Last month I did a post about buying a house and in the comments we discussed whether we were crying over nothing. We also started looking into real-estate as a potential income source. So we decided to do a bit of follow up on that.
When we bought our property in 2013 we took out a 10 year loan which we equated in April last year. Since then we have run the numbers and invested a part of the money we were parking in max gain. This has allowed us to achieve a balance between higher returns and interest paid.
We are currently finishing 4 years of paying the loan and our remaining loan if we take our all the remaining amount right away or at the end of the year. Should we wait another 18 months the time frame will be reduced by another 3 months. We therefore stand to finish off our only debt by the end of 2020 before either one of us is 35. That is definitely a nice thought and we do have some money we can throw at the loan, over and above our current investments and EMI after the yearly raise we just received.
Our calculation of current return vs investment old us that we would have fared better had we invested the money in 2013 instead of buying a house. Let us take this a few steps further to see how owning this piece of real-estate will fare for us:
In the last post we calculated that
Rent earned from property (80% occupancy, 10% hike, tax at 20%): 13,00,000*
Expected Property value: 58,00,000
Money paid (Loan EMI+ Out of pocket): 31,00,000
Total addition to net-worth: 71,00,000
Net gain from property if it sells for peak price at the time: 40,00,000
Increase in net-worth in case the money was invested: 67,04,570
This means we will end up ahead in 9 years with the property (rental coming in) than we would have by simply investing it. This rosy scenario depends on multiple things.
- We are able to sell the house when we want to and are able to get a fair value for it. The value above is dependent on an average of the appreciation in last 4 years.
- We actually earn the rent we believe we will. 80% occupancy and tax on rental income brings this into quite realistic rental gain.
Once we retire we would probably be living in the flat ourselves unless we end up buying another property. If we do buy another property then one of them will be a rental which will provide us with recurring income.
To add or not
Most people include real-estate equity in their net worth. In our current calculations we consider rent as an income but we don’t include the home equity in our net worth. The reasons for those are multiple and not being able to sell the house as quickly as we want is definitely one of them. Other reasons are the unpredictability of housing market and various reasons the price of the house depends on. We might be a great landlord but if the resident associations is a PIA or suck at maintenance our house might lose value.
We are doing and redoing multiple calculations for scenarios where we do invest further in real estate and in ones where we don’t. Real estate has a huge potential of recurring investment post retirement and an increased income during our net-worth creation phase. If we do add the value of our real estate holdings in our net worth as well then the figures start looking great. I would rather err on the side of caution and not include it.
Do you include your real estate equity in your net worth?
We will keep you updated as we go along and improve our finances and take measures to build a nest egg which can take care of us for a considerable amount of time. In past few months we have done many changes to how we invest along with a few experiments to gauge how we can benefit from various investment strategies like dividend investing and others. We really appreciate the feedback we get from our readers which is the major reason for us starting the blog.