The million dollar question on the minds of young Indians is 'buy a house or prefer a rented house'?. The answer from a financial angle is pretty straight forward. It DOES NOT make sense to buy a property considering the historical growth rates in real estate. Rental yields are in the range of about 3-4% in most Indian cities. Staying in rented house and investing the incremental savings (EMI-rent) in financial assets would surely give better results than buying a house. There are ample calculators online to help you visualise how the numbers look like in the case of buying a house vis-a-vis staying in a rented house.
In this post, I will try to cover the non-financial aspects of whether one should buy a house or simply choose to stay on rent.
What stage of your career are you right now? In case you are not yet 'settled' as far as the location is concerned, it makes no sense to buy a house. Even within a city, if your office location might change, its advisable to avoid buying a house.
How comfortable are you with financial assets like equities or debt? Many people are not comfortable with financial assets like equities or bonds, owing to the volatile nature of these assets. If you are one such person who does not like volatility, you are better off buying a house instead of letting your capital lose to inflation in fixed deposits.
How much of real estate assets are you likely to inherit? Well, ideally as per the rules of the book, assets to be inherited should not be considered as a part of your financial planning. But, real estate is an asset class which is passed on from one generation to another. In case your parent or any elder within the family is heavily invested in real estate, and you know that a part of it is likely to be inherited by you, there is no need for you to invest in anther house. Stay in a rented house, and keep investing the incremental savings (EMI - rent) into financial assets like equities or bonds.
Think about the balance sheet. An average 35-40 year old couple in India, today has a networth of Rs. 2-2.5 crores. If you choose to buy a house worth Rs. 1 crore, 50% of your networth will be blocked into real estate. The biggest problem with this approach is that firstly, real estate is a relatively illiquid asset. If you have to sell the house for some reason, finding a buyer is difficult. Secondly, you lose the flexibility by blocking a huge chunk of your networth. Going ahead, if you get an interesting investment opportunity into a new business or your own career, liquidating your house has a high cost attached to it.
Agriculture is a phenomenon which is only 12000 year old (compared to the age of earth which is 4.5 billion years). Before the advent of agriculture, we all were hunter gatherers. Roaming around the world is ingrained in our DNA. Author Yuval Noah Harari, in his book 'Sapiens: A brief history of humankind', goes to the extent of saying that agriculture is the biggest scam on earth! If you are someone who likes to explore new places, buying a house is surely not for you. Ofcourse, I am not talking about becoming hunter-gatherers again, but travelling the world like modern humans is fun too (It may not be as much fun as hunter-gatherers though :). In the peak of your career, you may not find the time to explore the world, but that does not mean you should buy a house and keep paying the EMI. Life expectancy is increasing, thanks to medical science. Once you make good money during the peak of your career, there shall be an opportunity to explore the world, provided you do not over-commit yourself to less liquid asset classes.
One of the biggest drawbacks of NOT buying a house is that you have to keep moving from one house to another. House owners are not very comfortable to extend leases beyond 3-4 years. Assuming you are 25 YO and want to defer your house buying decision for 10-15 years, you may have to shift your residence 3-5 times! If you can manage the burden (physical, financial and emotional), you are good in a rented premise. Remember that moving houses is tough. Everything changes, right from your domestic help to your child's friends!
There is a systemic shift undergoing in India from physical asset classes like gold and real estate to financial asset classes like equities and bonds. The present government encourages the common man to invest in financial asset classes. This trend of shift from physical assets to financial assets is likely to continue for the foreseeable future (at least till the time the 'Lotus' keeps winning hearts). In such a scenario, buying a house is not the best thing to do with your hard earned money.
House purchase is perhaps the only big purchase we can make by taking a bank loan (No bank would lend us to invest in other assets like mutual funds. Ofcourse, you can take a personal loan and invest in mutual funds, but that is not viable because of the lower tenure of personal loans compared with housing loans). If the Indian economy grows at a rapid pace of 12-13% for a few years in a row (the way some south east Asian nations grew in the 1990s), house prices would surely zoom. In this case, the ones who have borrowed from banks for making leveraged investments in real estate would be the beneficiaries.
Real estate investments carry a huge concentration risk. If you are investing Rs. 1 crore today in a house, you can buy only 1 house! But if you are investing in financial assets (stocks or mutual funds or bonds), you can buy as many of them as you like. If your house selection goes wrong, you stand a chance of getting stuck in an asset that wouldn't appreciate. Recently, a client of mine purchased an apartment in a developing area for Rs. 75 lacs. Within a few months of moving into the property, he learnt that the local municipal council has allocated the adjacent piece of land for a big dumping ground. The apartment purchased for Rs. 75 lacs, now sells for Rs. 60 lacs. The foul odour from the dumping ground is just not tolerable!
Finally, buying one house is okay, but overexposing yourself to real estate by buying a second home is a HUGE mistake, as per me. It must be avoided at all costs!
Thanks for making it to the end. That's it I have for now. Summing up, if you love financial independence, do not buy a house. If you love convenience, you may consider buying a house!
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P.S. Commercial real estate investments have a higher rental yield between 8-10%. A new way of investing in commercial real estate is getting popular (called fractional investing). It's a simple concept. In fractional investing, a group of investors comes together and pools in the money for buying a commercial real estate like office or shop or a warehouse. The incoming rent is divided by the investors among themselves in the ratio of their investments. Many of the problems of residential real estate are avoided in fractional investing. Get in touch with us here, to know more
We should aware of risk while investing in Real estate