To Buy or To Rent an Apartment? - 1

This is the question that keeps haunting the minds of the service class individuals
who migrate from their native city to other places in search of work – Whether to buy or to rent an apartment. Here is a small example that can help in making a decision about buying a house or renting it. Best is to observe it in terms of the market rates, so let’s consider a practical example with the real estate markets rates of buying a flat and renting it.

Here’s an example:

A 3 BHK apartment of around 2000 sq. feet is being priced at 4200 Rs. per square feet in prime locations like Pune, Hyderabad or Bangalore. All these cities are IT destinations of India. So the basic price of the flat comes out to be around 84 lakh Rs. flat!

Then, add to it the stamp duty, registration charges, etc. and the price will shoot up to around 90 lakhs. Interestingly, these apartments are new constructions and are far off from the main city. Builders claim that it is the upcoming area and will be populated soon.

See another alternative – to rent.
A 3 BHK apartment in the same locality with same amenities and facilities are being offered for rent at the rate of 15,000 – 20,000 Rs. per month. However, the size of these apartments are a bit small, around 1500 sq. feet, as compared to 2000 sq. feet for the flat for sale. So if you do some kind of “scaling” for size, the rented apartment for 2000 sq. feet area would come for a monthly rent of 25,000 Rs.

Proceed to the calculations for the 2 alternatives

To Buy or To Rent an Apartment? - 2

This is part 2 of the article: To buy or to Rent and Apartment. Please start reading from Part I, before continuing with this part.


Now consider the calculations:
The lowest interest house loan is today available at 12%. Going with that, if someone wants to purchase the house costing 90 lakhs, the EMI would come to around 1 Lakh Rs, per month for a 20 year long tenure loan. Compare this EMI to the rent you pay if you rent a similar apartment. The EMI comes to almost 4 times the monthly rent.

Let’s not forget that once you finalize the deal of buying the house, your EMI will start immediately. However, you may have to wait for getting the possession of your house for months. In cities like Pune, which is witnessing an 80% shortage of workers, due to the MNS led “Anti North Indian Agitations”, the building work has been severely affected. Possessions are delayed due to labour shortage in construction.

People who have booked the flat are hit in many ways.

1. They have to live in rented flat and pay the rent as their bought flat is not ready

2. No possession of flat, but their EMI payments are hurting them.

3. Some companies have strict policies for claiming tax benefit. The policy says that Home loan benefit can be claimed only if employee gets the possession letter. So even though they are paying their EMI’s, they cannot claim tax benefit for home loan repayment.

Then, suppose you get the possession of the flat. How about the other costs? You will have to pay the property tax, corporation tax, etc. Also remember that your new house is far off from the city, that adds to your commuting expenses. How about the insurance premium that you will have to pay for your house loan, for which your bank is the beneficiary (and not you)?

Then, how about the mental tension of repaying the EMI each month for 20 long years? What if you loose your job after 5 years?

So, buy or rent? The choice is yours! The real estate market is “said” to witness a fall. God knows when it will come, or whether it will come.

Weigh your pros and cons. Don’t just jump in with your assumptions that may prove to be costly at a later stage.

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SBI MF Real Estate Equity Fund Review

One of the Indian’s largest mutual fund houses have filed application with SEBI for yet another new fund or NFO, that too in the Real Estate or Infrastructure sector.
The fund will be launched with the name of SBI Real Estate Equity fund or
Magnum Sector Funds Umbrella (MSFU) Real Estate Equity Fund. As per the offer document, the aim of SBI MF Real Estate Equity fund is to provide investors an opportunities for long-term growth in capital through active management of investments in equity and equity-related instruments (including derivatives) of companies in the realty and similar sectors and in debt and money market instruments.

The SBI Real Estate Fund scheme will be available in 2 plans:

1) Growth Option: Where the dividend money will be re-invested
2) Dividend Option: Where the dividend money will be paid to the investors

Unfortunately, Tax benefit is NOT available under the SBI MF Real Estate Equity Fund.

It is an open-ended scheme and it would be available in Retail and Institutional Plan with growth and dividend options.

Minimum investment for the individual retail investors is Rs 5,000 while under the institutional plan, it is at Rs 5 crore.

The SBI Real Estate Equity fund will be tracking the benchmark composite benchmark created using BSE Realty Index to the extent of 60 per cent of the portfolio and BSE 100 for the remainder 40 per cent.
So ultimately, it seems to give a mix of Real Estate as well as other BSE 100 companies when it comes to performance management and tracking.

However, one thing to note is that the Real Estate index is dominated primarily by the Real Estate giant DLF – which has a 35% weightage to move the Real Estate index up or down. Probably that may be the reason why the SBI Mutual Funds have kept a portion of this fund benchmarked against BSE 100.

No details are available about when this NFO will be made available. Investors who are really bullish about the real estate price rise, which is witnessing a downfall in US and UK markets, may like to take a bet!

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