Sample this - I buy a flat near say ITPB, Bengaluru for 50 lakhs. I rent it out for 20 thousand per month to a family. Then my cash inflow per year is 2.4 lakhs after taking trouble to find the right area, house, broker, lender and tenant. Whereas if I keep the same 50 lakhs in a bank that pays 10% interest. My cash inflow per year is 5 lakhs without any problem. Ignoring the taxes in both the cases for the time being. Then why should anyone buy a house to rent it out?
One possible explanation could be that the value of the house appreciates. If I find the right house, it could probably appreciate by 20% per annum and double its value in 4 years. Then its fine if I have a job, the house is just an investment and I am not dependent on its cash flows. With this there are also risks involved such as 1) Fraud during buying or selling 2) Natural Calamities like Earth quake, flood, cyclone etc 3) Fire accident, destruction 4) Government acquiring it and 5) Property not appreciating its value.
But I don't think a Businessman who makes a living out of this would be happy with this model of getting (2.4 lakhs on 50 lakhs investment) 5% RoI. Also if he doesn't have 50 lakhs cash with him, he will have to borrow that amount at about 15% interest or 7.5 lakhs per annum. Making an annual loss of 5 lakhs.
I would rather have 1 Re now than 2 Rs 4 years from now. "Bird in hand is worth two in bush". Either people don't understand the concept of opportunity cost and time value of money or I am missing something very basic here.
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