Mostly people tell you ‘I bought a house for Rs. 50 lakhs’. Great.

A house is rarely just the cost that the broker told you when you bought the house. Have you seen what are the associated costs?

Cost of the house is Rs. 50 lakhs. Assuming you did not have any money for down payment, you paid Rs. 50,000 per month for 20 years = 50,000 x 12 x20 = Rs. 1,20,00,000.

Stamp duty, brokerage, etc. @ 2% = Rs. 100,000

Furnishing (throughout the life of the house) = Rs. 15,00,000

Maintenance, tax, etc. @ 2% of the original cost of the house : Rs. 100,000 x 20 = Rs. 20,00,000

thus the total costs = 1.56 crores. Assuming a 30% tax, you need to earn about Rs. 2.2 crores to afford this house. If you are an employee and earn about Rs. 10 lakhs gross, that is about 16 years effort.

Yes during this period the value of the flat would have gone up…I am not talking about that.

My take is if 16 years of your 30 year working life has gone into buying a house, how much time is left for you to earn for your entertainment, retirement, children’s education (a friend is just now paying Rs. 4 lakhs as fees for the kid’s 12th standard and IIT coaching class fees, yipee!), children’s marriage (Rs. 30 lakhs is not unheard of, correct?)….and of course RETIREMENT.

The financial services industry is desperate about ‘where to lend’ is happy lending to the housing industry. Just how much are they willing to lend? Well, frankly anything. But that is another post.

My idea of writing this blog is simple. Money like time is just energy. It can change form. So if you look at ANY EXPENSE, look at it in terms of TIME, not money. If you earn Rs. 5 lakhs a year, and if your wife suggests a vacation in Switzerland, tell her ‘It is one year gross  – about 3 years net’…LOL….Just change the mirror, the image will change!!

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1. ##### Milind N

Thank u Subra….our Blogs Hot Topic of DEBATE ….REAL ESTATE Your real estate notes like others ,chaged our perception and we can ignore and with stand …Society and peer pressures ,stayed away from Land sharks (Read Builders) and Lending Sharks(Read ever willing HFC and Banks)…..Instead Invested in Same Banks and HFC ….and more Importantly LEADING A Peaceful Life without that Nagging Inner urge to acquire real estate pieace is some far flung distant suburb without electricity for 4 to 6 hrs….Banjamin Franklins word….”Rather go to bed without dinner than rise to DEBT” …Exposure to SUBRA Made that Possible….Change Mirror,Image will change…How True…Many thx Sir

2. ##### Avin

Why should parents save for children’s marriage? If children want marriage costing x, they shd be able to pay for minimum 50% of that on their own.. Even more. In fact, saving for your own marriage is an excellent exercise in financial planning especially at a young age. Teaches you to live within your means. I understand the social and ‘status’ pressure in india, but its really ridiculous that minute child is born, parents start saving for a ‘marriage ‘ fund. Only in india.

3. ##### Shiva

Thanks a lot for all your posts Sir ! It’s been an financial awakening for me reading your posts (especially the ones on real estate). Keep up the good work 🙂

4. ##### akshat

why is furnishing included separately ? even if you live in a rented house, you will purchase furniture/electronics etc. own house will probably entail a one time expense for woodwork. if you are fond of a good life, you might re-do the interiors multiple times. is this what you are referring to ?

5. ##### wealthucreate

Sir,
Did you write my mind on this article? :)…. Well Sir, i compliment every word you have written. Just to add more , The own house for young professional who are career oriented might result in obstacle.

Let me support it with an example. A person earning 10 lakhs gets an offer of 15 lakhs and the work is something that he always wanted to work on. Now If the company is far away from his house that would take 2 hours for him is not feasible option.

As of today i stay in rented house…. plan to buy after 5 years ???

He might refuse the offer just because of the distance. Is it not the own house, that stopped him from joining the company? A big loss right? Further if he was in rented house he would have easly moved nearer to the office.

I would not say i would live in rented house for my life but will buy when i would be in some decent position in my career, meaning am done with with my career aspirations. I would know where my kids are going to school.

In short i would take take before i commit. By then i would have build decent corpus…..

6. ##### LuckyOye

The government further muddies the waters by giving tax breaks on the interest component of the EMI (HRA is also a matter). Well, that 1.5l was good for 2000 to 2009, after that the numbers don’t calculate properly at all. For e.g. if you buy a house for 1Cr. today, a 1.5l break on an annual EMI of 10-11l is hardly anything.
Your equation between money, energy, and time is very much hollywood like!

7. ##### Bala

My policy, buy a house in a good area – when I mean good, it has to be a place with all amenities – if you have the capacity to put in a down payment. Buying a house does not mean you ‘have’ to stay there.. rent it out. You can still chase your passion and move about the world and work from a rented house. Since the area is good, definitely you will get a decent rent which can help with your rent in they place you want to work.
The arguement for buying is that even if you are not buying – others are. There is a good chance you may not get a chance to set foot in that area later – unless you are counting on the banking system to break like it did in the US and house values come down.

Never buy a house in an area where there are hardly any roads and wait for the area to “develop”. If the City expands in a different direction – you may be stuck with a lemon.

If you are renting from a decent location, definitely you are spending 20% -30% of your salary on the rent.

8. ##### bharat shah

thank you for the article when we are in dilemma whether to upgrade our family residence of 2 BHk to 3 Bhk which seems necessity one way at this stage,but other way, it requires additional finance equivalent to eating out more than half of corpus created capable to fulfill 3 major goals (children education, children marriage and retirement ) very moderately, in first 10 yrs. of the earning .

9. ##### nitin bourai

Hi Subra
the money looses its value over time so if any individual buy a house of 50 lakh and take a loan for 40 lakh his EMI will be around 40k for 20 years
if an individual is earning 1 lakh per month he can park his 40k for EMI and invest the remaining 30k in stocks,bonds what ever he wish.

now amount of EMI for 1 year will be 40k*12 = 480000 ,if we calculate the return he will get after investing his 30k saving of each month into stocks for a period of 20 years with a return of 10% it will be =FV(10%/12,20*12,30000) equals (22,781,065)
this calculation will increase if his salary increases at a steady rate and if he contribute more than 30k

and in this period his house cost will also increase,in case something unwanted happen like a casuality or he lost his job he can sell the property and clear his debts or he can use the investents he has done in the saving years

i think taking a loan is best for guys who can easily pay the EMI and generate more returns by other investments which he can decide to enter and exit.

in 10 years the purchasing power of 40k EMI will reduce to more than 70% due to inflation ,so i think its the Bank who is working harder than the person who is taking loan

10. ##### Ashok

@Wealthucreate,

Agree with your point. Buying a house should be put off till you are around 50-55. By that time, the kids would have flown the coop or just about to.

Then using your savings and buy a bigger house/flat in a distant suburb of a big city or in a Tier-2/3 town. One wouldn’t require nearness to office/schools/colleges during retired life. Just look out for a decent hospital in a 5km radius… and enjoy retired life to the full instead of living in a 2-bhk bought, when you are in your 30s, in a “hot” area of a city.

These areas would most likely be highly polluted, no parks, un-walkable and you will have to depend on your kids’ cars to do even basic shopping/banking.

11. ##### Ashok

@Bala,

For a 3-BHK flat costing say 75 Lakhs in Bangalore, you are likely to get a rent of 20K per month = 2.5L per year. That’s an yield of 3%.

As I have put in my previous post, the definition of “good” area changes with our age. What you may define as good when you are in 30s (nearness to office, schools, malls) is not as good when you are retired (no noise pollution, pedestrian friendliness, access to hospital).

There is another perspective of owning a house property – it eats more than 50% of your life’s saving. In many cases, a retired person is sitting on a house which he happily owns, but has no income to support him living in the house. I wrote this article http://insight.banyanfa.com/?p=250 trying to stress upon a financial aspect that buying a house to live in is an excellent idea, but the biggest financial waste. Would love your comments as well.

Regards
BanyanFA

13. ##### Sujit

Folks,

Here’s my perspective. I stay in a city (not a town, not a metro) where the politician/builder lobby has raised a development bogey in the last 10 years which has pushed the prices of real estate beyond sky.
I have the capacity to pay an EMI of 40K PM. But being a small city the place where I will get a flat/house for say 50lacs is too far away from my workplace and may be even out side the city limits.
If I were to think of buying a flat in a decent locality within a radius of 6 km’s from my work place (Rem I live in a small city travel one end to other end will add just 20kms on the odometer) will cost me anywhere up to a face value of 70 to 80 lacs. This is just the face value, there would be other costs and the total will come up close to 90+ lacs.
Add to that the black money factor. Most builders here are small time businessmen/politicians turned builders and deal mostly in black money.
Thus the overall proposition will make sense only if I have a stash of close to 50 lacs to make a down payment.
Overall a very costly affair. I would go with the deductions made by Subra Sir.
Renting will work anytime here.

@ Sujit,
Wonderful analysis. If you want to reside in a home, then the renting decision shall always win. The rental yield in India is generally between 2-4% of the value of the property – if you ignore the capital gain associated with it. You can any day get more return out of your invested capital if you place it in other investment options !

15. ##### Naresh Sharma

Ahhh..thought provoking but owning a house is more of a necessity rather than an economics…just like a marriage where being with a partner overrides virtually every logic…even in the evolved times!!!!

16. ##### Ashok

@Naresh Sharma,

Interesting 🙂 !!

17. ##### Praveen

Rental Yield???

Rents in Bangalore are almost doubling every 5 years. Even if you stay in same house for five years owners are simply asking to revise rent as per market rate or vacate the house.

So if you buy a house initially you have to shell double the amount of rent you pay., but in 5 years your rent is equal to your EMI and in 10 years you EMI will be part of the rental you get for house.

This is just my observation atleast in bnglr., but don’t know the future