Showing posts with label investment in properties. Show all posts
Showing posts with label investment in properties. Show all posts

High Priced or Low Priced: Which one should I go for?

Many often, we come across this dilemma when we wish to make an investment, not only in Real Estate, but even while investing in Equities and Bonds. Let us try to decipher this confusion.

Define a Time Horizon

The first thing you should do is to decide is the time window you are looking at while making the investment. The decision of high/low valued assets will follow your time horizon. We typically define the windows as follows:

1-5 years: Short-term Investment
5+ years: Long-term Investment

Everything has a Limited Upside

This is one fact that you should imbibe in your thoughts if you want to be a successful investor in any asset class, real estate included. You cannot count indefinitely on the increasing prices and trust that they will keep on increasing forever. There will be a stage when the price movement will virtually halt and the growth rate will shrink manifolds.

The Decision!

Once you have decided your time frame and imbibed our above advice in your wits, it’s time to take the decision. Check the analysis done below:

Here we are taking an assumption that the upside for High Priced property is 10 years & for low priced, it is 7 years. This is justified because generally the high priced property is more sustainable as compared to the low priced property.

Initial Investment
Initial / Long Term Growth Rate (%)
Short Term (1-5 years)
Short Term Returns
Long Term (5+ years)
Long Term Returns
Low Priced
$ 100,000
13 / 8
$ 163,047
$ 190,178
High Priced
$ 1,000,000
8 / 8
$ 1,360,489
$ 1,999,005

As is apparent from the above analysis, the Low Priced Property yields more returns in short term and comparatively lesser returns in the long term as compared to the High Priced Property.

With this illustration, this discussion comes to a conclusion:

Low Priced  :
Short Term
High Priced :
Long Term

Disclaimer: The above analysis holds good for most of the cases, but not all. Hence it is advisable to take an informed decision before making any investment.

------ Thanks for reading RealT Horizon J Happy Investing ------

Valuation by Rental Prospects - Real Estate Valuations

In our post - Valuation of Real Estate: How can you value your RealT?, we discussed about various parameters one should consider while valuing a RealT property. Today let’s discuss about one of the technical tools of valuation which forms a vital component of this process.

Today we will discuss about a monetary parameter of valuation. We will take a simple real-life case study and show how ‘Rental Income’ played its role in constituting the value of that asset.

Before we begin, let’s make some validated assumptions. We are saying ‘validated’ because the case we are discussing here is a real life case.

Case Study: Rental income from an asset in Civil Lines, Kota (India) [Places’ names have been changed deliberately]

An asset was bought by a person, 10 years back, in a posh locality in Kota, Rajasthan (India). Following are the assumptions:

Purchase Price
INR 2 million
Upfront Investment in Maintenance
INR 400,000 (20% of purchase price)
Yearly Maintenance Cost
INR 100,000 (5% of purchase price)
Initial Rental Income
INR 7,000 (Validated from Case Study)
Appreciation in Rental Income per annum
8% (General practice, as well as validated)

We are not taking into account the time-value-of-money & the appreciation in the asset’s value over the time. This is just to keep the things simple and calculate the impact of only Rental Income as compared to the investments in the asset.

Following are some basic calculations of total Investments and Returns in the form of Rentals:

All figures in INR '000. Click to enlarge.

 =>  Returns from only Rental Component as compared to the overall investments:

This figure shows that this person has recovered his 41% investment in the property, just by rental incomes! He didn't have to do anything in earning this revenue.

Beauty of Rental Income

The above discussed case study clearly shows that Rental Income indeed forms a vital component in the overall valuation of any asset. It is just like dividend investing: you keep on getting recurring returns on your invested money, leave aside the appreciation in the asset.

So next time you think of investing somewhere, just evaluate whether or not that asset is capable of generating recurring returns in the form of rental income!

------ Thanks for reading RealT Horizon J ------

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