What is Rental Yield

Rental yield is a measure of the income generated from a rental property relative to its value and is one of the important measures in calculating the ROI from real estate investments.

8 Strong Reasons why Staying on Rent makes Sense

As with most people of my age, it is always a dream to own a beautiful home - to live a beautiful life, to impress myself, my family and also to impress the world around me, to give my family a comfortable and happy life. 

We were already staying in a relatively smaller ancestral home but the charm of having our own home, crafting it the way we wish to, and living there happily thereafter - was a dream built on lucrative advertisements and teasers. A home is a home, after all. Everyone loves to have their own. We have one of our so called 'dream homes' even today.

But today, my views have changed. Today, I feel that unless age or disease has made one immobile, it is better not to own a home. Yes, and I am going to give you some very strong reasons to start thinking in this direction. But before I give you the reasons to stay on rent, you must know that this is not a new concept at all. Its quite common to stay on rent (in spite of having the ability to buy a house) across the world. Its just catching up in India now.

Its not a new concept

Switzerland has the world’s leading population of home renters in the world. The majority of the population here prefer to rent rather than own their own homes (56% population stays on rent). Hong Kong is second at 49%. Germany comes third in the world leading percentage population of home renters at 48.1%. South Korea has a percentage home renting population of 44.8%. The other countries in which over 30% of their population rent their homes are Japan, Denmark, the United Kingdom, New Zealand, United States, France, Canada, Netherlands, Australia, Ireland etc.

Majority of the countries are experiencing a rise in population of home renters. So, what makes renting a house so lucrative? 

Let me share with you 8 strong reasons why you should start pondering in this direction very seriously.

1. Enables Career Movements

When we are just into the start of our career, we anyways cannot afford to buy a home. So, the bachelors usually stay in rented and shared accommodations - flexible locations, close to their workplace. If the job involves movement across different cities, the bachelors do not have to think twice. This flexibility in movement, mostly unknowingly, becomes their big strength.

Later in life, it is again likely that their career demands movement across cities for their next progression. In many cases, the movement may be across countries. You would never want to compromise an a fantastic new job or a new role in US or Australia just because you have bought a home in India. The emotion of you having your own home may limit your career growth prospects. A rented home, in such cases, gives choices to you and your career growth. This could be an edge that you may have against your peers in the early stages of your earning life.

2. Enables movement of children

Then comes a phase in life when the parents want to have a house closer to where the children study - their schools or colleges, so that the children's commute time is reduced. Parents again do the mistake of buying a house with such transitionary criteria's, even if that means longer commute to their own workplace. They feel that though they have compromised on their own commuting distances, life is now settled. They forget that children grow pretty fast and they will move out of schools to colleges and then to jobs, much sooner than you think. And where would their jobs be? No one knows this answer in advance, especially in today's globally connected world.  The emotion of your having your own home may limit your as well as your children's career growth prospects. A rented home, in such cases, gives choices to you and your children.

3. Helps get rid of useless stuff

Yes, rented home involves movement, but that's good because every time you will move, you will realize how much needless stuff you have been accumulating. This is an opportunity for you to begin the practice of giving away things. And slowly learn to consume less. The rule is to keep attics clear at all times. You will learn to save a lot from questioning your purchases keeping in mind that you could move. Your furniture will also turn minimalistic as it had to fit into every new house.

4. Strengthens your network of friends

As per one of the bestselling books, Ikigai, the Japanese have the most centenarians in the world (people who cross the age of 100), and one of the prominent reasons is their strong social network of friends.

With movement, you will not only get enriched with cultures of different regions but will also enjoy a good circle of friends. These are people who share our joys and sorrows wherever you will live. They will become part of your lives. You can still return to your ancestral houses, and meet with your friends for a meal and laugh about our times there. The wealth that a diverse group of friends can bring into one’s life is alas so underestimated. In these days of social media, it is strange we call people with whom we have no shared experiences as friends, and in real life, be actually so devoid of friends.

[Recommended Read: 26 Inspirational Lessons from the book: Ikigai]

5. Keeps your portfolio liquid

Investing a huge chunk of money for your 'own' home sucks away most of the liquidity from your portfolio, and liquidity is extremely vital for the long term success of your portfolio. It is emphasized with real examples in the book FOOPS!

Tying up money in chunky assets like a house, also leaves too little to save, invest and spend in smaller happy moments of life. That surprise pizza party, the mobile that your spouse always wanted, the trip that you all will cherish forever - these are some of the memorable moments that liquidity gave us. That little bit extra in your hands can create some of the best memories of your life.

[Recommended Read: FOOPS!]

6. Significantly enhances portfolio returns

A rented house, even with a better standard of living than the one you could own, can not only give you a blissful living, it can help you build you wealth faster, and take you to financial freedom much earlier. 

The financial calculations are not difficult to understand.

Even with the best house that you take on rent, you will pay approximately 3% per annum of the cost of the house you are renting. So, in effect, instead of dumping , say 1 Cr in buying a house of your own, you can stay in a similar or better house for Rs. 3 lacs per annum or Rs. 25,000 per month rent. 

That 1 Cr that you would have dumped in the house, can be wisely invested to easily earn 10% returns per annum. Even if you take out 3% from these returns as your rent, you still save 7% per annum, which is approx. 7 lacs or Rs. 60,000 per month. This extra Rs. 60,000 every month can buy you sweet memories, and can be invested to create massive wealth over a period of time. Now, that's some extra saving every month - for doing what? for staying on rent.

If you are wondering whether the capital appreciation goes to the one who owns the house, remember that you cannot count your own house as an asset. Whatever be its capital appreciation, you cannot use even a penny out of it, since you cannot liquidate the house.

7. Saves on house upgrades

Well, once you own a house, be ready to spend big chunks of money on regular basis - for house upgrades. You change, your family changes, your needs change, and the house has to keep adapting to your and your family's changing needs - almost every 5 to 7 years. If you were in a rented accommodation, it was pretty easy - just move to a new house as per your new needs. But now that you have your own house, you got to spend significant money at regular intervals to keep upgrading it. Not only that, when you own a house, be ready to shell out property tax, home insurance and other regular maintenance to keep the house in a livable state. 

8. Freedom to move

Once you get financially free, you have all the freedom to move around the country, and the world, stay in places you like and move away from places you don't like. In that case, you may or may not want to live in a cramped polluted city. May be you love mountains or beaches. May be you just love the calmness and serenity of sea. If you are on rent, you always have that freedom - to choose life.

Summary

If you can get out of social constraints like your plans to gift your house to your children, if you don't bother much about showing off your possessions, and if you have control on the emotions of owning your own home, then it makes a lot of sense to ponder upon staying in a rented accommodation, than your own. It may just be the flip you need to lead a more beautiful and enriching life.

Regards

Manoj Arora
Official Website

Cost Inflation Index base year has shifted. You may be in for windfall tax gains

[Updated : 09-Nov-2018]
Cost Inflation Index(CII) now has a new Base Year. In a seemingly silent move that is likely to immensely impact your taxation on long term capital gains from real estate, bonds, gold and debt based mutual funds, the base year for Cost Inflation Index(CII) has been shifted from 1981 to 2001. Understand more about CII and how this change in base year impacts your future potential gains and taxes thereof.

What is Capitalised Ground Rent?

If you are liable to pay Ground Rent for your plot or flat, understanding the Capitalized Scheme can potentially help you save tons of money...read on...

What is Ground Rent?

As the name suggests, Ground rent is the rent paid for taking the ground on lease from the land owner. Typically, in case where you leasehold a land or a property from government authorities like DDA (Delhi Development Authority), you ought to pay a fixed ground rent annually.

Who is liable to pay ground rent?

All allottees on "Hire Purchase Basis" are liable to pay Ground Rent till the execution of conveyance or Capitalized Value under the special scheme is paid to DDA. Once the capitalized value of Ground Rent is paid to DDA, all previous dues of Ground Rent and/or interest thereon, if any, are not required to be paid.

How much is the Ground Rent?

Ground rent is payable annually in advance @ 2.5% of the cost of land as given in the Allotment cum Demand Letter in respect of all allotment on lease hold basis. 

What if you default paying the ground rent?

In case of default in making the payment of Ground Rent by the stipulated date, the allottee is liable to pay interest at the rate of 10% per annum. 

How long do you need to pay ground rent?

The Ground Rent is payable till such time the property remains on lease hold basis. Once the property is converted into free hold, the Ground Rent is not payable.

Do people default on ground rent?

Almost 60% of the population never bother to pay ground rent for years together. This lapse is either because either they are not aware of it, or they simply ignore it. The government also does not have any strict followup on this rent collection. Whatever be the reason, the ground rent keeps accumulating with late fees and interest charges, and the lease holder will be required to pay the entire accumulated amount whenever he or she plans to sell the house or convert it into free hold.

Liberalized Scheme for payment of Ground Rent

As a simple and easy system to clear the dues of ground rent, a one time payment has been introduced under the scheme "Capitalized Ground Rent". Under this scheme, allottee is required to pay only 7.5% of the cost of land as indicated in the allotment cum demand letter on account of capitalized value of Service Charges in respect of new allotment and 5% in respect of old allotments in respect of unpaid & future dues. Thereafter allottee is exempted from paying Service Charges in future.

Remember that the ground rent under this scheme is 7.5% + 5% of the "cost" of land, and not the "price" of the land. In most cases, the "cost" turns out to be drastically low, thus making this a very efficient mechanism for one time settlement of ground rent.

Is the scheme optional?

Yes, this scheme is 100% optional. The allottee who does not opt for the "Capitalized Ground Rent" would continue to pay the ground rent as per original terms and conditions of the allotment cum demand letter.

If you are owning a leasehold property, make sure you find out whether this scheme can help you save tons of money, before you decide to pay the next ground rent.

Related Posts:

• What is notional rent for a rented house?
• See what people say when they move from the rat race to financial freedom
• Learn how to pursue Financial Freedom
• All about House Rent Allowance
• Read what readers of the book have been saying.
• All about managing money

Cheers

Manoj Arora

Freedom can buy you.... what money cannot !!

Life's Mission | Fan Page | Official Website | LinkedIn | YouTube | Twitter | GoodReads | Quora

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Books to elevate your life
From the Rat Race to Financial Freedom | Happiness Unlimited

Seven (7) Income Tax related changes in Budget 2014 that you ought to know

Indian Union Budget 2014 came up with many surprises for an individual tax payer. Here are the 7 (seven) rule changes that you must leverage to the hilt. Remember that increasing the returns on your investments are as important as increasing your income, if not more.

(1) Increase in basic exemption limit 

The basic tax exemption limit has been increased from Rs. 2 lakh and Rs. 2.5 lakh, which means that there is an additional Rs. 50,000 per year for you on which the government will not levy any tax. Since this additional money was levied a tax of 10% earlier, this would result in an approximate tax saving of Rs. 5,150 for most individual tax payers.

Though small, but a welcome change for all individuals.

(2) Increase in the ceiling for deduction of interest on loan taken for purchase of house (section 24(b)): 

Taxpayers would get more from their housing loans. Ceiling of deduction on interest on housing loan has been increased from Rs. 1.5 lakh to Rs. 2 lakh in respect of self-occupied houses. For houses that are rented out, there was anyways no limit. Those who are paying high amount of home loan interest (more than 2 Lacs per year), the additional tax savings would be up to Rs. 15,450. 

This was long overdue and a welcome change for home loan seekers.

(3) Increase in the ceiling for deduction for investment (Sections 80C, 80CCC and 80CCE)

Ceiling on deduction on investments has been increased to Rs. 1.5 lakhs from Rs. 1 lakh. This allows the individuals to save tax on an additional Rs. 50,000 and depending on the tax bracket that they fall in, they can have tax savings of up to Rs. 15,450 (for 30% bracket). The common investments covered are EPF, PPF, Life insurance premium, housing loan repayment, children tuition fees, etc. 

This is another welcome change considering that the limit was set many years ago. 

(4) Tax exemption reinvestment on long term capital gains on sale of a house (Sections 54 and 54F): 

There was a lack of clarity about the quantum of tax deduction if taxpayer reinvested the amount of the long term capital gains (LTCG) in more than one house. The proposal seeks to clarify that the investment made only in one house would qualify for the tax deduction. Further, it is also clarified that the house to be acquired should be within India only.

(5) Tax exemption reinvestment of on long term capital gains on sale of any asset in capital gains tax saving bonds (section 54EC): 

The tax law provides a deduction from long term capital gains if the amount of gains is invested in certain bonds within 6 months from the date sale of the long term capital asset. It further provides that the investment in such bonds in a financial year cannot exceed Rs. 50 lakhs.

(6) Taxation of income arising from non-equity oriented mutual funds: 

Until now, the units of non-equity oriented Mutual Funds were considered as long term capital assets if those were held for more than 12 months. This period has now been changed to 36 months. 

Currently, the taxpayers have an option to pay income tax on the long term capital gains on sale of such units at the rate of 10% without availing indexation benefit. This option has been taken off.

This would mean that the taxpayers would have to pay income tax at the rate of 20% after taking into consideration indexation benefit. 

These above changes would mean that the investments alternatives to Fixed Deposits such as FMPs would no longer be attractive unless the investments are made for more than 3 years. 

(7) Taxation of REITs (Real Estate Investment Trusts)

REITs are structurally similar to mutual funds and invest only in real estate assets. The tax treatment of investments in the units of listed REITs has been made at par with those of listed equity shares. Therefore, the long term capital gains on sale of units of listed REITs would be tax exempt and the short term gains would be taxed only @ 15%. This proposal would make investment in REITs very attractive from tax perspective.

Related Posts:

• 5 reasons why everyone will never get rich
• All about Income Tax
• The amazing power of compounding
• See what people say when they move from the rat race to financial freedom
• Learn how to pursue Financial Freedom
• Article # 2 in CWB Magazine : From a Good life to a Great life
• Read what readers of the book have been saying.
• All about managing money

Cheers

Manoj Arora

Freedom can buy you.... what money cannot !!

Life's Mission | Fan Page | Official Website | LinkedIn | YouTube | Twitter | GoodReads | Quora

More on "From the Rat Race to Financial Freedom"

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Save Taxes on Capital Gains

Capital Gains are different from money gains. These are the biggest gains that you would ever earn in your life. Understand how to get smarter with capital gains and saving taxes arising out of such gains.. Read More.

What is a Capital?
Capital are the funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services. Real capital or economic capital comprises physical goods that assist in the production of other goods and services.

Capital Vs Money
Capital is different from money. Money is used simply to purchase goods and services for consumption. Capital is more durable and is used to generate wealth through investment. Examples of capital include brand names, stocks, gold. All of these things are inputs that can be used to create wealth. Besides being used in production, capital can be rented out for a monthly or annual fee to create wealth.

What are Capital Gains?
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

Assets that qualify for Capital Gains Tax
As we understood in the definition, a capital is different from money. So, not only you must understand the assets that qualify as Capital ,bit you must also understand the tax structure on those assets. Different assets have different capital gains tax levied on them. Lets go one by one:

(a) Stocks / Equity Funds

• Any investment in stocks or Equity based funds for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Any mutual fund which invests 65% or more of the corpus in equity is considered as a equity based mutual fund.
• STCG is taxed at a flat 15% of the gain.
• Any investment in stocks for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
• There is ZERO tax on LTCG for this asset class.

(b) Bonds / NCDs 

• Any investment in Bonds or Corporate Deposits for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG)
• STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
• Any investment in Bonds or Corporate Deposits for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
• LTCG for this asset class is a flat 10% on the gain.

(c) Debt Oriented Funds / Gold ETFs / Gold Funds

• Any investment in Debt oriented funds for less than 1 year is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Any mutual fund which invests less than 65% of the corpus in equity is considered as a debt based mutual fund.
• STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
• Any investment in Debt oriented funds for 1 year or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
• LTCG for this asset class is either 10% flat or 20% on the gain after indexation.
• Indexation/ Double indexation is a very useful strategy to make these gains virtually tax fee. Read here.

(d) Bullion / Jewellery / Real Estate

• Any investment in Bullion or Jewelery for less than 3 years (Three years) is termed as Short Term, and any gain arising out of the same as Short Term Capital Gain (STCG). Remember that this involves holding the bullion / jewelery directly, and not via funds. For funds, the above section (c) is applicable.
• STCG is taxed as per the applicable tax slab that you are in. It could vary from 0% to 30% depending on the total income in the year. Click here to understand the current tax slab you belong to.
• Any investment in Bullion or Jewellery for 3 years or more is termed as Long Term, and any gain arising out of the same as Long Term Capital Gain (LTCG)
• LTCG for this asset class is 20% on the gain after indexation.
• Indexation/ Double indexation is a very useful strategy to make these gains virtually tax fee. Read more about it here.
• You can save all your tax on Capital Gains out of real estate asset by investing the gain in another property or buying specific bonds. Understand this by an example by clicking here.

The right understanding can save immense taxes for you. Money saved is money earned. Get going.


Related Posts:

• Income Tax Slabs
• All about Capital Gains
• Double Indexation Benefit on Debt Funds 
• See what people say when they move from the rat race to financial freedom
• Income Tax Submission, Delays, Deadlines and Implications
• Learn how to pursue Financial Freedom

Cheers

Manoj Arora

Freedom can buy you what money cannot !!

Author’s Life Mission | Freedom portal | Author's Fan Page | Blog | Face Book  | Google+ |  YouTube | Twitter | Ask for help |

What are REIT (Real Estate Investment Trusts)

REITs (Real Estate investment Trusts) first originated in the United States. REITs were created in order to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities. See whats happening in India on the REIT front now a days, and this can potentially change the way we manage our wealth portfolios today.

Securities and Exchange Board of India (Sebi) issued a consultation paper on draft Real Estate Investment Trusts (REITs) Regulations, 2013. Once it has received feedback from the public, the regulator will come out with the final regulations on REITs. Thus, it appears that after a long wait REITs may finally start operating in India soon.

What is a REIT?

A REIT is a pooled investment entity, just like a mutual fund. After registering with Sebi, REITs will launch initial offers that investors will subscribe to. While mutual funds invest their corpus in equity, debt and money markets, REITs will invest primarily in real estate, and that too mostly in completed, revenue-generating real estate. The rental received from these properties will be distributed among investors as dividend.

Advantages of REITs

• Lower entry barrier: Real estate is a big ticket investment. With the advent of REITs, investors will be able to gain exposure to real estate with a smaller amount. Minimum unit size is expected to be Rs 1 lakh and minimum subscription size of Rs 2 lakh. Thus, deep-pocketed investors will be able to take exposure to real estate via REITs, thereby diversifying their portfolios beyond the asset classes available currently (equity, debt, money market, and commodities). In the future, the investment limit could be lowered further to include all kinds of retail investors. 
• Lower risk: Since REITs will invest primarily in built-up property, the investor will not have to bear development risk, as happens when you invest in under-construction properties.
• Greater transparency: REITs will provide an above-board source of funding to the realty sector, which currently depends heavily on black money. Limiting the use of black money will go a long way towards making the sector more transparent and consumer friendly.
• Easy liquidity: As envisaged by Sebi, the units issued by REITs will be listed on stock exchanges. Whenever an investor wants to exit, he will be able to sell his units on the exchange. Today, liquidity is one of the biggest inhibitors to real estate investment.
• Diversification: The minimum asset size that a REIT will be required to have is Rs 1,000 crore. Having such a large corpus will allow REITs to diversify across locations and types of real estate, such as offices, warehouses, and shopping malls. Such diversification will reduce risk. It is impossible for an individual investor to achieve diversification in his small portfolio.
• Professional management: As with most mutual funds, REITs too will have managers who will manage the realty portfolio and try to earn higher returns for investors.
• Asset allocation strategy: At present, it is impossible for retail investors to apply the asset allocation strategy to real estate. The essence of asset allocation is that you invest in a variety of asset classes. Such diversification lowers risk and ensures that some part of your portfolio does well under all market conditions.

The risks

As with any other investments, investing in real estate entails a few risks too. 

• Real Estate is a cyclical asset. Just like equities, real estate markets also see bull and bear phases. These cycles tend to be longer and deeper than in the case of equities. Another risk is that real estate is an illiquid asset. Since the ticket size is large, it is not easy to sell and exit your investments even in good times.
• During a slowdown, when you are more likely to need money, buyers become even more scarce. Both these risks will exist even when you invest via a REIT. To some extent, by listing on the exchanges, REITs may lessen the liquidity risk associated with real estate but they will not fully eliminate it. In difficult times, you may have to sell your units at a steep discount.

Who should invest?

REITs are well suited for investors with the following characterstics:

• Investors seeking a regular income from their portfolio. 
• The investor should not be already overweight on real estate. 
• According to Sebi's consultation paper, REITs will declare NAV twice a year. Investors will have to take into account their liquidity needs before investing in them. Those who already have high exposure to illiquid assets (PPF, insurance policies, physical real estate) should not take a heavy exposure to REITs as well.

The right allocation

Once REITs become a reality, how much should you allocate to it? Depending on yourrisk appetite, 30-50% of your total allocation must go to growth assets, which include both equities and real estate, could be to REITs. 

Thus, if you are, say, 30 years old, it is expected that you should have 70% of your portfolio allocated to growth assets. In that case, REITs could occupy around 20-35% of your portfolio (or roughly half of your growth assets)

Cheers

Manoj Arora

Lead a Financially Free Life !!

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TDS on property sale in India Section 194-IA

[Last updated : 12-Dec-2017]
If you are buying a property, remember that it is your responsibility as a buyer to withhold 1% of the sale deed value from the payment to the seller and get it deposited with the Income Tax authorities as TDS in the sellers name. This tax (called as Withholding Tax), is applicable from 1st June 2013, on sale of any immovable property (other than agricultural land) costing more than Rs.50 lakh u/s 194-IA.