When it comes to real estate investments or simple purchase of a residential house, most people do not factor in all the costs. In reality, there are several which total up to a huge number. But they are often ignored or accepted as a common practice.
Typically, while buying a house, one suddenly realises that the budget has gone haywire completely because additional costs have to be incurred. Let's look at these different costs in a real estate transaction?
There are indeed many and most of the major ones have been outlined below. A special one needs specific mention, which is the conversion from Carpet Area to a Super Built Up Area. Carpet Area is the actual sellable area that you should measure with your tape, whereas super built up area includes all common areas such as lifts, parks and things that most people will never know of.
This conversion from Carpet to Super Built Up is called loading and this often varies from 30-50 per cent, depending on the project and type of property. Let's take an example. A premier builder is selling his flats in Goregaon with a super built up area of 1,200 sq.ft.
Quoted price is Rs 12,000 per sq ft and thus the cost without including any of the costs given below would be Rs 1.44 crore (Rs 14 million). However the actual carpet area is just 875 sq ft (loading of 37.5 per cent) and hence the actual carpet area cost comes to Rs 1.44 crores/875 = Rs 16,457 per sq ft. This is outrageous and yet every real estate seller, be it developers or individuals, get away with it as it has become an accepted norm in a real estate transaction.
Basic costs
Stamp Duty: 5 per cent - varies across states.
Brokerage: 2 per cent
Parking charges: Rs 300,000-10 lakh
Water connection and electricity deposit
Maintenance: Rs. 5-15 per sq. ft. and upwards depending on the type of property
Wear and tear.
Legal fees and litigation costs
Home Insurance
Interest cost: If you have taken a home loan
In the above example the stamp duty would work to be Rs 1.44 crore X 5 per cent = Rs 720,000
Registration charges: Rs 0.3 lakh
Brokerage: 2 per cent will be Rs 288,000
Parking charges = Rs 500,000
Other charges: Rs 120,000
Total of basic costs(one time): Rs.16.58 lakh. Now the cost to you has just gone up from Rs 1.44 crore to Rs 1.60 crore.
Besides these, there could be a major interior work that could cost from a few lakhs to a much higher number. Then comes furniture, which could again leave a big hole in your pocket. However, you have an option not to incur this expense, especially if you plan to rent it out.
Now on your flat of Rs.1.6 crore + Amount spent on furniture and interiors, you have to incur a maintenance cost of Rs 7,200 per month (Rs 6 per sq ft), plus any wear and tear that might happen. Wear and tear is not a regular phenomenon and will not happen in the first few years of your property. However, depending on the quality of construction and type of usage, this could turn out to be a sizeable expense.
Most people in India do not buy a house insurance or property insurance but for those who buy it, it's a small cost to bear. If you now decide to sell your property then there are taxes that you need to factor in.
Long-term capital gains: 22.66 per cent if sold after 3 years
Short-term capital gains: 33.99 per cent if sold before three years
People are often clueless about their exact real estate returns earned over a period of 10,15 and 20 years. A lot of them will utter numbers such as 12 per cent, 15 per cent or higher numbers, factoring in rent. We did number crunching for a hardcore real estate investor who has been investing in the property markets since 1988 and his returns were in the range of 9-10 per cent compounded annual growth rate, after all costs and taxes.
Check your own numbers
If you have ever made a real estate purchase, calculate the returns that you have earned over the past 10 and 20 years after factoring in the various costs incurred and taxes (if you had to sell it today).
The writer is director, My Financial Advisor
