Buying apartment in Bangalore: A contrarian view

Buying apartment using a loan in  Bangalore is a bad idea. There are enough article on it. Simple logic for that if you pay 11% interest and the appreciation of property in bangalore is max 7% it just does not make sense. The rental return is 3-4%, hence even assuming rental income the return is not worth to invest in real estate and even a simple FD does a better return. Bangalore unlike Mumbai and Chennai can grow in concentric circles and as the outskirts develop the rate of buying a new apartment will turn out to be cheaper than buying an existing apartment in a well developed area.

Buying apartment for emotional reason is what drives most of the investment. Emotional reason can include reason of "settling down near the kids school", "proclivity to spend and hence the associated inability to save in anything other than real estate" and so on.    Assuming you have to made a decision to invest in an apartment
, is there a better fashion to invest so that it at least ensures that we do not lose the capital corrected for inflation when we want to exit.

The key here is to invest in apartment during the construction phase. In this phase you need to pick up a builder who usually deliver and does not cheat. The builder should be picking up only reasonable projects at a time and should not be stretching thin. The builder is not known to complete the structure fast and spend disproportionate time in the final stages before delivery. In this scenario you would have paid 90% of your payment as per the structure construction schedule and you will be in a double whammy situation of paying the rent and interest/EMI which squeeze your quality of life till you get the delivery of apartment. So having found a builder who is reasonable, pick a builder who spends more time on structure (this means you can pay the part payment from your saving rather than your loan) and lesser during the completion phase. This will ensure your interest outgo later will be minimized and can go directly to your bottomline. Now if you can find a builder whose part payment schedule matches with your savings profile, you can own an apartment without spending much on the interest. This means you can still end up with a return of 3-4% from rental (in case you plan to rent it out)+ 7% appreciation which is better than FDs if not better than large cap equity mutual fund. Assuming even 5% inflation, we will still be doing a better return than FD.

Another aspect is Bangalore is that there are pockets of high sqft cost  area and relative low cost area. Pick a low cost area if that is where you saving profile matches rather than stretching to buy in a costly area. Worst case you can rent the apartment in the area you bought and rent it in the area near office/school. This will ensure you are covered for the worst case scenario of sudden rental increase. The rental difference between any two area in bangalore is hardly 10% which from return perspective will take a max 1% hit on your capital. The rough cost of construction for a high quality construction in Bangalore (for a low rise) is 2800-3000 per sqft in bangalore (electronic city area at least). So any addition to it is for the premium for land and all the facilities. So keep your cost of acquiring the property near it. And the right pick is one where you get the max value for money.

The third aspect is buy slightly higher sqft house if your budget allows and if you are willing to stretch. This will ensure that you do not find yourself crammed the day you move in to the new house and you think of then buying a even bigger and newer house.

Having said this contrarian view, it still makes sense to rent and stay unless you are driven by emotional reasons.