When you are under social, peer, parental, sibling, marital pressure to buy a house direct them to this article, says P V Subramanyam ;-)
Have you heard these housing lies?
• A home is a good investment
• Inflation makes the EMI very cheap
• Real estate prices NEVER go down -- it always keeps going up
• You can always rent it out if and when you want to move
• Paying rent is throwing away money -- with EMI you own the house
• Buy a house soon and buy as big a house that you can afford to buy!
Let's see the real bitter truth:
1. A home as investment: Let's say you buy a house worth Rs 1 crore. Assume you have invested say Rs 10 lakh and borrowed Rs 90 lakh. When you do your return calculations include all this: the brokerage, registration costs, furnishing, annual maintenance...etc.
Include the interest paid as a cost.
Now go and do all that and find out what is the 'profit' that you made. Over long periods of time this is likely to be a single digit number.
2. You can always sell it or rent it out: A cousin's family has been struggling with a house in a southern metro. Unable to sell it, and unable to rent it out to a decent family they can trust. The whole process of finding a buyer or a tenant is not as 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 Mumbai a house costing Rs 2.25 crore will cost you about Rs 225,000 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 per cent per annum and interest costs are about 11 per cent per annum. Sheer innumeracy to assume that the differential will catch up over a 5 year or a 7 year period.
4. What if your landlord throws you out? This is clearly a movie impact. Old movies -- any number of Hindi 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 article... ;-)
P V Subramanyam is a chartered accountant with more than four decades of experience in the field of personal finance and blogs at subramoney.com.
