Housing myths for millenials
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!!
- 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.
- 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.
- 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 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 – Tamil, Hindi, ..and 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 post on my blog…and ask them to read the following too…
Puneet
Thanks a lot Subra for making my day with this wonderful post…
On [In Indian conditions, the rent is far far lesser than the EMI that you pay, so there could be a cash flow issue also.] – people can refer http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/ and see that it’s nearly same everywhere.
Krishna
I’m glad I didn’t buy a plot or an apartment about 5 years ago owing to speculative greed which was and is still prevalent among ‘IT’ crowd in Bengaluru. I wasn’t aware of IRR or NPV calculation back then, what prevented me was God’s grace perhaps. The quoted price always seemed higher to me.
Today the price of same plot or apartment has gone up no doubt, but when I subject it to IRR calculation, taking into account finance costs etc.. the returns is negative in most cases and single digit for best cases. I can’t assume it’s going to get better anyways. For an apartment purchase in Bengaluru with 1+ Cr price tag, you need to earn rent for 35 years and expect it to be sold for at least 10 crores just to break even! This is assuming 11 month occupancy in a year at 10% YOY rent increase.
It’s a shame ( on me and others) that some of us so mathematically inclined forget to do such basic mathematics before committing to life long’s earning corpus, and smartphone tools are aplenty.
prasoon anand
I also belong to the minor category ( thanks to subra sir , Pattu and other guides ) , who have , so far been able to resist the social pressure to own a flat .
I tried my many relatives and friends to convince about the real truth of rent Vs bUY , but alas , most of them have ignored it calling it as a only theoretical calculation .
I see a routine situation among my friends and relatives , who are so bogged down with their EMI burden ( though they are extreme happy about their priced possession) , that they are , after EMI and their monthly expenses( and greed based life style ) , left with no money , to help their parents ,sibling or relatives in need , no charity , and have deliberately avoided attending social function etc .
kamol
When parents insist their children to buy house, actually there is another reason.
It means their child is spending too much and not saving enough for future needs. If he / she buys a house with loan that means it is compulsory saving.
Even though it is mathematically not highly rewarding to buy house, it is correct from compulsory saving point of view.
Just for few minutes, think that you are a parent / father in law and then review above situation.
subra
kamol this is ONLY for financially responsible parents and kids who are interested in money OPTIMISING. Those without discipline can even buy LIC endowment policy and justify saying ‘otherwise this money would have been spent’. Good logic. I am very happy if u do that..I have tons of Hdfc shares and warrants.
INDLA SREEDHAR REDDY
Thanks Subra, I am also on the same view as you.I suggest my friends and colleagues not to buy flat instead stay on Rent and invest the money (planned for Home EMI – Rent) in Mutual Funds through SIP way.
Krishna Murty
Subra sir, my own experience has been quite good though. We bought a 2.5 BHK flat in Secunderabad in 2000 for 12 L. I had savings of 5L, took a loan of 7L. My EMIs were about 9K or so. The flat went on rent of about 5.5K from its very first month and with an initial tax break of 2K per month itself, it was kind of self-sufficient. The rentals crept up slowly and I never had even a month’s trouble. I was lucky and I am aware about that. It paid itself all these years and I cannot even imagine replicating it now. But you are very correct about buying a house in today’s prices of 70L -1 Cr…. Its far better to rent than put that much in a house.
girish
Great article. I myself on the lookout for a house. I have seen quite a few over the last 1 year. To my surprise, all of them are still unsold. Here are some of the tricks played by brokers. 1) the owner hasn’t made selling public. else it would have been sold out by now. 2) i have shown it only to you. 3) it was sold out. but the buyer had issues getting a loan. so its for sale again. 4) they quote a highly inflated prices, thinking the buyer will find it embarrassing to ask for more than 10% cut.
Anyways, regarding your cousin’s property. would you mind sharing a) property type ( apartment/independent house) b) the location. that will help it take forward. ignore otherwise
RAMESH C
Dear Subra Sir
I am currently living in Coimbatore. And this is my native.
it is very difficult to find bridegroom without having own house.
prasoon
on the contrary , would be in laws , should be avoiding giving their daughter to a person , who is head to toe into huge loan and EMI( home loan )
Gov
Ramesh C’s comment is very accurate. I’m from Coimbatore too… if you don’t own a home, tough luck! I hope the next Generation asks for “net worth” rather than home in a posh area etc.
Kumar
This Buy vs Rent argument is fine only if we started earning our first rupee after 2006/7., the time when the RE boom started/peaked.
But if we started earning our first rupee before 2004 and refrained ourselves buying a flat/home applying this Buy/Rent theorem then., we simply missed a life time opportunity and would be cursing ourselves now 🙂
Anon
Hey,
Need some solid financial advice how do I contact you?
Income 2.4L monthly
Emi 42K (luxury German car)
1L expenses
Can buy a house but already have a 3bhk. So should I put the surplus money in SIP?
Lazaro Silva
I am in a phase of making a very important decision in my life, buying a home or renting, but now reading this article I have already made my decision.