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Sanjay is a young entrepreneur. He launched his venture a few years ago and has done exceedingly well. He is planning on moving to a new office and the question that is confronting him is whether he should purchase or rent an office. He also lives in rented accommodation.
Owning property has always been the middle class dream. It gives one substance and Adam Smith’s oft quoted saying, “If you want to get rich, buy land – they do not make it anymore,” has been the mantra of most aspirants. The question facing Sanjay is whether at this time he should continue renting premises or buy.
The real estate market is depressed today. Builders are bleeding. Though they do not advertise this, if a serious buyer approaches them they are agreeable to offer discounts as much as 15% to 20% -- a development not thought of a few years ago. Apart from the high prices, a factor that has contributed to this is that the investor is no longer there – the investor who would purchase many apartments while the building is being built and then sell when they are complete (and make huge profits). The reason for this (especially for apartments) is the extremely low returns. The rental on an apartment costing Rs 3 crore in Parel yields a return of barely 4% per annum. In addition the owner has on top of this pay municipal and society charges. In some areas such as Bandra the return is marginally better. Offices in certain upmarket areas such as Bandra Kurla Complex give returns as high as 9-10% while in Bandra itself the return is again fairly low (around 6%).
With regard to an office, Sanjay should consider renting one. This is because his business is growing and if it continues to prosper, it is likely that he would want to move to larger offices at a later stage. At that time, to sell and then move might be difficult. Additionally, the rent paid for an office is entirely tax deductible and the maintenance charges are paid by the landlord. Often landlord, at the start of a lease, paints the offices and offers various fittings including air conditioners and some fittings. Additionally, it makes no sense in purchasing an office as that money could, if ploughed back into the business would give a much higher return.
With regard to residential accommodation my recommendation to Sanjay would be different. My suggestion would be to purchase taking advantage of the discounts builders are now offering. He must of course decide on an area that he plans to reside in for at least the next ten years and then zero in on the residence he wishes to purchase. The benefit of purchasing a house is that he can, in his own individual right, get several concessions especially if he takes a loan. He would be entitled to a deduction on the principal repayment of the housing loan and also on the interest paid (subject of course to limits permitted under the Income Tax Act). The interest on housing loans is also compared to other types of loan low – ranging from 9.5% to 10.75% (depending on the amount and the bank). Furthermore, any improvements Sanjay makes to the apartment will enhance its worth.
Above all, the great benefit in owning a house is that there is the likelihood and the possibility that in the future the price will rise and as Sanjay would have purchased it for the long term, if the market goes on an ascendant in a few years, he stands to gain. In addition, apart from anything else, it gives Sanjay and his family stability – the certainty of a roof over his head and an opportunity to grow roots.
The writer is managing director, Cortlandt Rand, and an author
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