Investment in real estate is considered wise, but getting hold of an impressive investment option without being subjected to risks is easier said than done. Amidst the spate of options churned out everyday in the name of ‘something new,' PropertyPlus last week brought details of a pioneering concept that promises good returns without the risk factors needling you. In view of the overwhelming response to the article ‘ >Earn rent even on a vacant apartment ' published last week in these columns, and due to public demand we highlight some more aspects of the ‘self-contained, fully furnished studio apartment concept' that would help give you a better perspective and also answer the flood of queries that are still pouring in.
What is the new concept brought in?
It is an alternative model for investing in real estate property, wherein the investor owns one or more studio apartment in a large complex to be offered as a long term lease accommodation to young IT professionals. The developer not only builds the complex, but manages it and passes on the pooled rentals to the investors on quarterly basis.
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In the complex having more than 700 apartments, there may be some unoccupied apartments for short periods. The rentals collected from the occupied apartments will be pooled and distributed to all investors (including those whose apartments are unoccupied) pro-rata based on ownership ratio. This means that even if any investor's apartment has remained vacant, he/she will still get rentals.
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Since the investment is secured by ownership of undivided share of land, an immovable asset, which appreciates over years and the asset also provides periodical returns in the form of rent, it is a safer investment compared to equity markets / other investment products.
Who will maintain the complex?
The complex will be managed by a professional property management company promoted by the developer. The investor needs to enter into a property management agreement.
Where is the project?
The first project based on this novel concept is under construction at Electronic City, a major IT hub in Bangalore. The project encompassing 700+ studio apartments is expected to be completed by December 2012.
What could be the price of each studio apartment?
There are two types of units available for sale now, the price of which varies from Rs. 8 lakh to Rs. 11 lakh approximately. The price is inclusive of furniture, fixtures, Wi-Fi facility, and white goods such as LCD TV, refrigerator and microwave oven.
What rent will it fetch per month?
It will be governed by factors such as locality, surroundings, quality of accommodation, furniture and fittings and facilities provided. In the referred project, one can estimate rentals ranging from Rs. 4,000 to Rs. 6,000 per month per person. The rentals may increase 5-10 per cent every year.
Who will pay property taxes?
The property management company pays the property taxes to the revenue authorities, out of 25 per cent management fee deducted from rents collected.
An example
Let us assume Anand has invested Rs. 10 lakh and owns an apartment in the said project. The apartment is occupied by two persons and fetching a rent of Rs. 10,000 per month. It is expected that the rent will go up by at least five per cent every year.
The occupancy in the complex is 80 per cent. If all apartments are fetching same rentals, the pooled rent for Mr. Anand will be Rs. 8,000 pm. After deducting 25 per cent maintenance charges, he may get Rs. 6,000 pm, i.e. Rs. 18,000 per quarter.
The periodical returns credited to Mr. Anand's account could be as indicated in table at left.Mr. Anand further invests the rent received on each quarter in a fixed deposit, earning eight per cent interest per annum. At the end of five years the interest received could be Rs. 82,000 apx., on quarterly compounding basis.
Mr. Anand decides to liquidate the asset and sells the apartment, which fetches him Rs. 20.12 lakh, giving an appreciation of 15 per cent pa. Thus, on the investment of Rs. 10 lakh, the total returns are as per table on right.
The illustration is drawn on assumptions considering present market conditions and other relevant parameters and is only an indicative preposition.
There will be almost Rs. 15 lakh returns on an investment of Rs. 10 lakh in five years by investing in projects that work on this new concept of studio apartment with property management detailing.
(The author is Director, Institute of Home Finance, and can be contacted on Ph: 093412 13530 or on e-mail atdeshpanderp2007@gmail.com )