Real estate is one of the most important investment destinations for many of us. And when it comes to investment in real estate (and not for self-use), most investors prefer under-construction properties.
Under-construction properties are cheaper than completed properties and offer greater scope for capital appreciation. However, investment in an under-construction property can be tricky. There is a lot of uncertainty pertaining to completion timelines, capital appreciation, finding a tenant etc. Precisely the reason why under-construction properties are cheaper.
As with any other investment, there are many variables that can affect performance of an investment in an under-construction property. While purchasing an under-construction property, some of the questions that plague your mind are:
- How will the returns get affected if the capital appreciation is not as expected?
- What if the possession of the property gets delayed?
- What will returns be if I sell property on possession?
- What if I hold on to the property for a while and sell it subsequently?
- How will the return be affected if you put the property on rent?
- What if you cannot find a tenant for your property?
- How will monthly maintenance charges and property taxes affect your returns?
- What about home loan EMIs? The longer you hold the property, the more interest you pay.
- How will capital gains tax affect returns?
Things do not always go as planned. You must assess returns in these common scenarios before you make the investment decision.
How do you do that?
Well, you can draw up your own spreadsheet to assess returns in various scenarios.
Bur who has time to do all this? Don’t you want a readymade solution?
I came across an Under-Construction Property calculator on BigDecisions.com (Read the Disclosure section), which can provide the answers you are looking for.
What this Calculator does for you?
As I see, the calculator has been designed as a decision enabler. You cannot use the calculator to check performance of an earlier investment in an under-construction property.
The calculator provides you the returns for many scenarios discussed above. You need to enter cost of the property, loan amount, expected date of possession, expected rent, monthly maintenance charges, planned date of sale etc. You can also specify if you need to pay Full EMIs or only pre-EMI till possession.
Banks do not disburse the entire amount at one go. Loan is disbursed in installments on completion of various construction milestones. There is provision to enter expected dates of completion of various milestones and the associated disbursement.
On the results page, there is a nice slider for capital appreciation and delay in possession. These two are the most prominent uncertainties associated with the investment. You can play around with the slider to assess the impact on return if any of your assumptions go wrong.
I tried to replicate the results of the calculator. I could not replicate the exact numbers. There was a minor difference. When asked about the reasons for difference, BigDecisions team highlighted that the difference was due to certain allied charges such as upfront charges for maintenance, club house etc. These charges were not considered for capital appreciation.
While I do not vouch for the accuracy of the results, the calculator showed the right direction for sure.
How does this Calculator enable decision making?
The calculator also shows XIRR (internal rate of return) of your investment. This makes comparison with other investment avenues easier. For instance, it is good to make 20 lacs (or 20%) on an investment of Rs 1 crore. By the way, we do get fixated with big numbers. However, if it took you 4 years to make a profit of Rs 20 lacs, the return is only 4.66% p.a. You would have been better off putting your money in a fixed deposit at 8% p.a. Even post tax return would have been 5.52% p.a.
So, your boring fixed deposits can provide better returns If you don’t get your real estate investment right.
You are already aware of various risks involved in investing in an under-construction property. This calculator puts a number to those risks and helps assess the impact on returns if those risks materialize.
You never know. This calculator may in fact force you to revisit your decision to invest in an under-construction property.
If you are planning to invest in an under-construction property, you should try out this calculator. It can break many myths pertaining to investments in under-construction properties.
What if you have not finalized the property?
The above was when you have finalized the property. In case you have not finalized the property, BigDecisions has tied up with a leading real estate advisor to show ongoing projects (curated list) based on your choice of city, locality budget and completion date. Subsequently, the process flow is same. Currently, they have information about projects only in select cities.
Disclosure: I have reviewed this calculator under a commercial arrangement with BigDecisions. Though I have tried to maintain editorial independence, I advise readers to consider this arrangement. This commercial arrangement may have biased my opinion about the calculator.