Owning commercial space is assuming importance even among retail investors. Investors look at acquiring commercial property by availing bank loans and letting out the property on long lease. One makes such investments with any eye on rental income taking care of EMIs and capital appreciation of the property leaving you with a handsome return on investment made.
However, one needs to validate if this strategy of acquiring commercial property by availing a loan, makes a viable Investment option.
Let us consider an example in the backdrop of the following:
An Investor bought ready-to-let Commercial property partly funded by bank loan.
EMI of the loan is adjusted against the monthly rent.
Let us quantify the strategy with some numbers:
|Property Value||5.0 crores|
|Loan Amount||3.5 crores|
|Margin Money||1.5 Crores|
|Rate of Interest||10%|
|Assumed Rental Yield||6%|
|Annual Rental Income||30 lakhs|
|Average Annual Increase||5%|
|Capital Appreciation (annual)||3%|
|Loan Tenure||10 years|
With the above assumptions, Return on Investment on Commercial Property is shown in the grid below:
|Dates||Yrs.||Rental Income||EMI||Net Cash Flow|
- Return on investment works out to 6.87% per annum.
- Risk-return is not very attractive if one considers expenses like property taxes, periodical maintenance of the property etc.,
- Non occupancy of the property for prolonged periods may further lower the returns.
- On the flip side, capital appreciation of the property beyond historic average may leave one with some handsome gains.
While such opportunities seem lucrative, one need to weigh the options with abundant caution