Anitha, soon after her marriage in 2007, bought a 3 BHK apartment developed by a B grade builder for Rs. 45 Lakhs. Now with two growing kids and her in-laws moving in with her, her family decided to upgrade to a bigger house. As a result, in 2017, they bought a 4 BHK apartment in another well-developed society.
Now, what best can she do with her old apartment? She’s got a prospective buyer willing to pay Rs. 1 Crore for her property. So, is selling it at this price a good option? Or should she wait for the price to increase further? How about putting it on rent? How about renting it and investing that money in fixed deposits and earning interest out of it? Anitha is in a serious dilemma!
Now, in order to break down this conundrum, let us understand each case.
Case I: Selling the Apartment
Considering the present real estate market, Rs. 1 crore is a decent price that one can get for a decade old property by a B grade builder. This roughly boils down to 12 per cent appreciation y-o-y basis.
Moreover, with unsold inventory piling up and developers willing to negotiate, the market today has completely transformed into a buyer’s market. There are a plethora of options to select from and that too at a competitive price. With the tables turned, buyers are in better position to negotiate, to strike the best deal. Therefore, anchoring to a higher price wouldn’t help the case at all!
Thus, in the current scenario, selling it at this price seems like a good option. Isn’t it?
Case II: Wait for Price to Increase Further
It is often said that in asset market, future outlook is more important than past performance, as it is driven by expectations! Well, with this mindset, one may possibly argue that land is a constantly appreciating asset. Indeed. But one must also understand that the physical structure on land is a depreciating asset.
With age comes the additional expenditure of maintenance and upgrades. Moreover, if a property is left alone, it will just continue to lose/reduce its value.
Age of the property is a very crucial factor that must be given utmost importance. Also, appreciation of an apartment value depends on various factors such as surrounding development, physical infrastructure or with new avenues of job opportunities. And these factors, in most of the cases, are not forever. For instance, Anitha’s apartment is close to Sarjapur Road in Bangalore, an area where multiple new projects are mushrooming at a fast pace. Around the project, there is no scope for further development. IT/ITeS companies are already functional in and around the area. In this backdrop, nothing major is expected to happen that will drastically enhance this particular property’s value.
Further, as mentioned in Case I, the market is flooded with an array of options in the primary segment at a competitive price. Thus, finding a prospective buyer for a decade-old property is not a cakewalk.
And if one still aspires for further appreciation, periodic capital input is the only way out.
Case III: Letting out the Property
This, sort of, evolves as a most convenient way for many. And why won’t it be? After all, who doesn’t like extra monthly income? Well, as they say, there are two sides to every coin. While renting may be great for some, the disadvantages associated with it cannot be side-lined.
Denizens do not have the time and energy to deal with tenants or to resolve issues pertaining to maintenance of a property. Once a tenant vacates, it becomes a task to find another one. Undoubtedly, technology advancements have helped in this field but there are always certain grey areas. Thus, in this case, many tend to take assistance from property management portals that come with an additional cost.
Another important factor is the fluctuations in the rental housing market. While one may anticipate certain amount of rent in five years’ time, there is always the possibility of rental values remaining more or less the same. This, along with additional cost on a property, might result in financial strain.
Case IV: Investing in Fixed Deposits with Rental Income
Gone are the days when fixed deposits were one of the best options to save money due to high interest rates. Macro-economic conditions coupled with increased liquidity due to the surgical strike against black money have resulted in decreasing rates. And with dwindling interest rates, many have now begun to resort to other alternatives such as government schemes that also come with tax benefits. The table below shows the interest that FDs in major banks can fetch.
If we were to believe the market experts, interest rates are expected to decline further in the times to come. Moreover, the real interest rate, i.e. the rate of interest that one receives after allowing for inflation, is also depreciating. The only saving grace would be higher real interest rate in the future, for which the possibility as of now looks very bleak.
Out of all the above cases, Case I (selling the apartment) is most likely to be a safer bet for Anitha. The amount received after selling her property is expected to help her in the repayment of the loan that she has availed for her new home. By doing that, she will also save tax on long-term capital gains.
In one doesn’t have a loan to repay, investing in another property or government bonds/infrastructure bonds is a good option to save tax on capital gains. Last but certainly not the least, it is a matter of personal choice.
Got a different opinion? Tell us in the comments box!