When should I buy a house? Should I buy it as soon as possible, or should I wait for property prices to ease? Should I invest and then buy with it after some years? How important is it to have a property that we can call our own? Why can't I stay in rent forever?
A look at some of these issues sourced out of my comments from a thread at Facebook group Asan Ideas for Wealth.
I have received suggestions to make a rent vs. buy calculator. I believe such calculations are problematic since the only input that makes a difference is the rate at which property prices appreciate.
When I want to make a rent vs. buy calculation, I will always assume rate at which prices appreciate is higher than the rate at which rents appreciate (this is of course backed by history). So buying as early as possible will always win.
Besides there are too many factors that cannot be put on an Excel sheet - logistics, for instance: (drainage, water, location, proximity to work, schools etc)
So what do I do? Should I buy as early as possible? Or invest and buy later? Or stay in rent forever?
It all depends on your families present income and expenses and the rate at which they are likely to appreciate.
If my income is decent, that is an EMI would be constitute only 30-40% of the post-tax salary, with expenses constituting 30-40% and the remaining 30-10% available for investment (10% buffer for emergencies),
if my income will appreciate at a decent rate, say 10% or more and my foreseeable expenses (as of now) will appreciate only in step with inflation,
I think it makes sense for me to buy a home today. I will keep my EMI going and focus on investments and perhaps prepay it in chunks.
There is a danger that because of the EMI, I cannot invest enough for the first few to several years. However, since I own the house, I can use it as an asset if I do not have enough for retirement. I can sell it and buy a smaller place and use the difference for sourcing a part of retirement expenses.
Of course, I may grow to love the house too much but that is a bridge I have to cross in the future.
Invest and buy later!
I can choose to do this either because I want to(!) or because my income is not expected to grow at a good pace. If I choose to buy now, the EMI will be 50-60% of my post-tax salary, which would be stifling.
Question is, will I be able to invest enough for the house? If I do this, what about retirement?
If I can only invest enough for the house, I am ignoring retirement planning. Even if that is okay (this would be the case in the 'buy' option too), when will I be able to buy?
With something like equity, one can never tell and may have to wait 5+ years. What if property prices soar and the future EMI is pretty much the same as my present one, in terms of how it eats into post-tax salary?
There are absolutely no guarantees that the future EMI outgo will be lower than the current one. The only way to ensure that it will be lower is to invest more. To do this, one needs higher income again!
If I can reasonably expect my salary to grow at a good pace, I think it makes sense to buy asap and focus on investments rather than invest and buy later.
There are uncertainties associated with both approaches. I would rather take a chance with known uncertainties (my skill sets, qualifications, job security, ability to get another job) than with unknowns ones (market risk, inflation, property price movements etc.)
Of course, the uncertainties are linked, but we need to draw the line somewhere.
There are many who believe owning a house is overrated. I agree, but with the proviso that it depends on ones life stage. If I was unmarried or married without kids, I won't mind renting. If I was old with the kids staying elsewhere, I won't mind renting.
If I had young kids to parent, then I would prefer a house of my own with as much space as I can afford. Kids need space to think and play the way they want. If you walk about in my house barefoot, your feet will turn blackish blue. My kid draws all over our floors and walls with crayons, sketch pens, you name it. I can't do such things if I was in rented accommodation.
If I choose to stay on rent forever, I must consider that as an expense while planning for retirement. This means that the monthly investment required would be high. Can I afford to do this?
Of course, I can invest and buy a retirement villa upon retirement. This is not a bad idea at all. This means coping with landlords, which is down to dumb luck.
Today, I can afford the rent for a 3 or even 4 bedroom apartment in Mylapore. However, I cannot afford the emi for the same apartment if I choose to buy it. That says something about rental yields (from the point of view of the landlord) does it not?
So yes, renting makes a lot of sense. Especially when we can get a good deal in a decent locality.
If one has the mental frame to stay in rent for an indefinite amount of time (max. up to retirement) then it makes a lot of sense. One can then invest and wait. If there is an opportunity to buy a 'good' house without sacrificing comforts, then one can. This will work best when there are no expectations of when this purchase will be made.
If no such opportunity presents itself (a good, but unaffordable house now, remains unaffordable forever!), the investment sum can be used to buy a retirement villa or perhaps fund the rent post-retirement.
The trouble begins when I set myself deadlines: I will buy after 3Y, 5Y, etc. This can swing either way.
The EMI outgo could remain the same or you could even buy the place without a loan!
So I think open-mindedness with a plan for the worst case scenario will work the best. Like everything else in life, expectations can let you down.
Each option has its pros and cons. Whichever option I choose, I realise that it is important to invest in productive assets.
Register for the New Delhi DIY Investor meet: April 23rd 2017Get free, yet comprehensive calculators, tools and analysis delivered to your mailbox! Subscribe to get posts via email
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Read more about the book and pre-order now!