Things to learn from big-ticket property deals

Gulping down the news of the Rs-750-crore Lincoln House deal, with a lump in your throat? Back of the envelope calculations point out there is no need to curse yourself for not being able to invest in property and earn big money.

Not just the Lincoln House deal, but the other big-ticket property deals of the Mehrangir House (Rs 372 crore), Jatia House (Rs 425 crore), Maheshwari House (Rs 400 crore) and the Washington House (Rs 341.82 crore) dotting the Mumbai landscape have important lessons to learn for the real-estate investors.

Lincoln House (50,000 square feet) at Breach Candy in Mumbai was on the block since 2011, but got sold only in mid-2015. Even after the long wait, the seller had to budge from their expected price by Rs 100 crore. At Rs 341.82 crore, the Washington House was also sold below its reserve price of Rs 350 crore.

So, if you are banking on your real estate investment to fulfill a particular goal, you may face hurdles such as lack of buyers or even have to wait for long before you are able to sell the property, especially during recessionary phases.

Though the purchase price of the Lincoln house is not publicly known, we can draw similarities between other deals. The famed Worli flat in the Samudra Mahal, which was sold for Rs 21 crore (Rs 1.18 lakh per sq ft) fetched the seller 13.32% annually when we compare it with his purchase cost of Rs 700 per square foot in 1972. Let's consider areas not as prominent as Worli, where a flat purchased for Rs 40 lakh in 2001 fetched Rs 2.4 crore.

The seller would earn a compound annual growth rate 12.18%.

As per the National Housing Board's index to track property rates Residex, a house in Mumbai, which was worth 100 in 2007 would fetch 238 in July- September 2014. This translates to a return of 13.19% CAGR. Compare this with the 10-year return of 17.12% from HDFC Top 200 scheme, which is tax free.

But these aren't the real returns earned on the property. Other costs need to be factored in.

Lincoln house was built in 1933 and later leased to the US Consulate. The new owner Poonawalla will again have to make changes in the house as in its present form it served as an office. The actual purchase price would accordingly increase to the tune of the repairs cost.

These costs are likely to impact your returns from real-estate too. Other allied costs such as monthly maintenance fee, property tax, water tax, electricity bills that need to be footed (irrespective of whether anyone stays there), wear and tear and repair costs including painting, home loan interest, home insurance costs, brokerage, stamp duty and registration fee too need to be added to the total cost before cheering about the profits made on selling the property.

While taking into account the other bills, don't forget to factor in the taxation implications. The profits thus made would have to be invested in another house or capital gain bonds to escape tax. Else, the seller would have to bear a 20% tax (if sold after three years of purchase) on the indexed amount (adjusted for inflation) of the gains. Compare this to investments in select other instruments where returns are tax-free if held for 1 year (stocks and equity mutual funds) and 3-15 years (debt mutual funds, PPF, etc.)

Many believe that real-estate prices move in just one direction - up. Between January and March 2013, price in Delhi soared 202, but have been on a decline ever since. Between July and September 2014, the prices were recorded at 189 as per the NHB Residex. Same is true for Chennai, which has been seeing ups and downs regularly.

You would also face a mismatch in terms of the money needed and the value of the property to be unlocked. For instance, if you just need Rs 20 lakh for your child's education and you have been relying on the property investment, you would have to liquidate the entire house worth Rs 1-2 crore to fund a need of Rs 20 lakh.