Is Buying a Home a Good Investment?

Buying a Home in the ’30s

You have dreamt of buying a home on turning 30, apart from reaching other goals such as getting married and saving for retirement. The Indian government has taken several concrete steps in the last 3 decades to make home-buying an easier and more affordable process.

Home loan applications are now processed in a jiffy and lenders offer attractive payment options for properties under construction. A home loan is typically availed for tenures ranging from 20 years to 30 years. Longer the tenure, the smaller the EMI. However, the longer the tenure, more the interest you end up paying on the loan.

For example:

• Loan Amount: Rs.50 lakhs
• Rate of Interest: 7%

Here is a look at EMIs and applicable interests for different tenures.

Lenders rarely finance 100% of the cost of the property. You will have to pay a margin amount upfront (commonly termed as a “down payment”). Therefore, you must also factor in the opportunity cost of the down payment amount.

Buying a House for Rental Income

When you invest in a property, the total cost incurred is much higher than the price advertised. For example, if you are buying a flat worth Rs.1.5Crores, you must factor in the property tax, maintenance, association/society charges, costs involved in transferring meter, khatha, etc. to your name. If you are availing of a home loan, factor in the interest and one-time charges.

Learn how to plan for your dream house at retirement.

Example: Ramesh bought a flat, from a prominent builder, in 2013 in west Bangalore. The advertised price was Rs. 27 lakhs. Ramesh had enough savings to buy this flat without a home loan. He ended up paying Rs. 35 lakhs that included stamp duty, advance corpus for maintenance, covered car parking etc.

Buying Without Loan:

Fortunately, the much-hyped metro line came up close by and the nearest station was 2 KM away. Property prices shot up and Ramesh’s flat was worth 65 lakhs by the end of 2021. What if Ramesh had let out his flat between 2013 and 2021. Look at the rental yield:

The assumption above is that rents increased by 5% each year. The rental yield is clearly showing a downward trend. The net rental yield would be much lower if you factor in other recurring costs.

Buying with Loan:

EMI is a good example of a recurring cost to calculate net yield. If Ramesh had availed of a home loan of about Rs. 22 lakhs in 2013 and paid an EMI of Rs. 21,000 each month:

The net yield turns negative when you factor in the EMI. The only consoling factor is that EMI remains flat and rents may increase, thus improving the yield over some time.

Investing Vs Buying House in the 30s

Real estate has been a long-term investment. It may take up to 20 years for property prices to double except in exceptional cases, which are usually rare. If we take that scenario and assume rentals increase by 5% every year, the yield from a property is less than 8%. That is when you have bought the property without a loan.

However, in the example shown above, the property price has appreciated at an average annual rate of 8%. Other than that you cannot dispose of real estate properties whenever you please and rarely in pieces. Finding a buyer can be cumbersome.

On the other hand, if you can invest the amount equal to EMIs in a ULIP with a mix of debt and equity for 20 years and have a yield of 8% p.a. you can easily make Rs 1.4 crores. That too without considering the bonus additions. Not to mention that:

• You will have access to your fund value partly after just five years of investment
• Your family will receive at least the life cover in the policy in case of your unfortunate death, regardless of the fund value

To sum up, real estate is a highly illiquid asset and your returns depend on the city, locality, employment opportunities in the vicinity etc. Equity investments are more flexible and you can allocate your money across different funds in ULIPs. Both investment and returns from ULIPs have tax benefits.

Thus, purchasing a home, whether for residing or rentals, will make more sense after you are retired. You can easily afford the property, save money buying it, and rentals will provide you with an inflation-adjusted income. Even if not, you still have enough corpus left to ensure a lifetime pension.