excellent post. I did this mental math while buying my first house in 2022 in Pune. The real estate market was just about to revive (post covid lockdown, a lot of IT folks had gone back to their native places, and the rental market crashed)
My mental math told me that in a steady market, I would be getting a 5-6% rental yield (yes, it was that good due to low housing prices). The home loan rate was 7.25%, so a spread of 1-2% was effectively paying for a 3-4% appreciation yield. 1:2 bet!
I happened on this a few months later than it was first posted. Sorry for the delayed reaction.
In the US, residential mortgage holders benefit from the ability to deduct mortgage interest on their taxes. For rental properties, you can also deduct maintenance costs as well as property taxes, and depreciation on the value of the asset (net of land cost). It's those deductions and the ability to lever up 3:1 (debt : equity) that can turn a property appreciating in low single-digits into something with a 15-20% ROE.
Are none of those tax benefits available to Indian investors in residential real estate?
Thanks for the comment! Interest on the home loan is deductible - so if you’re in the top tax bracket (30%), the effective interest rate for a 9% loan would be 6.3%. Principal repayments were deductible up to 1.5 lakh in the old tax regime, but not in the new tax regime. Property taxes and maintenance are also deductible if I’m not mistaken. However, all these things considered, the real rental yield on most properties today would not cross 3-4% , given that home prices have had a steep increase in the last few years, so the 4:1 leverage doesn’t really get you amazing returns
Why don’t you consider the property price appreciation at all? Yes the rental yield could approximate the value of the investment, but that is if you held the house in perpetuity. Most people do end up selling the home at some point during their life (at least 1-2 house sales are fair game for a single life time). Why not factor that in?
I treated it as an investment. So my assumption is that the person who buys the house from you would also consider the rental yield anyway . So, regardless of whether you sell or not , the intrinsic value will be linked to economic value. If you don’t consider this, then it is pure speculation (greater fool theory)
excellent post. I did this mental math while buying my first house in 2022 in Pune. The real estate market was just about to revive (post covid lockdown, a lot of IT folks had gone back to their native places, and the rental market crashed)
My mental math told me that in a steady market, I would be getting a 5-6% rental yield (yes, it was that good due to low housing prices). The home loan rate was 7.25%, so a spread of 1-2% was effectively paying for a 3-4% appreciation yield. 1:2 bet!
I happened on this a few months later than it was first posted. Sorry for the delayed reaction.
In the US, residential mortgage holders benefit from the ability to deduct mortgage interest on their taxes. For rental properties, you can also deduct maintenance costs as well as property taxes, and depreciation on the value of the asset (net of land cost). It's those deductions and the ability to lever up 3:1 (debt : equity) that can turn a property appreciating in low single-digits into something with a 15-20% ROE.
Are none of those tax benefits available to Indian investors in residential real estate?
Thanks for the comment! Interest on the home loan is deductible - so if you’re in the top tax bracket (30%), the effective interest rate for a 9% loan would be 6.3%. Principal repayments were deductible up to 1.5 lakh in the old tax regime, but not in the new tax regime. Property taxes and maintenance are also deductible if I’m not mistaken. However, all these things considered, the real rental yield on most properties today would not cross 3-4% , given that home prices have had a steep increase in the last few years, so the 4:1 leverage doesn’t really get you amazing returns
It's insightful, thanks for sharing.
Why don’t you consider the property price appreciation at all? Yes the rental yield could approximate the value of the investment, but that is if you held the house in perpetuity. Most people do end up selling the home at some point during their life (at least 1-2 house sales are fair game for a single life time). Why not factor that in?
I treated it as an investment. So my assumption is that the person who buys the house from you would also consider the rental yield anyway . So, regardless of whether you sell or not , the intrinsic value will be linked to economic value. If you don’t consider this, then it is pure speculation (greater fool theory)