As a human being, it is natural to strive to achieve Roti, Kapda, and Makaan, the basic tenets of life that give security and sustenance. Buying roti is essential but do you have to buy a home? And even if you do, will it be a good investment?
Buying a house has its pros and cons. You may have your own wealth goals and objectives for buying a house. Listed below are a few top reasons why people buy houses:
1. You have a reasonably stable job:Most people start stabilizing in their chosen professions in their 30s. In this phase, if you start thinking of investing for the long run and having your shelter. Although you cannot afford to buy a house with your savings, you can avail a home loan. Availing a home loan at a younger age, and with a stable job is easier because a home loan is a big commitment and requires a sustainable, predictable source of income to honour EMIs.
2. Staying long:When you rent a house, you are at the mercy of the landlord. At the end of the lease period, the landlord/landlady may sell off the house, move in or simply decide not to let out the house to you any longer. If you own a house, you can stay there forever.
3. Lock the price:If you buy a house at the right place, at the right time, at the right rate of interest, you will benefit! The property price will increase at a rate more than what you pay to your home loan lender. But you will have to be lucky to get all these pieces together.
4. Inflation hedge:Your EMIs will be fixed throughout the tenure of the home loan. Home loans are of long tenures. Inflation would have increased the cost of living. Your mortgage will not be significantly affected though. Rents are easily impacted by inflation.
5. Pride of ownership:Owning a home is a good feeling after all. This feeling is priceless for many!
Buying a Home in the ’30s
You have dreamt of buying a home on turning 30, apart from reaching other goals such as getting married and saving for retirement. The Indian government has taken several concrete steps in the last 3 decades to make home-buying an easier and more affordable process.
Home loan applications are now processed in a jiffy and lenders offer attractive payment options for properties under construction. A home loan is typically availed for tenures ranging from 20 years to 30 years. Longer the tenure, the smaller the EMI. However, the longer the tenure, more the interest you end up paying on the loan.
Loan Amount: Rs.50 lakhs
Rate of Interest: 7%
Here is a look at EMIs and applicable interests for different tenures.
|Years||EMI||Principal||Total Interest||Total Repayment|
Lenders rarely finance 100% of the cost of the property. You will have to pay a margin amount upfront (commonly termed as a “down payment”). Therefore, you must also factor in the opportunity cost of the down payment amount.
Buying a House for Rental Income
When you invest in a property, the total cost incurred is much higher than the price advertised. For example, if you are buying a flat worth Rs.1.5Crores, you must factor in the property tax, maintenance, association/society charges, costs involved in transferring meter, khatha, etc. to your name. If you are availing of a home loan, factor in the interest and one-time charges.
Learn how to plan for your dream house at retirement.
Example: Ramesh bought a flat, from a prominent builder, in 2013 in west Bangalore. The advertised price was Rs. 27 lakhs. Ramesh had enough savings to buy this flat without a home loan. He ended up paying Rs. 35 lakhs that included stamp duty, advance corpus for maintenance, covered car parking etc.
Buying Without Loan
Fortunately, the much-hyped metro line came up close by and the nearest station was 2 KM away. Property prices shot up and Ramesh’s flat was worth 65 lakhs by the end of 2021. What if Ramesh had let out his flat between 2013 and 2021. Look at the rental yield:
|Year||Value of Flat (in Rs Lakhs)||Rent/Month||Yield|
The assumption above is that rents increased by 5% each year. The rental yield is clearly showing a downward trend. The net rental yield would be much lower if you factor in other recurring costs.
Buying with Loan
EMI is a good example of a recurring cost to calculate net yield. If Ramesh had availed of a home loan of about Rs. 22 lakhs in 2013 and paid an EMI of Rs. 21,000 each month:
|Year||Value of Flat (in Rs Lakhs)||Rent||EMI||Yield|
The net yield turns negative when you factor in the EMI. The only consoling factor is that EMI remains flat and rents may increase, thus improving the yield over some time.
Investing Vs Buying House in the 30s
Real estate has been a long-term investment. It may take up to 20 years for property prices to double except in exceptional cases, which are usually rare. If we take that scenario and assume rentals increase by 5% every year, the yield from a property is less than 8%. That is when you have bought the property without a loan.
However, in the example shown above, the property price has appreciated at an average annual rate of 8%. Other than that you cannot dispose of real estate properties whenever you please and rarely in pieces. Finding a buyer can be cumbersome.
On the other hand, if you can invest the amount equal to EMIs in a ULIP with a mix of debt and equity for 20 years and have a yield of 8% p.a. you can easily make Rs 1.4 crores. That too without considering the bonus additions. Not to mention that:
- You will have access to your fund value partly after just five years of investment
- Your family will receive at least the life cover in the policy in case of your unfortunate death, regardless of the fund value
To sum up, real estate is a highly illiquid asset and your returns depend on the city, locality, employment opportunities in the vicinity etc. Equity investments are more flexible and you can allocate your money across different funds in ULIPs. Both investment and returns from ULIPs have tax benefits.
Thus, purchasing a home, whether for residing or rentals, will make more sense after you are retired. You can easily afford the property, save money buying it, and rentals will provide you with an inflation-adjusted income. Even if not, you still have enough corpus left to ensure a lifetime pension.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.