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Rajeev Chockalingam is currently working in Mumbai and hopes to retire in a farm house near his hometown, Coimbatore, a tier II city after the next 10 years. However, he wants to ensure he has enough funds to support this retirement and also make his retirement dream come true, without having to resort to debts in the later stages of life. In essence, he wishes to invest in property hoping it will yield exponential returns by the time he is ready for his plans.
If you are like Rajeev, who is looking at investing in real estate, there are two options available. Remember 'invest' in real estate and not purchase to occupy the property. A house is an investment when you look at making money from it - either in the form of rentals or by re-selling it at a higher price. That is why in personal finance, the self-occupied property is never counted as an investment asset.
Let us look at the options available:
1. You can book a flat when the project is launched and sell it off when the project is completed
2. You can book a ready to move in property and start getting rentals right away. These rentals can partially fund EMIs.
Which of these is better? Forgetting the practicality angle, financially which of the options make sense?
Option 1 –
Option 2 –
However, the situation has its own hassles.
Therefore, the tax advantages and the fact that you may be able to resell the property for a substantially higher price after a longer period are the positives. While the adverse cash flow situation this may entail is an obvious negative to this option. Also, please remember a house property is an illiquid asset. If you are stuck with it, that will be a long term stuck together affair. Go for it, if you understand these well enough.
In the case of Rajeev, this may work to his advantage if he chooses his property carefully post research and chooses a location that has scope to appreciate and as it is a long term investment it may work out if he plans to partially pay off his EMI, using the rest from his rent if he is able to find good long term tenants.
However, he could also consider the option of investing in land rather than an actual property as the condition of the property will deteriorate with time. The obvious disadvantage here is the fact that land loans are not easily accessible and he would have to fund the entire EMI with other income sources. Apart from this keeping an eye on the land and protecting the asset long distance is not a very easy proposition.
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