Why I will not buy a house!
I'm a millennial. And I'm at that stage of my life where a lot of my friends and batchmates are taking one of the most important decision of their lives - investing in real estate. Ask any financial planner or investment advisor, and they’ll tell you that it’s a bad decision.
I've had numerous conversations with friends on this topic, and the answers they give obviously lead to various rounds of discussions. A lot of people today think that investing in a house is the right thing to do.
But finance suggests otherwise.
Let's talk about the 4 major reasons why people would buy a house, and look at them one by one from a logical and a financial perspective. While my numbers are based on the situation in Mumbai, most metro/tier2 cities will follow the same pattern (unless there are any outliers).
Reason 1: You'd rather pay a slightly higher EMI and own the house, than pay rent for a house that does not even belong to you: This makes sense as a statement, until we get into the numbers. For a 2BHK apartment in the suburbs of Mumbai, the rent would be somewhere between Rs. 30,000 and 40,000 and the value of the property would be about Rs. 1.5 crores to 1.8 crores. Let's assume we decide to buy it, and make a 20% down payment on it and pay the remaining in EMIs. The EMI, at a rate of 7% would be anywhere between Rs 1 lakh to Rs. 1.2 lakh PER MONTH. Yes, you're paying almost 4 times as much money as you'd pay rent if you opt to buy the home. That's because of the interest, which in effect over 20 years, will actually be equal to, or sometimes even more than the amount you borrowed from the bank! Is paying an EMI which is 3X-4X the rent worth it? That's for you to decide.
You can see a sample screenshot of these calculations from the website www.emicalculator.net and try it out yourself.
2. Reason 2: Real estate is a good investment: No! This is where all of us get it so wrong! Real estate had given good returns if you had purchased a property in Mumbai between 2000 and 2010. The prices had gone on to become 3X in a span of a few years. But that's no longer the case. Today, property prices are stagnant, and even if they rise, they give hardly a 1-2% annualized return, which also takes a few years. Also, if you've taken a loan to buy that property, you're actually giving interest rather than gaining it. Instead, if you want to invest money, try Mutual Funds, Bonds or even Fixed Deposits - those will give better returns. Plus, unlike real estate, they don't require a huge sum, and can be encashed easily. (We all know how long it takes to sell a property in India)
3. Reason 3: At least you're buying an Asset: This is where I borrow my learning from Robert Kiyosaki (author of Rich Dad, Poor Dad - Please read this book if you haven't. I promise, it's life changing!). Robert says (pretty logically) that an asset is anything that that puts money into your pocket (and generates income), while a liability is anything that takes money out of your pocket (and adds to your expenses). How then, is a property taken on a home loan, an asset? You're paying an EMI through your nose every month, and it's just taking money out of your pocket!
The problem is that we Indians are used to assets which are tangible - which can be seen, touched and felt, like a house, a car, furniture etc. We do not consider the "intangible" class of assets - stocks, bonds, mutual funds and other investments. These are actual assets which will generate an income for you.
4. There's no reason to buy a house in this point, but just a reason why you should think one hundred times before buying a house (especially on a loan) - you're tied up for life!
Yes, a home loan is like that evil girlfriend/boyfriend who is not going to leave you, no matter how hard you try. And a lot of people will relate to this, especially due to the pandemic. I know some people who have lost their jobs and are stressed because they have their EMI to pay (which is at least 50-60% of their salary). They have no idea how they're going to get over this.
Now, pandemic or not, a home loan is going to tie you in multiple ways. Do you want to quit your job and start a business? Who will pay the EMI till your business stabilizes? Want to just take some time off and rediscover yourself? Who's going to meet your lenders when they come knocking on your door? If you have an EMI which is 50% or more of your income (which is the case with most people), you will also need to have a constant source of income to pay the EMI. Is the statement "I have my own house" really worth all the stress it will cause because you're not able to do everything you wanted? I don't think so..
Now that I've given you 4 reasons why buying a house may not be the best idea, let me also tell you one reason why you SHOULD buy a house.
I am all for renting and against owning - whether it is a house or a car (I'll give you the math behind why an Uber is better than buying a car, in another article). However, I bought my first car 3 years ago. Why?
Here's why - it was a purely emotional decision: I love driving. Sitting in the driver's seat, driving on the highway with soft music playing on your stereo is something that refreshes me. I like going for drives with friends and family. Now, even though I know that taking an Uber is better than owning a car financially, I bought a car because of my love for driving.
The same is with a house - if owning a house is an emotional decision for you, if it gives you a sense of accomplishment, or if it gives you a sense of belonging, then go for it. Don't think too much before buying it. Just make sure that your EMI is not more than 25% to 35% of your income so that you have some comfort.
However, if you're purchasing a house on loan from a financial perspective - you're trodding down the wrong path, my friend! It may be a great emotional decision because of whatever reasons, but it is definitely the wrong financial decision.
Hope this article somehow helps you to get another perspective on managing your finances better!
In case you have questions, please shoot it in comments, or reach out to me on ankurajhaveri[at]gmail[dot]com
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