can't possibly imagine.

Having said that, I detest the idea of owning a flat to rent. As others mentioned, the rental is pittance and requires lot of donkey work. So what do I suggest to the OP? Sell your flat and buy a bigger flat. If your flat is already big, sell it and buy an independent house. Enjoy your investment - even if the real estate crashes - you will still be living in a nice place and as long as you are living in it, the resale price is immaterial. If you don't want any bigger house, buy land somewhere safe. Farm in your native place, or plots in a safe project, etc. Grow vegetables or fruit trees - find ways to use the asset to enhance your life. You don't have to spend a minute or a rupee to maintain such investment. You don't even have to read newspaper. Just keep your sale deed safe and write a will :-)

Let us say you invested in stock market and wasted all your prime youth logging in everyday morning to check your metaverse balance. Assuming that wall street crooks left few small crumbs for retail investors and you made terrific money. Guess what you would want to do with it when you are 60? Yes, that's right. Build a big house and end up living without company because kids are grown up and you are not that fun to hang out with.

What about liquidity in case of emergency? The size of your emergency will be proportional to the amount in your emergency fund. Just use common sense and pick any asset that doesn't demand too much time from life. Be an optimist. If all else fails, borrow from a friend who has mutual funds and don't return.

Alright that is an over exaggeration but many ordinary folks who severely overestimate their investing skills are better off investing in a decent house, career/own-business and family.

[thirugata]

Originally Posted by androdev

I used to live in a rented house, I taught my landlord about stock market, now we both live in a rented house.

On a lighter note, just like this comment. When it comes to teaching and learning, it all depends on who is teaching what and who is learning how much.

real estate vs equity is a topic that can be debated till the cows come home. Not getting into that. Having interest/stake in both let me give my 2 cents here. Not sure if this opinion will help you to clear your thoughts or increase your confusion.
First, the return in real estate should be calculated as follows:
rental income + average annual appreciation of the property.
Now, let me add a new variable here if you are looking for investment in real estate.
Have you thought of a commercial property than residential?
Residential generally gives upto 3% rental income, but commercial upto 5% and if you are lucky even 6 - 7%.
Now advantages of commercial : Easy to manage, less maintenance cost per month (even if it is unoccupied). No expenditure on interiors so again nothing to get spoiled left unused. And probably you can look at 2 properties instead of 1 int eh budget you are looking at giving you diversification.
Disadvantage: No tax benefit. And in present scenario, less demand for commercial rental.

2 pieces of advise : Prefer a completed project and see if the loan amount can be minimal. both these factors makes sure you get more return for your investment irrespective of what kind of property you choose.

Hope that helps. Good luck.

[jigar1791@gmail]

So Finally, we have decided to put the idea of a long-term investment in a Real Estate in a closet, atleast for the near foreseeable future.

We did churn numbers to the extent that we feel we're Vedic Mathematics' gurus , and yes, did not want to risk the next 10 years by potentially screwing up cash flows to own something which may not appreciate much. Mutual Funds + existing Insurance Policies + Gold seems to be the most apt investment basket, atleast for me.

For now, the idea is off the table, and at the moment, enjoying parenthood to a baby boy we welcomed on 7th March, '22

A token of thanks to all those who have made the decision making easier by advising from their own experience and highlighting current market trends. Appreciated !

[ValarMorghulis]

A friend has a good chunk of money in FDs. He now wants to invest in an under-construction property by a grade-A builder for investment and to reduce his and wife's tax outgo.

Any suggestions as to who can guide how much loan should they avail and for what duration so that the returns from FDs/ tax savings etc. is optimized?

[warrioraks]

Originally Posted by ValarMorghulis

A friend has a good chunk of money in FDs. He now wants to invest in an under-construction property by a grade-A builder for investment and to reduce his and wife's tax outgo.

Any suggestions as to who can guide how much loan should they avail and for what duration so that the returns from FDs/ tax savings etc. is optimized?

A good CA with understanding of taxation system should be able to help. I think there is a thread on Tbhp, so might be worth posting to find a reputed professional around your friend's neighborhood.

My non-professional advice is - Always maximize the loan. Any under construction property has risks so it is better to reduce your equity and let bank take majority of the risk (although you cannot completely run away if things don't go well). You can always make pre-payments when funds are surplus but you can never ask the bank to reduce your EMI or give you back the money once payments are made.

[JediKnight]

Originally Posted by warrioraks

Any under construction property has risks so it is better to reduce your equity and let bank take majority of the risk (although you cannot completely run away if things don't go well).

This not correct. If an under construction property has some issue you are still fully liable to pay the EMI to the bank.

[warrioraks]

Originally Posted by JediKnight

This not correct. If an under construction property has some issue you are still fully liable to pay the EMI to the bank.

Yes, that's why I mentioned the bracket text in my post. You can't run away completely. But I would rather have the bank be one of the parties to the entire deal if something goes wrong. Anyways this is a personal choice and I wish the OP well with the investment.

[sunilch]

Originally Posted by warrioraks

Yes, that's why I mentioned the bracket text in my post. You can't run away completely. But I would rather have the bank be one of the parties to the entire deal if something goes wrong. Anyways this is a personal choice and I wish the OP well with the investment.

This is an incorrect advice honestly. Banks don't have any real risk as such when they lend to you as a person for any property purchase. Whatever they lend is also covered with other assets or insurance at their end.

Ultimately the individual borrower is the one who is carrying all the risk - be it interest rates, loss of income, delayed project or defaulter builder.

Banks carry the risk when they lend very large sums to corporates with shady promoters but otherwise the individual is always at the receiving end.


Correct advice: Borrowing from a more risk averse bank (such as a large PSB or very large private Bank) can give you some peace of mind with this assumption that the paperwork for the property is in order before the money is lent to the borrower. This is slightly better than anything else, when purchasing any under construction property.

[Entsurgeon]

Originally Posted by thirugata

real estate vs equity is a topic that can be debated till the cows come home.
First, the return in real estate should be calculated as follows:
rental income + average annual appreciation of the property.

Replying to a two year old yet evergreen post.
We calculate returns in real estate, but wherever this RE vs other investments is discussed, do we ever calculate the amount of investment? Unless we do that we cant arrive at accurate ROI.
Now the cost of your property isn't really your investment. Your investment in RE = Down payment + (monthly emi - monthly rental). Unless the property is vacant, even if its self occupied, it would usually save you your rental costs and hence should be factored in.
Thus, when comparing RE vs Equity returns, one should actually compare returns on one time investment equivalent of DP plus monthly SIP equivalent to the (emi - rental).
This will give more accurate picture unless you pay entire real estate cost upfront with zero loan. Only in latter case, you can compare the returns on equity investment vs full cost of RE.

[warrioraks]

Originally Posted by sunilch

This is an incorrect advice honestly. Banks don't have any real risk as such when they lend to you as a person for any property purchase. Whatever they lend is also covered with other assets or insurance at their end.

Ultimately the individual borrower is the one who is carrying all the risk - be it interest rates, loss of income, delayed project or defaulter builder.

Your advice is legally correct, so I am not challenging that.
But life goes beyond legalities, especially at the time of black swan or turbulent events.

The initial query from OP was about a friend who has a good amount of money in FDs. For the sake of simplicity, let's say someone has 1 crore in FDs and buys a house worth 2.2 crore.

Scenario 1 - Living in a ~2 crore house with maximum amount loaned by a bank. Minimum downpayment was given so the person still has more or less one crore in bank FDs.
Bank Loan - 2 crore
Money in FD - 1 crore

Scenario 2 - Living in a ~2 crore house. Downpayment was 1 crore. So bank FDs is more or less minimal. The rest amount was loaned by bank.
Bank Loan - 1 crore
Money in FD - 0

In case of builder default or financial crash or hard to loan applicant or financial system shocks, which scenario is less stressful for a person?

Again what you are saying is logically correct. So no disagreements there. My post was more around building a resilient financial profile in the context of someone who has a good bank balance. No right or wrong answer here but paying upfront to the bank is a one way door. You will not be able to take the money back. However lower upfront payment gives you more flexibility in life. At the end of the day, this is personal finance so it's a personal choice.

[sunilch]

Originally Posted by warrioraks

Your advice is legally correct, so I am not challenging that.
But life goes beyond legalities, especially at the time of black swan or turbulent events.

The initial query from OP was about a friend who has a good amount of money in FDs. For the sake of simplicity, let's say someone has 1 crore in FDs and buys a house worth 2.2 crore.

Scenario 1 - Living in a ~2 crore house with maximum amount loaned by a bank. Minimum downpayment was given so the person still has more or less one crore in bank FDs.
Bank Loan - 2 crore
Money in FD - 1 crore

Scenario 2 - Living in a ~2 crore house. Downpayment was 1 crore. So bank FDs is more or less minimal. The rest amount was loaned by bank.
Bank Loan - 1 crore
Money in FD - 0

In case of builder default or financial crash or hard to loan applicant or financial system shocks, which scenario is less stressful for a person?

Again what you are saying is logically correct. So no disagreements there. My post was more around building a resilient financial profile in the context of someone who has a good bank balance. No right or wrong answer here but paying upfront to the bank is a one way door. You will not be able to take the money back. However lower upfront payment gives you more flexibility in life. At the end of the day, this is personal finance so it's a personal choice.

You have changed the context here from that of the OP. Both of your scenarios are based on the assumption that the borrower is living in the house on which loan is taken.

This inherently reduces the risk (from Builder or local municipal authorities' side) and is better than borrowing against an under-construction property.

In the case mentioned by the OP, it is a very high risk that the borrower shall be taking.

If cases mentioned by you, it is always beneficial to borrow from bank and use your money for growth. In fact, even when you are done with your main loan you can go ahead and take a top-up or loan against property and use that money for growth or life-style. Many folks, including myself, do that.

[warrioraks]

Originally Posted by sunilch

You have changed the context here from that of the OP. Both of your scenarios are based on the assumption that the borrower is living in the house on which loan is taken.

How come? That's not my assumption.

[sunilch]

Originally Posted by warrioraks

How come? That's not my assumption.

In both examples you have mentioned 'Living in a ~2 crore house' which does away with the fact that the borrower here wants to borrow to 'invest' in an under-construction property for some tax-advantages.

Scenario 1 - Living in a ~2 crore house .....

Scenario 2 - Living in a ~2 crore house .....

My non-professional advice is - Always maximize the loan. Any under construction property has risks so it is better to reduce your equity and let bank take majority of the risk (although you cannot completely run away if things don't go well). You can always make pre-payments when funds are surplus but you can never ask the bank to reduce your EMI or give you back the money once payments are made.

I initially responded to this point wherein you gave the impression that some risk shall get transferred to the Bank. That will not be the case at all. Regardless of the quantum of money that you keep aside for emergencies, you have to repay what you have borrowed along with the interest on it. It will not matter if the builder defaults, does not finish the project on time or the borrower looses his ability to earn or losses his other investments in some other scheme. The bank shall, rightfully, demand full re-payment of the loan along with the agreed interest. Borrower keeping aside some money is a good strategy for risk management but still the borrower carries all the risk.

So there shall be no transfer of risk (or any part of it) to the bank in case one borrows for an under-construction apartment. Mentally borrower shall be at peace with the fact that paper work on the date of disbursement is good and complete, as per bank's assessment. Beyond this, bank's don't provide any safety to the borrower.