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How to invest in Real Estate? | Ankur Warikoo | My experience with Real estate investing - YouTube
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Should you invest in
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real estate or not,
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and if you do,
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then what can be the possible returns?
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We will get to know through
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an excel sheet.
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Friends, through this video,
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I want to share with you,
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my own real estate investing journey,
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and through that,
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I want to deliver to you
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an excel sheet objectivity.
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Excel sheet objectivity means
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that without emotions,
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you are able to look at something
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for what it really is.
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After that, you can bring
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in your emotions.
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For example, a lot of people
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want to buy a house,
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they want to have their own roof.
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I understand.
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A person who has lived his
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whole life in a rented house,
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I absolutely understand the
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importance of having your own roof.
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But it will take a lot of
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such decisions under the
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influence of emotions,
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and I would want to bring in
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the Excel sheet objectivity
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that it requires.
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So this was in 2010,
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I took an exit from my
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first startup gaadi.com,
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secondshaadi.com, it was one company,
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and that's why, for the
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first time in my life,
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I had some money.
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And as it was, we were living
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in a rented house at that time,
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my parents had bought a house,
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I had never made a
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personal investment,
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so the moment I had money,
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I thought that the first thing
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we should do is buy a house,
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because if you can buy
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a house at the age of 30,
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that too with your own money,
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then your position increases
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so much in the Indian culture
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and society,
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that it is incomparable.
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And I think I made the
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first fundamental investing
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mistake of my life.
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To understand that,
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we will get to know through
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an excel sheet, that when
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I bought that house,
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and when I eventually sold it
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after almost 6 years,
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how much money did I actually make?
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So first of all, let's make
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a structure of the Excel sheet,
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this Excel sheet is pinned,
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so you can download it
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from the comment section,
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or you can click on the link
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in the description and download it,
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and you can play around with that.
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So first, period of evaluation,
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which means for how long are you
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looking at this investment?
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And that has to be determined,
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it can be 5-10-20-50 years,
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whatever the case is,
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so we have assumed it to be
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20 years.
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You can input in all the green cells,
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which means you can change
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your values in them, but don't fiddle
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with the white cells,
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because that is a derivation
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or a formula.
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How much are you buying a house for?
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So let's start with 50 lakhs.
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I will change all these numbers,
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for my actual investment which I did.
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How much is the registration amount?
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So when you buy a house,
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you have to pay a registration amount
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to the government.
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In Haryana, that amount is 5%,
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if you use the male-female
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co-registrations.
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If you are only male, then 6%.
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If you are only female, then 4%.
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So, whatever that number is.
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This means you will have to give
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₹2.5 lakhs over and above ₹50 lakhs,
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which would go to the government.
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If you are taking it on a loan,
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then how much would be the
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down payment?
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Down payment can be 100%,
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if you have that kind of money,
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otherwise, whatever money you have.
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Usually, you have to give 25%
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if you are taking a loan.
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This means, for this ₹50 lakhs,
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and to give the ₹2.5 lakhs,
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for ₹50 lakhs you will have to make
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a down payment of ₹12.5 lakhs.
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So total upfront, the money
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that you will have to give
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from your own side is ₹12.5 lakhs
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and the registration amount
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of ₹2.5 lakhs, so ₹15 lakhs.
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And the remaining ₹37,50,000
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would come from your loan amount.
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What would be the rate of interest
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of your loan?
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Let's take it to be 8%.
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For how many years?
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Let's take it to be 20 years.
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So you are effective EMI would be
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around ₹31,000.
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If you are a salaried professional,
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then you get a tax deduction
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on the interest of this home loan
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and the principal payment,
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so if we assume you to be
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in the 20% tax bracket,
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then this 8% would actually
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become 6% net for you.
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And then your effective EMI would
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be ₹28,000 instead of ₹31,000.
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This was the first structure.
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From this, the first thing
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you would come to know is in the
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period you are evaluating it for,
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how much interest would you
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pay to the bank?
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This money will go to the bank.
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Neither will it increase the
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value of your house,
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nor will it be your income,
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it will be your expense which
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you will give to the bank
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over that period of time.
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So to buy this house worth ₹50 lakhs,
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if you take a loan at 8% for 20 years,
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then you will pay around ₹30 lakhs
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to the bank as interest.
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And when we buy a house,
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it requires maintenance.
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If you are buying this house
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for yourself, then also you
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need to maintain it,
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or if you are buying it to
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give on rent, then it needs
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even more maintenance,
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because when the tenants leave,
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it needs to be whitewashed,
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if something is fundamentally
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broken or damaged,
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and it was not the responsibility
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of the tenant to repair it,
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then you will have to get that
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also done, so on.
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Broadly, 0.2% of the value of the house
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would be your annual expense,
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which means to maintain a house
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worth ₹50 lakhs, you have to
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spend around ₹10,000 to maintain it.
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Then comes rental yield,
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and this is the most important thing.
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Rental yield means,
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how much rent will you get
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by renting out this house?
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It is important to know that
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in India, the rental yield of
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residential houses is between 1-2%.
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This means, 1-2% of the actual value
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of the house will be your annual rent.
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That is how you would calculate it.
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So what is the rental yield?
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And then let's assume that your rent
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is increasing by 10% every year,
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which generally happens,
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though it's very aggressive,
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but let's assume that increases.
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So how much rent would you
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get in 20 years?
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That is around ₹28-29 lakhs.
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Great!
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So how much is the net cost of
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buying that house?
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This is equal to the cost of
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the house, ₹50 lakhs,
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registration amount, ₹2.5 lakhs,
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the loan that you gave to
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the bank, ₹29 lakhs,
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your expense on the maintenance
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over this period of 20 years,
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plus the rental income you
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earned which was around ₹29 lakhs.
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So the actual cost of owning
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this house by adding all this
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together was ₹56,60,000, ok?
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This was about ownership.
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Now let's say you want to sell
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this house at some point.
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So that is what we are considering.
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So after owning this house for
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20 years, now I want to send it.
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Let's assume that the cost of
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this house increased by 8% every year.
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This is the average real estate
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growth in the country.
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Of course, it could be much
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higher or much lower,
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but this is the average.
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When I will put in my numbers,
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you will actually come to know
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what really happens.
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This means, the house worth
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₹50 lakhs today, after 20 years,
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this house would be worth
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₹2,33,00,000.
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It sounds very good,
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and it actually happens too!
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We buy houses, our parents buy them,
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our grandparents buy them,
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and they are worth crores now,
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so it seems that you made
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a lot of money.
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But we will actually come
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to know what happens.
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So your net benefit of buying a house,
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is your net output,
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which comes after 20 years,
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₹2,33,00,000, minus the expense
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that you did to build this house
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or to own it which was around ₹57 lakhs.
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So net-net ₹1,75,00,000.
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Now, these ₹1,75,00,000 is your
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income over 20 years on an
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investment of how much? ₹50 lakhs.
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So after 20 years, when you are
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trying to determine that the money
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you made through the investment
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you made in the beginning,
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what happened to that?
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And what was the
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starting investment?
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It was not ₹50 lakhs,
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your starting investment was
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₹15 lakhs, which was your
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down payment plus the
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registration amount,
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everything else was variable,
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which you kept giving every month,
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and that was your investment.
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And the total money you earned
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in one go was ₹1,75,00,000.
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So if you put that in a formula
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then your net return would be 14%.
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Now this 14% is including inflation.
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If you consider inflation
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which is around 6%,
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then your actual rate of return
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would be around 8%.
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Not bad at all right?!
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So it looks really good on the
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Excel sheet and I would love for you
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to play around with this
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Excel sheet and get this done.
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Now I would like to focus on
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all the mistakes I made in my
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first real estate investment.
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First of all, I bought my house
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in 2010 and I sold it in 2016.
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So my period of investment
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was 6 years only.
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When I bought the house,
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it was for ₹18 lakhs.
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I bought a house in Faridabad,
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it was an Omaxe property
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worth ₹18 lakhs.
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Again the registration was 5%.
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I made a down payment of ₹4.5 lakhs
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because I had some money,
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plus whatever was the total
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upfront investment including
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the registration amount and all that.
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And I took a loan, and it was
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quite expensive at that time,
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so I took it at 9.5% for 20 years,
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and ₹12,500 was my EMI,
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which I still remember.
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My tax bracket was 20%,
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so that will remain the same.
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This is the total interest.
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Maintenance, so the cleaning
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and whitewash of the house every year,
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but the big challenge was
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when I bought this house, it
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was under construction.
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So from these 6 years,
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it was under construction
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for 4 years,
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so I could not rent it out.
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And finally, when we got the possession,
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since that colony was very new,
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and that area was very far,
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I could never put it on rent,
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so that means this rental yield
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and it was zero for me.
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I did not earn anything through rent.
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So my actual cost of ownership
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was around ₹25 lakhs,
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for a house which was
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for ₹18 lakhs only.
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This is for the ownership
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of 6 years.
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So I sold this house for
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around ₹31 lakhs after 6 years,
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and when I sold it, I felt,
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'What a great deal! I bought
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the house for ₹18 lakhs
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and after 6 years, I sold it
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for ₹31 lakhs! It's amazing!
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I am rich! I made almost
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double the money!'
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But that is not the reality
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because after doing all the math,
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the net benefit that I got
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was ₹6 lakhs only.
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So if I multiply that with
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my rate of return, then I got
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a return of only 6% annually.
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Only 6%!
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This means, all my money could
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barely beat the inflation.
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And in our mind, these ₹31 lakhs
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did not grow by 8%,
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while fundamentally it seems
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that if in 6 years, it's good
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that a house worth ₹18 lakhs
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increases to ₹31 lakhs,
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ultimately after doing all the math,
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it only translated to 6%
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rate of return, which is horrible.
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If I would have invested this
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money in gold, forget stocks,
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then I would have got at least
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an 8-9% return as against
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this return.
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So what are the ways that you
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have to think about
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real estate investing?
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Number 1, the period should be long.
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If I make this period into 20,
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then with the same math,
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everything is the same,
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I say that my house which was
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for ₹18 lakhs, then it grew by 8%,
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and after 20 years,
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it was for ₹84 lakhs,
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so it goes up to 7%,
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which is still not great,
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but it is higher than that 6%.
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Number 2, you will have to have
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a rental yield.
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If you buy a house for yourself,
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then that is not an investment
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by this logic, because then
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it doesn't make a difference.
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Yes, you are getting a roof
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on your head, but that is
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just emotional,
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it is not necessarily
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the best use of your money.
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To understand this,
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I made a very long video
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using an excel sheet, which was,
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Should you buy your house
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or rent your house?
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Please check that out,
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because my suggestion would be,
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not to buy a house
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at least in your 20s
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for your own self.
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The minute I put in
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a rental yield of 1%,
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this increases to 8%
[801]
from that 7%, or 8.1%.
[805]
As I keep increasing this
[807]
rental yield, and make it as 1.5%,
[810]
which means I actually get to
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a point where I can get more rent,
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it goes to 8.5% which is still
[818]
better than what it was.
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And then the number 3 thing, is,
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of course, a lesser interest rate.
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If you make it 8% only,
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then suddenly this goes to 8.6,
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which is also slightly better.
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The way to think about this is,
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this is clearly not working.
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So what is an option,
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and there comes commercial real estate.
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It's not something that
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I have ever done,
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but I know that the rental yield
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of commercial real estate is
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much more than the residential.
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It is around 3-4%,
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at times even going to 5%.
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So if I take it as 4%
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for the same thing,
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then look at the value.
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A return of 10%, which is great, right!
[864]
Because a return of 10% is
[866]
just as good as most investments
[869]
you are making, except of course,
[870]
stock investments, and this tells you
[872]
that this is really good value.
[875]
Now it doesn't matter.
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If I buy a shop worth ₹50 lakhs,
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If I buy a shop worth ₹50 lakhs,
[878]
If I buy a shop worth ₹50 lakhs,
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and keep it for 30 years,
[881]
which means I will sell it
[882]
after 30 years,
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then the first thing that happens is,
[884]
I can earn so much of rental on it
[887]
that this shop becomes
[888]
free of cost for me.
[889]
Instead of costing, it is
[890]
actually making money for me,
[892]
which could be a perennial thing,
[894]
which means I don't need to sell it
[896]
because at some point it has
[897]
become a positive asset for me,
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I have paid for everything already.
[902]
But if I still want to sell it,
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then I will get a net inflow
[908]
of ₹7,40,00,000, which over
[910]
that shop worth ₹50 lakhs and
[913]
a 30-year period translates
[914]
into 10% return every year,
[917]
which is not bad, not great,
[921]
but it is still something
[923]
far far far greater than
[925]
what inflation, or gold,
[927]
or any such asset can be,
[929]
plus the asset is yours.
[931]
This is the way that you have
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to think about real estate investing.
[935]
Go for a longer duration.
[937]
Go for something which has
[938]
a higher rental yield
[939]
which is commercial.
[940]
Go for a lower interest rate
[943]
as much as you can go low.
[945]
And that is when it will
[947]
start making sense.
[949]
Don't make the same mistake as me.
[951]
Through this excel sheet,
[952]
keeping the emotions aside,
[955]
we will bring in the objectivity
[957]
of an Excel sheet,
[958]
and then determine whether this is
[960]
the right asset class for you or not.
[962]
I hope this was useful.
[964]
Ankur Warikoo, signing off!
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