Maximizing Property ROI: The Value of a Good Payment Plan in New Launch Projects

Should you actually invest in under Construction Projects?

Investing in an under construction project is often deemed a high risk move. Historically, there have been enough black sheep projects and builders where even tenured investors have burned their fingers and seen their investment value erode. While regulatory authorities like RERA and similar global regulatory oversight has made the real estate environment more controlled and predictable, you still can't wish the risk away.

So, should investors completely move away from under construction property? The short answer is well Yes and No! Let me elaborate on this thought

YES - Stay away from

• Developers who lack the pedigree and a proven ability to deliver on their promises

• Properties where the paperwork and chain of documentations / approvals is unclear

• "Double your money in 6 months" broker spiels without a clear verifiable hypothesis

• Blindly putting money as every property increases in value

• Booking unless you have looked at the property as an end-user to ensure it ticks all the boxes for someone who will rent or buy this from you in the future.

NO - Don't stay away because ...and this is a very BIG NO because no matter how you dice this, value creation cannot happen without some commensurate risk in the equation. By default higher the risk, higher the corresponding return. This is true for all asset classes including bonds, shares, gold etc. Therefore your role is to mitigate those incidental risks and ride the vestigial risk / market fluctuations with a keen eye on the dynamic drivers and prices.

Why does payment plan matter?

In the realm of real estate, particularly concerning new launch projects, a strategic approach to financial planning can significantly influence return on investment (ROI). A well-structured payment plan serves as a blueprint that outlines the financial obligations of investors and buyers. It not only aids in budgeting but also enhances the overall investment strategy.

A good payment plan possesses several invaluable attributes that contribute to achieving positive property ROI. It provides clear financial timelines, allowing investors to allocate funds appropriately. This foresight can prevent financial strain and ensure that payments are made on time. Moreover, smoother cash flow management allows property owners to reinvest profits from the investment back into additional opportunities, further maximizing ROI.

What should you validate in the Property and Payment Plan?

1. Total Cost of Ownership : Make sure you factor in all the fixed, variable and incidental costs related to your property. Make sure you read the fine print - There maybe some hidden charges like transfer fees etc. that can upset your ROI calculations later.

2. Builder Payment Milestones : Check and double check the actual triggers for the payment due. Different builders have different models. This could be time linked, construction linked, hybrid, subvention. No matter the nomenclature ensure you understand the trigger point for a certain payment.

3. Factor in Discounts, TPRs, Sweeteners : Builders often use Timely payment rebates, freebies (Alleged) and similar tactics to encourage the transaction. Make sure you factor in the actual monetary value based on time due with a conservative approach. A future discount means nothing if you plan to exit the property before that milestone.

4. Taxation : Factor in the outflow of GST and any government fees like BBA charges, lawyer fees or any incidentals.

5. Recourse in case of missed milestones : Understand if you have any recourse or ability to delay the payment in case of missed builder milestones or Force majeure events.

6. Penalty and cancellation : Good time are great but your planning should be ready for any exigencies and or change in circumstances - Financial or personal. What is the cost of delayed payment? What is the developer policy on cancellations and recovery? These hard questions ensure you are covered at all times.

7. Financing Cost : If you are planning to finance your property, include the cost of capital calculations to ensure the correct ROI

How does a good payment plan impact ROI?

If your exit strategy is articulated and the game plan is clear, a good payment plan can have a multiplier effect on your ROI. Let's see this with a few examples. Assume you picked an under construction residential property of 2000 Sq Ft. with a 4 Cr overall ticket size payable over 4 years. You hold the property for 3 years and sell it at the end of third year at a rate of INR 24000 PSF i.e. a premium of INR 4000 . In order to simplify this for everyone, we are excluding time value of money paid i.e. ignore NPV discounting and simply compare total earning by total cost.

Payment Plan 1 - 30:70

Payment Plan 2 - 25:25:25:25

Payment Plan 3 - Downpayment / Ready to move Property

Clearly even when the cost base, entry-exit points and earned premiums remains same, the ROI calculations turn out to be substantially different. This is a value of a good payment plan. A smart investor can augment this base model with opportunity cost of capital, cost of financing and transaction specific costs to make the ROI calculations more discernible.

So investors, gear up your payment plans and make that game changer deal today!

Author : Abhinav Chamoli, Director Earthz International