Why buying house makes sense ?
Should I buy a house or continue to be in rented one ?
This seems to be eternal question for many of my colleagues and friends,with roaring real estate prices and not so rising incomes 😉 perhaps it has become one of the key decision for many first time house buyers.
Interestingly there is no straight forward answer (like with many things in life), however lets dig down with a case and see if we get to any sort of conclusion.
So here comes Frieda (yes again) with her with monthly income of INR 40 K (take home) and monthly expense of around INR 15K (including Rent of 7K) living in shared accommodation in India’s most happening Metropolitan (won’t be naming it you know which city I am talking about). Also she has been working tirelessly 😛 in India’s glamorized Information Technology sector for last 3-4 years and has considerable savings to payoff down payment in tune to 1.2 million rupees. She has two options
- Continue to pay off Rent 7K per month for housing loan duration,
- Buy a House worth 35 Lacs in this Metropolitan ( It is usually safe to buy only to the tune of 4 times of your savings even if your are working in most prestigious job)
Which Decision makes more sense financially?
Some assumptions – Our habit of simplifying things and life J
- Rent, price appreciation and salary to increase at 5% though you would want salary to increase at much faster pace 😉
- Rental deposit to landlord for 12 months
- Loan to tune of 85% of property value for 20 years
- Basic to be 37.5% of take-home pay
Propmart has made a cool tool to make life easy for me , No more exceloging – The financial gains out of buying a house over rented one comes out to be mere 900K, Check Detailed report here,
The breakeven in terms of cash flows is happening after 17 years. Doesn’t sound good right – Even after toiling to pay loan for 20 years the end benefit is just 900K. But I would say it still makes financial sense to buy a house and the gains are much more lets us look why
If you sell,
Firstly – Appreciation of property is taken at 5% – looks very pale if you look at the this report of price appreciation in last decade done by Lloyds (14.4%) Additional one percent improvement in rate means your gain increases by 33% to 1.2 mn and two percent improvement takes it to 1.5mn a whopping increase of 66% . Told you small is BIG
Secondly – Many times you would not be selling this property as you are resident in that property. Will it still make financial to buy – yes of course, you don’t pay ever increasing rents Thirdly one of most underrated advantages of owning a property is Reverse Mortgage – A house can give you life long monthly cash flows till you die a rented property can never give you that.
Fourthly, another big advantage is they deduct the EMI straight out of bank account (often salary account) leaving you with little to splurge 😛
Finally a lot us have emotional attachment to our own house J !!
Read of the Fortnight
Warren Buffett Way – A splendid book
Hope this post makes this crucial decision of investment a little easier!!