Here one needs to understand the concept of investment. Investment refers to buying certain asset class with the expectation of rise in its value in future so that asset can be sold and profit is booked in the transaction.
So, the question is whether residential house is an asset within the definition of investment. The answer is a big Yes but we need to understand that primary purpose of residential house is shelter. So, when you need home for staying in then buying a residential house is absolute necessity and one should go for it. (Now whether to buy a home or take it on rent is a separate question all together and we have written a separate article on this. Pls click here to read the same)
Now let us consider a situation where a person is already having a house where he is staying and he is buying another house with the perspective of investment in that situation one has to evaluate all this option on all the parameters of investment.
Cost of Acquisition
Cost of acquisition will be the price that you pay to builder + all government charges that you pay to own the property (GST + Stamp duty + registration + registration of mortgage etc.) also if the property is under construction then the interest that you pay to the bank till the property is completed and the interest that you are going to pay till the time the loan is running.
Rental Income yield
Rental income from property to be calculated after excluding all the recurring cost associated with the property like maintenance, property taxes etc. Also, it is seen that in most of the cases the rental yield for residential properties is hardly 2 to 3% of the amount invested for acquiring the property. Please consider taxation aspect also to calculate the yield.
Interest Cost
Interest cost is the biggest cost and it is the most ignored cost while calculating the cost of acquisition. If anyone has taken loan for buying the property in that case interest serviced on loan when the property is under construction or even till the time the loan is going on need to be capitalised i.e. to be added to the cost of the property.
Property funded through own funds
If you are buying a property as an investment out of your own funds then property should yield at least the risk-free return available for the funds deployed. This yield from the property may be in the form of rental income yield or overall appreciation in value.
Liquidity
How easily and fast one can liquidate an investment is one of the important criteria while taking decision with respect to investment. As compared to other class of assets real estate is relatively difficult and takes longer time to liquidate. There are lot of factors that affect the liquidity of the property such as demand and supply of that kind of properties in that region etc. In good areas where demand is high you may be able to sell easily whereas in some of the areas you may face tough time to liquidate.
Returns on Real estate investment
Good returns on real estate investment depends on various factors such as the price at which you are acquiring the property, cost of funding of property (Rate of interest at which you have borrowed money), point of time when you are entering and taking exit from the transaction (buying and selling) demand and supply of similar type of properties in that area etc.
Conclusion
In current situation it is very difficult to make good returns on real estate investment and it requires expert knowledge of market condition, valuation (whether property is overvalued or undervalued), area of the property and a good network of resources. For a common man it is very difficult to make good returns from real estate investment in short run.