Real Estate – RBI kicks the 80:20 scheme . Things to read before you buy a House.


This is a topic which is most discussed about in every friendly discussions where my views may not match with the group , maybe because i believe renting is not a bad option to owning. Given that i have no idea about real estate would prefer posting some good articles on the topic


The only reason to mention a topic which is beyond my circle of competence is because as individuals majority of us have 60-99% of our networth in Real Estate and we should be reviewing it.



1)  This is a nice article on what questions you need to answer before you buy a house – by P V Subramanyam – 


My view – This is a must read article before buying a house. Some important questions


- are you buying a house to live in or hoping that the property prices will double in 3 years time as it has happened for your friend?

- what happens if you are transferred to a different location? can u afford rental there as well as here and the EMI?


- what happens if one of you quit a job voluntarily and one of you lose your job involuntarily?


2) A checklist before buying property in India


A good and simple read from Manish Chauhan – .


My View – Manish focuses on the non financial factors and how the locality, connectivity are important considerations. Buying a house is more an emotional thing than financial if you plan to stay there for a long time.


3) Finally RBI warns banks against funding 80:20 scheme by Real Estate Builders


This has been covered by many but no one can be more clear than Deepak Shenoy –  ( Got to read his articles on NSEL and other things as well )


He gives a nice peek into how some Real Estate investors could have used this scheme to start a Real Estate Ponzi.


My View – As Subba Rao left a nice remark on its relation with the Finance Ministry


Gerard Schroeder, the former German Chancellor, once said, “I am often frustrated by the the Bundesbank. But thank God, it exists.” I do hope Finance Minister Chidambaram will one day say, “I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.”


The above decision by Subbarao on his last day makes me believe that RBI does exist for the right reason..



Some other articles which have a little negative bias and sensational


Property bubble bursts as prices crash 20% in investor-driven markets

Read more at:


South Mumbai property rates crash 30% as buyers miss the ‘view point’



Conclusion :


My personal views on Real Estate stems from a very simple calculation of pricing assets that is Yield and Price to Earnings or cash Flow.


Currently a 1 crore flat can get you rents of 20-25k in Mumbai a month which gives a yield of 2.4-3 lakhs per annum. In many cases the yields are as low as 1.5-2%.


Apart from that there is no cash flow from owning a real estate ( there can be some maintenance costs ). So if i were to take a real estate investment as a listed company it would imply a price to earnings multiple of 33-40 times and in some cases even in 50 times.


So either the asset needs to grow at a big two digit CAGR ( like it has done for last 10 years but will it do the same for next 10 years is a big question) or one should be able to get more emotional, connectivity, professional and other intangible benefits from the house you own.


Will try posting more relevant articles on Real Estate.  The next should ideally be on SARFAESI act and other norms for foreclosure by Banks in case of default. Its a difficult process for banks to foreclose loan defaults in real estate as well as the litigations.

Maybe thats the reason RBI is warning on 80:20 scheme ( which i believe was a great idea for builders who had to take loans at 12-36% interest )



Disclosure: Please do not take any of my above views on Real Estate as Investment Advice from a person who might much more worse than a Novice 🙂




Nooresh Merani

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