Should I buy a house Subra?
I have never been able to answer this question with a straight face. Let us take the case of 4 well to do YOUNG couples asking me this question.
The first couple is where the Husband is an engineer aged 33, wife has taken a break for looking after the kid, and may not return to the job market in a hurry, if at all. He has a take home pay of Rs. 130,000 and invests Rs. 70,000 per month in equity related investments.
The second couple is where the H and W are both MBAs, both have a take home pay in the region of Rs. 200,000 – invest very well in direct equity. Have a house provided by one of the parents, have bought an investment house where the rent received is more or less equal to the EMI to be paid. Both are 34 years of age. No kids. No plan to have kids. No time available to spend the money (both work 12 hours). Have a substantial net worth.
The third is where the H has a take home pay of Rs. 200,000 wife has a solid job and has a take home pay of Rs. 79,000. H is a CA, wife is an MBA. Currently staying in a big house – boy’s parents house – and since the boy’s parents travel a lot – this couple is comfortable, and the 3 bhk in a nice locality of Mumbai gives them lotsa space. Not much saving though, lots of travel, eating out, lifestyle expenses. Worse, H has no investment plan and squanders money on friends. Wife disciplined happy to do small sips and accumulates some money. No kids as of now, but planning one in 2-3 years. Can make a down payment of Rs. 5 million and pay an EMI of Rs. 125,000 without much sacrifice.
The fourth is a couple where he Husband earns about Rs. 120,000 per month, wife earns about Rs. 125,000 per month, have very low expenses – Rs. 40,000 including Rs. 19000 as rent. Both well qualified and both young – just 27 years of age, no plans yet to have a kid, both parents willing to help with down payment of a Million Rupees each in case they decide to buy a house.
Well as I said all 4 come from upper middle class background, have done well professionally, and can expect the parents to make a contribution to the down payment. All of them with huge eligibility of loans. Couples are from Delhi, Mumbai, Mumbai and Bengaluru respectively.
My answer to each one has been different! Principally I was guided by the following:
- all of them will inherit at least one house
- some of them are aggressive investors
- some of them spend their money and feel good about it
- some of them spend their money and feel ROTTEN about it
- the first couple is headed to his small town at the age of 40 to handle his father’s business
- the second couple will inherit at least 2 houses in Mumbai, both big
- the fourth couple is trying to migrate to Australia
- the second couple is worried about the job security of the H’s job, but wife has a good job
- none, none of them have visibility of cash flow beyond 4 years
- ALL OF THEM are in software related jobs – one of them is a banker
Each person’s requirement and personalities are so different!
What would be your answer to each one of them?
Prashanth
None of them need to buy/invest in a house.
The third couple can perhaps buy a house in the husbands name so that atleast some of the money gets locked up in an ill-liquid asset.
Vinay D Kawale
I think the first three couple dont have needs to buy the house.Butlast couple should buy one for future.
They can rent it out, reverse mortgage in steady cash flow in retiremen or convert it into retirement home
Gopal
Can you add one more case where H is earning take-home of Rs.50,000 and W is earning take-home of Rs.25,000 and H’s parents are living with the couple and dependent on them ?
Saravan
None of them required house because the jod location keep changing everybody will get at least one house from their parents. Staying in rent is best ..so that people can concentrate on other requirement..like kids, career enhancement .
subra
Gopal is that case not simple? should not buy a house. Should stay in a rented house. A house is a waste and a luxury for the rich and spoilt
Sid
Interesting post indeed… On a more generic level, I’d say that its not the asset class but the brain behind it that makes the money!
As far as dabbling in real estate is concerned, irrespective of the market conditions & affordability, I guess one should be equipped with the following:
1) Love for ‘property’, should be able to smell money in a potential deal and within a matter of seconds can tell if the deal is worth it or not.
2) Thorough understanding of risk return expectations, choice of asset class, financing methods – strong credit lines, holding time frames et al
3) Uses unique methods to exploit various opportunities that come thy way. Eg: Locating & nailing distressed sellers.
4) Active participant with a strong network that keeps one tipping about potential offers.
On most occasions, it is possible only when this is being done professionally unlike ones who have a regular different day job.
On a side note, the interest from home loan that can be deducted from taxable income is capped at 2 Lac per annum.
The obvious crucial factor as in the other investments, is XIRR, cumulative internal rate of return.
One needs to crunch the numbers after taking into consideration the sum of actual cost, the interest paid on home loan, loan processing fees, stamp duty, registration, buy and sell broker charges, lawyer fees to validate the titles, annual repair, maintenance charges, property tax, society formation charges, cost of power of attorney in case one is not staying in the same location, conveyance charges of traveling to the location for buy, sell agreements, if need be. Add to that the physical security, building perimeter charges, if its a piece of land. Once the property is sold for a ‘profit’, the long term capital gains tax will creep in (Black money or the lack of, has changed equations) unless the proceeds are again invested in another property. After all this, we are expecting a positive real rate of return (Nominal minus inflation). The rental yield (annual rental income divided by market value of the property) is barely in the range of 2% these days.
There are some intangible pragmatics —
1) As a buyer, to find a good promoter/developer, who wold deliver the asset in the promised time & quality. Frauds run rampage in this industry.
2) As a landlord, find a decent tenant who would pay in time, abide by the rules, keep your house in good shape.
3) Hope that the home loan interest rates do not rise else XIRR screwed.
4) While selling, get a decent deal and not a distressed sale. Not being a victim of anchoring or confirmatory bias.
5) Lack of regulations & no mechanism to discover market price is an inherent problem.
6) When the stakes are high, prospects start using different tactics, political nexuses, unholy clouts, unwanted advances… all means.
Acknowledgements (apart from personal experience) —
1) our own SUBRA — Needs no introduction…
2) Pattabhiraman Murari — God of calculators, personal finance enthusiast, Asst professor of Physics at IITM
3) Sanjay Bakshi — ‘Fundoo’ professor, value investor, visiting faculty at IMT Gaziabad
4) Vivek Kaul — Senior Journolist & analyst
5) Manish Chauhan — Jago Investor Fame.
6) Vipin Khandelawal — Independant financial advisor
7) James Altucher — American Freak
8) Mr MoneyMoustache — American badass
National Pension Scheme
sir
you are writing a very good article and it has great khowledge.
keep it up!
Kirti
Interesting article it considers upper middle class!
Is buying a house a logical decision?
When you reach a certain age or start a family or get married, the pressure may be on you to buy a home. Family and friends may have expectations that it is time to buy a home and settle down.
One of the things about owning a home or it is said is that they tend to go up in value over time. The housing market is volatile, and there is no guarantee that you will make money over a five or even ten-year period, but over twenty-thirty years, the value of the home tends to go up.
Paying rent over a long period is always a loss. And rents do not stay the same. They will increase in future. Besides, you can’t decide how long you can stay there. The owner can evict you.
Pradeep
A very simple answer for all for couples, its a question of whether they love to buy a house or not.
Its a question of their happiness. If it were to give them happiness and satisfaction in buying, they should buy else do not buy.
Money is not a deciding factor here and hence not a financial decision