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For generations Indians have been told that any form of real estate be it a land or a house is an asset. We all grew up believing buying a house is a ticket to wealth. Is it really correct? Does it still hold good? Or is it a myth?

An asset is a resource controlled by the enterprise or an individual as a result of past events and from which future economic benefits are expected to flow to the enterprise or individual. In simple terms an asset is a resource which gives money in your pocket now and/or in future.

On the other hand Liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions. In simple words a liability is an obligation which takes money out of your pocket now as well as in future.

So your real estate can be categorized as an asset or a liability depending upon whether it is helping you in generating money or hurting you by taking money out of your pocket. Let’s go through below examples to find it out.

Example 1: Rahul buys a ready-to-move in apartment in Bangalore with a mix of his own funds & bank loan (commercial in the table below) for self use.

As the apartment is for self use Rahul will get a tax deduction on Rs. 1.5 Lakhs per year. Assuming he is in 20% tax bracket he will save Rs. 30,000/- pa or Rs. 2,500/- per month which is negligible when compared to monthly EMI of Rs. 35,800/- So there is a net outflow of Rs. 33,300/- per month for Rahul, thus making it a “liability” on an ongoing basis. It is a classic case of bad debt which creates a liability on middle class which lasts for almost two decades.

Example 2: Rahul buys the same apartment for rental income & not for self use.

From the above table you can see that Rahul is paying an EMI of Rs. 35,800/- against a rental income of just Rs. 12,000/- As the apartment is not for self use Rahul will get tax deduction on the entire interest expenses. Assuming Rs. 3,00,000/- as interest expense for the first few years Rahul gets a yearly tax savings of Rs. 60,000/- (20% tax slab) i.e. Rs. 5,000/- per month. Thus, total monthly income for Rahul is Rs. 17,000/-

We can see that this investment is taking out Rs. 18,800/- per month from his pocket! As the first table on Asset & Liabilities indicates that on an ongoing basis this property is a “liability” & NOT an asset. So those who wants to invest in an apartment for rental income only will find it a losing proposition! Rahul would be better off putting his money in FDs or Debt Funds.

Example 3: Rahul invests for both rental income & capital appreciation i.e. he plans to sell the apartment after 5 years (makes him eligible for long term capital gains & freedom from reversal of tax benefits on interest expenses).

Let’s evaluate the investment from the other definition of asset which is “resource from which future economic benefits are expected to flow to the enterprise” or individual”.

Assuming an average property appreciation of 5% pa, the price of apartment at the end of 5th year shall be Rs. 4000*(1+5%)^5 i.e. Rs. 5100/- per sq ft.

As we can see in the above table return on investment over a period of 5 years zoomed to 21% per annum which is quite high. In Indian context Real Estate makes a good investment only when you exit your investment.

However there is a flaw in the above calculation – what if there are plenty of options available especially newer units in the same location at the same price of Rs. 5100/- per sq ft? In that case there would be a discount applicable to an older resale property which is typically around 5 to 10%. When you apply this discount to the current market price your entire gains would be wiped out!


As a thumb rule unless capital appreciation is equal to or more than cost of borrowing there is very little chance of making a significant return in real estate. People should not get into real estate investment without understanding the economics of returns. It is very important for the investor to understand not only the current market dynamics but also that of future to plan his exit. Real Estate is no longer a high return investment and wealth creator it used to be 5 years ago. On the contrary it could become a huge liability if bought during “wrong time” & at a “wrong price”.

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