To Rent or To Buy a property for your studio? A financial take.
You want to set up your own studio. But cannot decide whether to buy or rent a property?
Read on and then make a “sound” decision.
Numbers speak for themselves just like your meters indicate. And investments in property don’t have an easy “Undo” feature.
Here’s an example with numbers taken from market sources (Nov 2017):
Commercial property location: off Link Road, Andheri West, Mumbai.
Bare shell studio (or office) @Rs. 18,000 per sq ft x 800 sq ft (super built-up) = Rs. 1.5 cr appx.
|OPTION 1 (BUY)||OPTION 2 (RENT)|
|EMI (for 10 years)||1,86,000||Monthly rent||75,000|
|Maitenance / month @ Rs. 5 psf||4,000||Maintenance / month||usually included in the rent|
|Total Monthly Outgo||1,90,000||Balance available for investment (in lieu of no EMI)||1,15,000|
|Total Amount paid
in 10 years
|Appx. Rs. 2.3 crores||Total Amount paid as rent in 10 years
(with 15% increase every 3 years)
|Appx. Rs. 1 crore|
At the end of 10 years, what is the scenario?
|Property value at 10 yrs. @5% increase per year||2,44,33,419||Monthly investment of Rs. 1,15,000 done for 10 yrs. becomes…
|Rs. 3.7 crore|
|Property value at 10 yrs. @7.5% increase per year||3,09,15,473|
To give you a real life example: A 500 sq ft commercial office in Malad West, Mumbai was costing Rs. 51 Lacs in the year 2011. In 2017, this same property today costs about Rs. 57 Lacs. So that’s an increase of Rs. 1 Lac per year in 6 years, which is an annual growth rate of about 2%. A fixed deposit (FD) of this amount in a bank would have yielded much more!
Looking at the property market today, and the way the Government aims to curb prices all over India, investing in a property does not look at generating a decent appreciation over time. At best, we can expect an annual growth of 5% to 7%. And ROI for these rates are shown in the table above.
The most important factor with such financial planning is your peace of mind. A “must-have” requirement for creative brains to function well 🙂
In Option 1 (BUY), you are tied down to a large EMI payment without any flexibility. Given the erratic payments and work flow in the music / audio industry, you may like to have some flexibility month to month based on your cash flow.
The Option 2 (RENT) gives this kind of flexibility, because you can even reduce or increase your investments each month depending on your cash flow. And this is completely under your control.
God forbid, if for some urgent financial need you may have to sell out the property, then it is a herculian task – getting a dependable buyer offering a fair price, getting paid on time, etc. As against this, you can encash any small (or big) part of your investment as and when you need it!
Benefits of renting, and investing all along the way:
- You have used the place for 10 yrs – as you wanted.
- You have the freedom to choose a bigger and better place, if required.
- You are not tied up to an old commercial property which may / may not be saleable.
- The best part of renting out a premises? You also have Rs. 3.70 cr in your account at the end of 10 years! Yes, 3.70 crores! The Rs. 1.15 Lac invested every month – instead of paying an EMI – turns into an average 3.70 cr (worked out from the past investment historical data).
- And yes, the icing on the cake? It is Tax-free as well! So use this amount as you want to – for a holiday, for a second income source, to continue to pay rent for the same studio, or setup a new studio… or do whatever you want to… After all, it is your money.
At just 12% returns on the Rs. 3.7 cr generated…
> It yields an income of Rs. 44 lacs a year.
> Say rental amount after 10 years (even if it doubles) becomes Rs. 1.5 lac a month = Rs. 18 lac a year.
> Balance amount saved = 44 – 18 = Rs. 26 Lacs per year… And this is into perpetuity.
There is no ending date for the earnings. Your funds will outlast you!
Sounds too good to be be true?? Well, it is! This is the power of compounding used with disciplined investments and ‘sound’ advice. Has it happened ? Yes it has… across time periods… use the public data available for any period… it is not a one-off jackpot!