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Investment in property is the best bet by a long shot as the returns are almost 15% compounded annually, on a 15-year period, which is hard to come by from any other asset class.

Investment in real estate remains a most profitable proposition in India, particularly in the National Capital Region (NCR) of Delhi, which is growing at a feverish pace.

Overall, the returns on long term, say around 15 years, are almost 15% compounded annually. These kinds of returns are hard to come by from any other asset class.

However, people say that the prices in Delhi or Mumbai have gone up very high and any investment at this level would not fetch good returns. But if you see the past records, in the long term, the high-price level gets evened out and the overall returns remain high.

At present, interest rates have started softening, which will improve the buyers’ capacity to borrow for purchasing houses. But, this may push the property prices further up from the present level, which is already considered to be high. Therefore, if you want to buy a house for personal use or for investment purpose, experts feel it is not advisable to wait for prices to correct. It will be better to make a long-term investment, if you want to invest in property.

Rentals in the NCR have soared markedly in the last couple of years. If you take the rental income into account, the net investment made by you to buy the house is even less. For example, if you buy a house for Rs 1 crore, your EMI at the present rate of interest — around 10% on 20 years’ repayment period — will be Rs 96,502. Out of this, Rs 83,333 will be adjusted against the interest of the principal for the first month and the rest Rs 13,169 will be used to set off the principal amount. So, for the next month, the principal will be reduced to Rs 99,86,831 against Rs 1 crore at the beginning of the loan. Therefore, the interest for the next month will be reduced to Rs 83,224. And hence, only Rs 83,224 will be used from EMI to pay the interest and rest Rs 13,279 will be adjusted against the principal.

In this way, the interest burden will keep on reducing, which will enable the larger portion of EMI to be adjusted against the principal amount. At the end of the fifth year, you will have paid only around Rs 10 lakh from the principal. But this will bring down your interest payment from your EMI to Rs 75,014 as against Rs 83,333 at the beginning of the repayment period. This will help increase the principal repayment to Rs 21,488 by the end of the fifth year.

Annual rental of an apartment has gone up to around 3% of the capital value, against 2.5% of the capital value a couple of years ago. This means that an apartment of Rs 1 crore will fetch around Rs 25,000 per month or Rs 3 lakh per annum in rentals. This will reduce your interest burden substantially. In the first year, at 10%, your interest burden on a Rs 1 crore loan would be Rs 9,92,552. If you adjust the rental income, the net outflow on account of interest payment will be only Rs 6,92,552. This will bring down the effective interest rate to 6.92%.

The rentals normally escalate by 10% annually; but even if you take an escalation of only 5% per annum, the interest burden will keep on declining.

At the end of 14 years, rentals will be more than the interest portion of your EMI. At the end of the 14th year, the interest portion from you annual EMI of Rs 11,58,024 will be Rs 5,54,115. As against this, your annual rental income in that year will be Rs 5,65,695.

Not only this, if you buy a ready-to-move-in house, in the first year itself, the effective EMI on a Rs 1 crore house will come down from Rs 96,502 to Rs 71,500. By the fifth year, it will become even more affordable at Rs 66,114, which will further go down to Rs 55,780 by the end of the 10th year. By the end of the 15th year, it will come down to Rs 47,000 only. Therefore, the effective cost of your investment will come down substantially during the repayment period of the loan itself.

If the property prices in the region appreciated by 10% compounded annually, which is very conservative as the prices have seen an appreciation of around 17-25% per annum compounded annually for the last 20 years in the NCR region, the value of your investment will be around Rs 6.75 crore.

If you calculate your return taking the rental income into account, it will be in the range of 15%, compounded annually.

If you take the risk of investing on a house under construction, the return will be even better. However, there will be no rental income in the first few years, but as the cost of the house under construction is normally lower than that of a completed one, both the rental income, as a percentage of your investment to buy the house and the value after 20 years with respect to the cost you paid, is substantially higher.

But while buying a house under construction, you must take care of a few things like the track record of the builder implementing the project, as timely delivery is very important to keep your finances in good shape; also, the burden of maintenance after completion of the house will be lower if the builder delivers quality product.

At the same time, while buying a house under construction, you must take care of the connectivity of the project. Better connectivity to a project will always give you a better price and hence better returns.

Via : ET