Deciding on property
I had purchased a 1,000 sq ft flat at Thiruporur in the outskirts of Chennai for Rs 25 lakh in August 2010. I took a housing loan for Rs 13.83 lakh. I had purchased the property mainly for tax saving purpose and also to settle down after retirement.
I retired from service in 2012. But I could not reside in that flat since both my daughters are working in the city. I am now living in a rented flat.
I won’t occupy the flat for another 5 years. The flat is at present vacant and cannot be rented out even at a nominal rate as supply is many times the demand in that area.
At present, at best I can let it for a rent of Rs 7,500. From the rent I need to pay a maintenance charge of Rs 2,300 per month.
I assume that in the next five years, there would be a lot of improvement in the area. At present I can sell the flat for Rs 31 lakh and with that I can close my outstanding liability of Rs 11 lakh. If I deposit the sale proceeds in SBI max gain HL scheme, I can get tax free interest savings of 9.95 per cent per annum. Please advise as to whether I should retain or sell the flat.
— D. Rajarathinam
It is important to distinguish between owning a house for consumption or for investments. If it is for consumption you should give a thought to infrastructure and other needs related to your daily life style.
Had you purchased the flat as an investment, it would not have been a bad decision. Consider this: your property price in the past three years grew at a rate of 7.5 per cent. Beside the rental yield is 2.5 per cent. In nutshell, your investment would have delivered 10 per cent returns annually over the past three years, which is higher than what most other asset classes managed.
But coming back to your question as to hold or sell, we suggest sell out because of two reasons.
One, since your life is going to revolve around your daughters, you may have to live close to their residences.
Two, in the areas that are around 10 km from the place where you live, the prices have jumped by more than 20 per cent in the past few years. So this may increase your rental outgo in the years to come.
Since you have not disclosed with what source you are meeting the EMI, we presume you have good inflows. Hence, it is prudent to sell the flat and settle the loan. Since you wouldn’t need to meet any EMI, utilise the funds to meet the rental outflow.
If you have considerable cash inflows, don’t buy another house. Consider this: if you invest a sum of Rs 19.4 lakh (after paying Rs 60,000 as long-term capital gain tax after August 2013) in a portfolio which delivers 10 per cent, at the end of 10 years your corpus will be Rs 50.3 lakh. If you can deploy the fund at two per cent higher than the rate of rental increases, with the interest income itself will be able to meet the rent . You can leave the deposit as estate for your daughters.
(This article was published on June 22, 2013 in The Hindu Business Line).