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