Purchasing a house

I have been thinking to write on this very favourite topic for a long time. Today I will share some facts which can help you make better investment decisions.

When it comes to buying a house most of us think it is an investment purpose and will sacrifice anything for it. Majority of working people take housing loan to buy a house. In the present time, taking a loan and buying a house is in fashion and every working individual is going for it.

Some of the reasons to buy a house are

  1. We think that after taking a housing loan we can get more income tax deductions and our tax will be less.
  2. Housing finance companies promote dream house a must buy for every living human being.
  3. House is an investment which whose value only appreciate with time.
  4. Most of the youngsters face difficulty in getting married just because his to be in-laws think he cannot keep their daughter happily without owning a house.

Buying a house on EMI is just a hoax and it only helps banks or housing finance companies to grow.

Let us take an example of it.

  1. House estimation

House cost: 50L

Interest Rate: 9.5%

Tenure: 30Years

EMI: 42K

Total amount to be paid: 1.5Cr

Purchasing a house

2. Investment estimation

Investment amount: 30K

Average return: 9.5%

Tenure: 30Years

Final amount to be received: 6.8Cr

Purchasing a house

Strange right!!

Now just see what difference an investment and loan can make in your life. The amount of return is just nominal and it could be more if an individual does some research and invest in good performing mutual funds.

My aim is never to discourage buying a house rather educating working professional about bad investment myth which is never clarified. You can always buy a house if you have an surplus money but buying an entire house on loan is never a good idea. It only fills bank or housing finance pockets.

Cons of not buying a house

  1. You have to live in a rented house and pay monthly rent which increases 5-10% every year.
  2. You may have to change house every 3 years as sometimes landlord does not allow to stay beyond 3 years.
  3. You do not have to paint or maintain house every time you move it as it is done free of cost by the house owner.
  4. You do not have to carry a burden of the house if you need to change your job.

When buying a house is good Investment?

As quoted by Warren buffet,

 Price is what you pay. Value is what you get. 

Therefore, it is very much important we should know when purchasing a house could be a good investment. As with every asset class houses also have their earning and cost.

Let us take an example of it. I have mentioned the cost of a 3/4BHK house in a metro city. I have taken rent which is the earning an individual can earn over a year from it.

P/E is a ratio which is calculated by dividing the present price of an asset by its present earning.

With above figures, we can calculate Price/Earning ratio for our house which comes around 40. This 40 ratio shows that we are willing to pay 40 times of the 1 Rs earning of the house. This is extremely very high. But this doesn’t mean that cost of the house will not increase over the year. It can increase as long as people are willing to pay the higher prices to buy new houses. The increase in prices will come with the expansion of P/E and it will increase over time. But at some point when the expansion of P/E ratio is not possible, the house prices will become constant or fall for coming years.

Buying a house is a good investment option when we are able to get a good return on it. In the mentioned example if we are able to get a house at low P/E that definitely it could be a good investment opportunity. There could be another example where if one is able to increase earning on the same house, say by opening a PG or using it for some business purpose then also buying a house is a good investment. In this case, you will get a house at low P/E because your earning has been multiplied or increased.

I hope this post adds some value to your financial life. Purchasing a house is an individual decision and can depend a lot on his/her financial conditions. Do comment if you have any recommendations.

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