A first-time home buying decision depends on several factors, as all investments come with specific return, liquidity and risk features which should align with your foreseeable needs.
1. Buy own house for living in it:-
a) If you see yourself living in the same place for at least 15 years,
b) If you are paying an exorbitant rent (more than 25% of your take-home salary),
c) If you can afford additional monthly burden of home loan interest rates, and
d) If you know that property prices are likely to rise in your chosen location for living during your retirement.
a) If you see yourself living in the same place for at least 15 years,
b) If you are paying an exorbitant rent (more than 25% of your take-home salary),
c) If you can afford additional monthly burden of home loan interest rates, and
d) If you know that property prices are likely to rise in your chosen location for living during your retirement.
2. Rent an accommodation:-
a) If you may have to move at short notice, forced to pay EMIs for an empty house or to get 2-3% rental yield during this duration,
b) If house costs will be more than twice your current annual household income,
c) If your surplus savings can't take care of loan down payment and home upkeep, and
d) If an affordable house in the city where you presently work is small or far, and not suiting your current lifestyle needs.
a) If you may have to move at short notice, forced to pay EMIs for an empty house or to get 2-3% rental yield during this duration,
b) If house costs will be more than twice your current annual household income,
c) If your surplus savings can't take care of loan down payment and home upkeep, and
d) If an affordable house in the city where you presently work is small or far, and not suiting your current lifestyle needs.
3. Buying vs. renting scenarios:-
a) If property prices increase annually by 5% and rent by 10%, the cost of renting will be higher from the second year; hence it is better to buy a house to save money in the long run.
b) If property prices continue to remain flat for some time, while the rent keeps rising by 10%, renting a house will be cheaper for most of the term.
c) If property prices go down by 5% a year, while rent rises by 10%, renting will be a better option for the entire term.
d) If property prices are rising, capital appreciation of the house can make up for low rent yields.
e) If property prices are stabilising, capital appreciation of the house won’t make up for low rent yields.
f) If the house's price is over 25 times the annual rent that you would pay, stay as a tenant for some more time, especially if property prices are likely to stabilise or go down.
a) If property prices increase annually by 5% and rent by 10%, the cost of renting will be higher from the second year; hence it is better to buy a house to save money in the long run.
b) If property prices continue to remain flat for some time, while the rent keeps rising by 10%, renting a house will be cheaper for most of the term.
c) If property prices go down by 5% a year, while rent rises by 10%, renting will be a better option for the entire term.
d) If property prices are rising, capital appreciation of the house can make up for low rent yields.
e) If property prices are stabilising, capital appreciation of the house won’t make up for low rent yields.
f) If the house's price is over 25 times the annual rent that you would pay, stay as a tenant for some more time, especially if property prices are likely to stabilise or go down.
4. Home loan scenario (if loan taken):-
a) If difference between rental yield and interest rate is more than 5-6%, postpone buying till it reduces.
b) If more than 80% of EMI is interest component, wait for interest rates to fall before buying.
a) If difference between rental yield and interest rate is more than 5-6%, postpone buying till it reduces.
b) If more than 80% of EMI is interest component, wait for interest rates to fall before buying.
5. Total Cost of renting (at 15,000):-
A) Initial renting costs (A) are:-
i) Rent security deposit (refundable) (6-12 months rent) - 1,80,000
ii) Broker’s fee (1 month’s rent) - 15,000
B) Annual costs (B) are:-
i) Rent for 12 months - 1,80,000
ii) Maintenance cost (2-3% of rent) - 5,000
C) Lost opportunity costs (C) are:-
i) Interest (8%) on investing initial rental deposit and broker’s fee - 14,400
ii) Interest (8%) on investing annual rent and maintenance cost - 14,800
D) Total cost of renting is:- (A+B+C) minus (Rent security deposit) - 2,29,200
A) Initial renting costs (A) are:-
i) Rent security deposit (refundable) (6-12 months rent) - 1,80,000
ii) Broker’s fee (1 month’s rent) - 15,000
B) Annual costs (B) are:-
i) Rent for 12 months - 1,80,000
ii) Maintenance cost (2-3% of rent) - 5,000
C) Lost opportunity costs (C) are:-
i) Interest (8%) on investing initial rental deposit and broker’s fee - 14,400
ii) Interest (8%) on investing annual rent and maintenance cost - 14,800
D) Total cost of renting is:- (A+B+C) minus (Rent security deposit) - 2,29,200
6. Total Cost of buying (a 65 lakh flat):-
A) Purchase costs (A) are:-
i) Down payment (20%) - 13,00,000
ii) Buying transaction costs (10% of down payment) - 1,30,000
B) Home loan EMI repayment (B) is:-
i) Principal - 82,176
ii) Interest (10%) - 5,19,996
C) Annual costs (C) are:-
i) Property and municipal taxes - 6,000
ii) Society maintenance charges - 24,000
iii) Utilities - 50,000
iv) Renovation costs - 50,000
D) Lost opportunity costs (D) are:-
i) Interest (8%) on investing down payment amount - 1,04,000
ii) Interest (8%) on investing EMI and annual cost - 58,574
E) Selling cost (E) are:-
i) Broker’s commission and selling transaction costs - 1,30,000
ii) Remaining principal payable to lender 51,13,954
iii) Tax (if any) on profit - 0
F) Proceeds from home sale - 71,50,000
G) Total cost of buying is:- (A+B+C+D+E) minus (Home sale proceeds) - 4,18,700
A) Purchase costs (A) are:-
i) Down payment (20%) - 13,00,000
ii) Buying transaction costs (10% of down payment) - 1,30,000
B) Home loan EMI repayment (B) is:-
i) Principal - 82,176
ii) Interest (10%) - 5,19,996
C) Annual costs (C) are:-
i) Property and municipal taxes - 6,000
ii) Society maintenance charges - 24,000
iii) Utilities - 50,000
iv) Renovation costs - 50,000
D) Lost opportunity costs (D) are:-
i) Interest (8%) on investing down payment amount - 1,04,000
ii) Interest (8%) on investing EMI and annual cost - 58,574
E) Selling cost (E) are:-
i) Broker’s commission and selling transaction costs - 1,30,000
ii) Remaining principal payable to lender 51,13,954
iii) Tax (if any) on profit - 0
F) Proceeds from home sale - 71,50,000
G) Total cost of buying is:- (A+B+C+D+E) minus (Home sale proceeds) - 4,18,700
7. Living scenarios:-
a) Retirement - Ideally, a house should be bought for actually spending the entire retirement in it, which would help decide its location too.
b) Working - Buy an affordable house only if working period would be of at least 10 years in that location.
a) Retirement - Ideally, a house should be bought for actually spending the entire retirement in it, which would help decide its location too.
b) Working - Buy an affordable house only if working period would be of at least 10 years in that location.
8. Caveats to consider:-
a) Buying a house is a big long-term investment, giving minimal annual returns at a specific place.
b) It is an illiquid investment, with no partial redemption for meeting emergency needs.
c) It can limit scope of other long-term growth-oriented investments, if bought at a young earning age.
d) Missing loan EMIs entails a double penalty – from lender as well as bank - and impacts credit score for other types of loans.
e) Rental yield below 4% is insufficient income as a regular investment, especially if cost of capital is high, as it neutralizes any gain from resale of property.
a) Buying a house is a big long-term investment, giving minimal annual returns at a specific place.
b) It is an illiquid investment, with no partial redemption for meeting emergency needs.
c) It can limit scope of other long-term growth-oriented investments, if bought at a young earning age.
d) Missing loan EMIs entails a double penalty – from lender as well as bank - and impacts credit score for other types of loans.
e) Rental yield below 4% is insufficient income as a regular investment, especially if cost of capital is high, as it neutralizes any gain from resale of property.