Friday, 20 May 2016

Rental Properties in Patna and cash flow

Rental Properties in Patna
At the height of the real estate boom in Patna, some people purchased rental homes in Patna without looking at whether the rental income was enough to cover all the expenses — including the loan if taken— and provide positive cash flows to the investor.

Going forward, investors should first be concerned about making sure that the properties in Patna they buy pay for themselves. For example, if one invests Rs 35, 000, 00 in down-payment to buy a Rs, 125, 000, 00 property, they should buy what gives them positive cash flows and more importantly a positive cash-on-cash return on their money.

Beware, because many propertiesin Patna, even with today’s lower prices, do not pay for themselves. In these cases the owners end up taking money out of their bank accounts on a monthly basis to cover the negative cash flow properties they have purchased.

Covering negative cash flow from your other savings is not a good investment strategy. Here’s why – look at these two flats purchased in Patna. One is a moderately priced 3 bhk flat inPatna and the other one is a luxury duplex:

COMPARING INCOME OF TWO PROPERTIES IN PATNA
Acquisition information
Moderately   Priced Property
Luxurious Duplex
Property purchase price
45,000,00
1,25,000,00
Down Payment(15%)
6,75,000
18,75,000
EMI ( 10% Interest) 20 years term
36,671
96,502
operating expense monthly
2000
4500
Down Payment cost monthly ( 9% interest)
5000
14000
Total Cost of property per month
43,631
1,15,002
Monthly rental
15,000
30,000
monthly appreciation in rupee term ( 8 % annual appreciation on moderately priced property and 6% on luxurious property))
30,000
62,500
Total  income from property per month
45,000
92,500
Net Profit/ loss Monthly
1369
-22502

The first property “moderately priced” property pencils out a nice positive return whereas the luxury ruins cash flows. Although the rent is higher on the second “fancier” property, it has significantly negative cash flows on operations per year. And going forward, this property will be negative on cash flows for years.  Not only are you investing larger down payment, but continue to add to negative cash flows for over years before the property begins to make money.

The question you should ask yourself is, “Why didn’t I just buy a cash flow positive property?” like the moderately priced flat in Patna?

This is just one example and you need to put the property specifics into your analysis, do some research on realistic rents, area vacancies and expenses to make your own decision.

Just realize that in general, prize properties in Patna are no prize. It’s the moderately priced properties in Patna with decent rents compared to the purchase prices that have positive cash flows and are the real prize.


By: Piyush Mishra, founder www.buysellrentpatna.in

Rent Property in Patna