One of the first decisions that we are all faced with relatively early on in our career is whether we should buy or rent a home.
- If I get a low-interest rate loan, should I buy a house
- How much difference in EMI and Monthly Rent is okay to go with
And these are just some of the questions that pop up. So let’s delve a little deeper into this question.
Now first things first, I am not going to take in the emotional part here.
Most Indians find buying a house as a goal of theirs. That is your choice.
But my point will purely be based on the Investment Side.
A house is normally purchased for 2 reasons:
- Investment
- Consumption
The mathematical side is well known.
We have all the Excel sheets in the world to help us make this decision,
You can input all your metrics and make a calculated decision.
But let’s take a different view:
1. Your Portfolio Size needs to be big enough to buy
It makes absolutely no sense to buy a property worth 1Cr, If your total net worth is let’s say 1.1Cr.
You can’t take on debt even if it’s productive if your total portfolio is too small.
2. The Rent and EMI gap has increased over the years
- In the olden times, these 2 metrics used to be similar, So the decision was quite simple. But now this is not the case.
- If you go to Delhi, a property worth 1Cr gets you 25k rent monthly i.e. 3L yearly.
- This gives a rental yield of 3%. This post-tax would be even less.
Below is the data in the US:
But at the same time,
If you get a property with a rental yield of >4% then that is a good buy.
We will dive more into rental yield later on in this series.
3. Think Different - Understand Opportunity Cost
Building on the last point, let’s say you are living in a Metro. As we mentioned above, the rental yield in such Tier-1 cities is low.
So would it not make sense for you to rent an apartment here for consumption?
And look for opportunities in other Cities or even outside India where you make better use of your money.
In my opinion, It absolutely would.
4. Your deal that you get matters
Let’s say you get a distressed sale, then it absolutely might make sense to buy that Real Estate.
5. If you have less than 25L and your income for the next 10 years is not clear (stable).
Then opt for Consumption Property.
Consumption Property is a property you buy for your own purposes (to stay) and not as an investment.
Owning Real Estate will help you here since
- Approx 33% of your expenses are on your rent.
- Having a property can help you save on this expense
- As taxes go up, the fact that you are consuming your own RE will benefit you.
- Simply because the only tax you pay for this is property tax.
The bottom line is:
- The price that you get,
- The type of property that you get,
- And the uniqueness will all matter.
And that’s what you need to learn about.
Understand how to make the best use of your money.
But how will you learn this in such an opaque market?
Source
- Akshat Shrivastava's 30 days Real Estate newsletter.
