Hi Sunil,

If I had AED 200,000 to invest, would you advise I should put all of this into Indian property, if I am looking at low risk and high yield, for a period of 2 years? Would I not be prudent to spread this across other investment classes?

Suku 

Hi Suku,

"low risk, high yield" - so you want the best of both worlds Suku? don't we all

To highlight what you need to do, I'm going to assume that the property market grows at 20% a year, and your yield (total rent per year as a percentage of property value) is 10%

so lets take 2 scenarios here...

1) You invest your money in a property (without using finance) - ie you buy a property for cash... This has to be "lower" risk, but then the returns are potentially lower as well..

So the rent makes you AED 20,000 a year (for 2 years)

and the property appreciates by 40,000 in the first year, and then by 48,000 in the next year (compound growth) So your total income (in two years) would be

AED 20,000 + 20,000 + 40,000 + 48,000 = 128,000! (We're also assumed rents didn't go up either)

So your return in TWO years is 64% - NOT bad ... and this is "low" risk.

Even if property prices didn't go up, you would still be making 10% a year return.

OK so what about high risk ?

2) lets say that you using your AED 200,000 as a 20% deposit on a property and borrow 80%

The property you have just bought is worth AED 1,000,000.

OK - Your rent each year will be 100,000

and the increase in value would be 200,000 + 240,000 over the two years (again compound)

What's the return? - well you're now paying back 800,000 loan, which basically works out to just over AED 75,000 a year (at 7% over 15 years)

So your rental income is now 25,000 a year (after mortgage or EMI payments) (a total of 50,000 for 2 years)

So...

AED 200,000 + AED 240,000 + AED 25,000 + AED 25,000 = 490,000 in two years

That's a return of 245%

But this is riskier !

Interest rates could go up - and you might find yourself in a negative cash flow position (Your payments each month are more than your rent) ... and if interest rates did go up high enough, you might find that the prices of property start to fall.. and the capital growth you were banking on has now disappeared as well.

So where is the balance... YOU have to decide that.... I can only show you the opions...

Should you buy one property or more than one ? Well I always say don't have your all your eggs in one basket.

Should you spread them across other asset classes? Well you have to analyse what the Opportunity Cost of your Money is (OCM) ... and that's a conversation for another day.

Hope this helped Suku

Sunil