Realty Property Dilemma of My Friend

A few days back one of my good friend, let’s name him Amit, asked me a generic question, what’s your thought on Realty Property as an investment? My answer was very simple, Property is meant for consumption. As per his facial expressions, I could understand my one liner answer was not something he was looking for and he was certainly not satisfied with that answer. For obvious reasons my one liner answer arouse many questions and it became a big lunch time discussion topic.

Following is our discussion along with a few research material.

Amit : What’s your thought on Realty Property as Investment?

Me : Property is meant for consumption.

Amit : What do you mean by it?

Me : One should buy property to stay in for a long time. It’s too big an investment to take a risk for. There are many charges which we do not include in our calculations. It’s not always “I bought it on X and sold it on X + Y so Y becomes my profit.”

Amit : What are the charges you are talking about?

Me : Property Taxes and Maintenance Charges are those kinds of charges which irrespective of whether property is in use or not you as an owner will have to pay.

Amit : But rent income is enough to cover these charges isn’t so?

Me : Second property onwards all non-consumption property rental is considered as income which gets taxed on your tax slab, irrespective of whether property is let out or not, read further here. So your margin of income on your rent gets reduced further.

Me, now me questioning further : You have taken a loan against your second property. Did you add interest you are going to pay as expenses, as that’s the additional cost to acquire property.

Amit : No.

Me : Did you consider expenses to keep your property habitable, for example buying furniture, color paint every few years. All such charges are owned by owner and not tenant.

Amit : No, but such charges increases rental income.

Me : Agreed. But it takes years to recover such expenses and by the time you recover your expenses you may be up for repaint. You know, rental property is used very rough. So essentially you are just playing zero sum game.

Amit : Hmm. But property prices are increasing very rapidly.

Me : Those are fresh property rates. Second-hand property seldom sells on market price. It’s always on 10 to 20 percent discount. If you don’t believe me then call any property agent. And, finding buyers for the second-hand property is another headache.

Me, again : Do you know tax implications after selling your property.

Amit : I will buy another big property (worth of 1.5+ Cr as of buy time) from sell proceedings of both of my houses to avoid taxes.

Me : OK, so that big property you are aiming for in long term.

Amit : Yes.

Me : Do you plan to stay there in your retirement.

Amit : Yes.

Me : Do you think you will able to afford charges, we already discussed, for such big property in your retirement age.

Amit : Maybe yes.

Me : Will you still prefer to stay in big house when either you or your spouse dies?

Amit : I will either lend it out on rent or sell it.

Me : Man, who rents such a big property. And if finding a buyer for a second-hand 2 BHK is tough then 1.5Cr worth bungalow is next to impossible.

Me, again : In case of emergency need of money, let’s say 5 lacks, you can not sell a bedroom from your property investment.

Amit : But I do have several other investments to meet my emergency need.

Me : Emergency is not going to come in your defined range of investments.

Amit : Nothing can be done now, I have already bought a second property.

Me : You are playing trial and error. 🙂

And we departed for work from our lunch table. Thanks to Amit I have had such discussion which helped me retrospect my own thought processes. I am sure it’s going to help many more.


Also published on Medium.