Money More Returns of the Day - Quotes

Property Right Value

“It’s a good deal”, “I think you paid more”, are the general expressions people say when they hear about our purchased flat/property value. I guess most of them comment based on comparison of the some property value they know and some comment based on their financial capabilities.

When I was buying the flat, I looked at my financial capacity to repay the loan amount, the areas in which I would like to buy, flat size and floor plan. I never calculate what would be the “true value” of the flat and am I paying more and if so how much.

The following is the article I read in Outlook Money /Rediff that says how to calculate the “Property True Value” to evaluate is it a rent-worthy property. I found it to be lot dependent on your down payment.
If you are lazy and cannot calculate yourself, send me a mail, I will share you an excel sheet that calculates these values. You can play around with different input numbers. :-)

Follow these steps to correctly evaluate a rent-worthy property. Assume the asked price is Rs 35 lakh and the down payment is Rs 8.75 lakh (or 25 per cent of the property's value).

Step 1: Expected net operating income (NOI)

This is rental income minus operating expenses such as repairs. This cost excludes EMI

Rental Income - Operating Expenses = NOI

Rs 2.4 lakh-Rs 15,000= Rs 2.25 lakh 

Step 2: Annual debt service amount

Lenders want the expected NOI to cover your annual debt obligation. So, they lend in a way that the repayment is covered by the NOI. If the bank wants a debt coverage ratio of 1.15 times, the annual debt service amount will be Rs 1,95,652.17.

NOI / Debt Coverage Ratio = Annual Debt Service

Rs 2.25 lakh / 1.15 = Rs 1,95,652.17

 

Step 3: Debt service ratio

This is the annual debt obligation as a percentage of the total loan.

(Annual Debt Obligation / Home Loan Amt)* 100 = Debt Service Ratio
(Rs 1,95,652.17 / Rs 26.25 lakh) * 100 = 7.45%

 

Step 4: Rate of return on your down payment

This depends on NOI yield and down payment portion

NOI Yield * Down Payment Contribution = Return on Down Payment

[(Rs 2.25 lakh / Rs 35 lakh) * 100 = 6.43%] *

[(Rs 8.75 lakh / Rs 35 lakh) * 100 = 25%]

6.43% * 25% = 1.61% 

Step 5: Market capitalisation rate

This is the sum of the debt service ratio and the return on your down payment

Debt Service Ratio + Return on Down Payment = Market Capitalisation Rate
7.45% + 1.61% = 9.06%

 

Step 6: Property's right value

This is the true value of the property (V). This calculation shows the property is worth Rs 24.84 lakh, which is lower than the asked price of Rs 35 lakh.

NOI / Market Capitalisation Rate = V

Rs 2.25 lakh / 9.06% = Rs 24.83 lakh

Money More Returns of the Day - PPF

When I visited my friend’s place, a cousin of my friend was at his place and he was inviting him for a treat over the weekend. He was giving the treat for the job offer he received from a Pharma company during the campus placements. It was really pleasant to hear someone NOT getting into IT band wagon. I was curious to know how much non-IT companies offer. Even though people say, “Do not ask the salary of man and age of a woman”, I asked him how much they offered. It was a very decent offer and is comparable to what IT companies offer for an engineering graduate just out a college.

Now that he is soon going to become financially independent, I asked him, “It is a very good offer, what will you do with the salary, do you have any plans?”. He said every thing about what all he want to buy and list of places he want to visit and to my disappointment he did NOT say, “I will start investment for future”.

It is very important to start saving/investment at early age, else one has to invest lot more amount at later stage to get the same returns (Experience speaks :-) ). I would say investment is also an art. At the end of the day, it is the proper investments (at right time) that give you the high returns.

There are several investment plans people advice from high risk to low risk depending on the income, age of the person, their financial goals and future commitments. For all the young people who are getting into job at a minimum I would suggest them to invest in Public Provident Fund (PPF) from the first month itself.

As per the new revised Direct Tax Code (DTC), the new tax code proposed to be replacing the Income Tax Act, 1961, PPF will continue to be under exempt-exempt-exempt (EEE) regime.

PPF account is exempted under all three stages.

Stage 1 Exempt - When you make deposit in your PPF account you get tax deduction under section 80C.
Stage 2 Exempt - The accumulation of interest in your PPF account is also tax exempted.
Stage 3 Exempt – The time of maturity when you withdraw your money, this amount is tax exempted.

Tips of investing in PPF

1. Instead of whole lump sum amount deposited once per year, try deposit every month.
2. Make sure that you invest by the 5th of every month. Interest is calculated on the lowest balance between the close of the fifth day and end of the month. If you invest Rs 5000 before 5th of every month, with 8% interest rate at the end of 15years you get Rs 17,41,725.72.
3. Ensure that you continue to make a minimum deposit of Rs. 500 every year.

At the age of 60 or when you retire it is how much you saved will matter more than how much you earned and a proper plan at young age will make 60th birthday as Money (Many) more returns of the day.