If you are a young kid who is renting an apartment, somebody would have told you one or all of the following things:
=>A home is a good investment.
=>Inflation makes the EMI very cheap
RE prices NEVER go down – it always keeps going up.
=>You can always sell it or rent it when you want to move.
=>Paying rent is throwing away money – at least the house will belong to you at the end of the day.
=>Buy a house soon and buy as big a house that you can afford to buy – after all you may not buy too many houses!!.
1)A Home as Investment: Lets see you buy a house worth Rs. 1 crore. Actually you have invested say Rs. 10L and borrowed Rs. 90 L. You do not include the brokerage, registration costs, furnishing, annual maintenance…etc. when you do your return calculations include all this. If you have borrowed money you pay interest – have you included that? Now go and do all that and find out what is the ‘profit’ that you made. Over long periods of time..this is a single digit number. Always.
2)You can always Sell it or Rent it out: A cousin’s family has been struggling with a house in Bangalore. Unable to sell it, and unable to rent it. The whole process of finding a buyer or a tenant is not so simple as the builders/brokers make it out to be. Even if you do get a good tenant, how long will the tenant stay, will he pay the rent on time, will he keep the house in good shape – are questions that you will not be able to answer very easily. In Indian conditions, the rent is far far lesser than the EMI that you pay, so there could be a cash flow issue also.
3)Renting is a Waste of Money: Do not throw money at the land lord it is a waste of money…you might as well buy the house. Oh, really? you are joking, right? In Cities a house costing Rs. 2.25 crores will cost you about Rs. 2,25,000 per month as EMI whereas the same house is available at a rent of about Rs. 30,000 per month. What are we talking about? Rental yields are about 2% p.a. and interest costs are about 11% p.a. Sheer innumeracy to assume that the differential will catch up over a 5 year or a 7 year period. It will not.
What if your landlord throws you out? This is clearly a movie impact. Old movies – Malayalam, Tamil, Hindi, ..and any number of movies were made with the theme of a cruel landlord. Well, if your landlord throws you out, find a new landlord. By the way the landlord is far more scared that the TENANT will leave…!!
So when you are under social, peer, parental, sibling, marital pressure to buy a house…direct them to this post on my blog.