How the heck to Invest and Reach Nirvana: Is buying House a Good Investment?

In India having your own house is still pretty important and it is a huge commitment unless your parents or in-laws are funding it.?Even then, you better plan this well. The important question to answer is should you consider owning a house at all or live by the saying -Fools build a house that wise people live in. If you should then when is a sensible time to do so?

?Buying a residential property is not a good investment in India as the returns through rentals in all likelihood is lower than FD and the long term appreciation in value is modest. Everyone tends to get anchored to the buy price and feels elated when they see the current market price. But they forget the time elapsed since they bought it and don’t compute the CAGR on it to get a real assessment of their investment. So, you have to derive significant emotional and self-fulfillment benefits to justify buying a house. Which is fine by me. If you do buy, make sure it's in a place, neighbourhood you will love to live in. This protects you from having to pay very high rentals in the future, in case your preferred location becomes really very expensive.

Here’s the impact of it:

You save on the rent you are paying currently and, in the future. There is some tax savings possible for the principal amount and the interest paid. If you are saving some tax on the rent that you pay, the net impact is that much lesser. So, check out exactly how much your cash flow increases. However, there will be outgoings in the form of EMI you will repay on your loan. In most cases, this leads to a reduction in your monthly savings and that means less for your other goals.

However, there is one more benefit that you must take into account. Assuming you pay off all your loans before you retire, owning a house reduces the living expenses after retirement. This leads to a significant reduction in the retirement corpus that you need; so lesser investments for that.

There is no one answer and you probably need some advice on this. But here is something that appeals to logic from a planning and cash flow point of view. Find out what your dream house cost today, say 1 cr. Plan to pay at least 20-25% down payment for it when you buy it.

On the Moneyworks4me FPT add Dream House in your Plan, in the current cost input only your down payment says 25 lacs. If you are looking at doing so 7 years from today., and 7 years under years left. You get the monthly savings that you need to invest for this alone. Is this in the doable range? Let's say it is. Now 7 years later the cost of your dream house would have gone up and the loan you need to take would be 75lacs compounding at the rate of inflation. Use the FV calculator to find this out. Say you need to take a loan of 1cr. Check out the EMI for this for a suitable tenure. Choose a 20-year tenure and not higher. The EMI at an 8% interest rate works out to 86,000 pm. Will you be able to afford this EMI without it affecting your other plans? If not, do you have any other way of making a higher down payment.

However, don’t make any changes to your plan for building up the corpus to pay the down payment for your house. The monthly money that you invest for this, the increased rent you are likely to pay 7 years later, the tax saving, and the reduced corpus required for retirement will enable you to take a reasonably large housing loan. So, keep your options open. However, I would discourage you from making your dream house your priority over other goals largely because rentals in India are a lower-cost option to enjoy comfortable accommodation. ?

Read more in the book: ‘How the heck to Invest and Reach Nirvana’ by Raymond Moses.