Do you need to own the property you live in?
Owning a property might make sense for several reasons. It`s an important asset class to own. If you are reasonably sure of the reasons for appreciation it can be very profitable as well.
Off-late one of our more core beliefs have come to be challenged – property prices don’t always go up. And so, the notion that ‘you just can’t go wrong with property’ is not necessarily true in every part of India. In fact properties prices have seen correction in several parts of India in the last two years.
Which brings us to the key question – do you have to own the property you live in? Bharat Shah, a Mumbai businessman has always confused these two. Owning a property might make sense for several reasons. It’s an important asset class to own. If you’re reasonably sure of the reasons for appreciation it can be very profitable as well. But, people often mistake this to mean that they must own the house they live in and pay hefty EMI’s. Now, Bharat is among those that believe paying rent is a criminal waste of money – this may not make sense.
Take his current example where he’s contemplating buying a dream apartment in suburban Mumbai.
The purchase price of the apartment: Rs 2 crore
Monthly rent that he would have to pay for the same house (if he chose to rent instead of buying it): Rs 40,000
Down payment, if he chose to buy it by taking a loan: Rs 40 lakh (assuming he’d pay 20% of the price of the apartment as down payment)
Home loan (for the rest): Rs 1.6 crore
EMI on the loan: Rs 1.55 lakh (assuming he can get a 10% interest rate on a 20 year loan)
As you can see from the above example, the apartment can be rented for less than 2.5% of the property value as opposed to a mortgage loan at 10%. That too, after paying Rs 40 lakh as down payment.
If the property appreciates by 10% every year, then Bharat will take 4 years for his decision to pay off. On the other hand, if it appreciates at only 5% a year, it will take more than 10 years for the house to pay for itself. In other words, if he has any doubts about the market and reasons for a healthy 10% appreciation per year, he should rent the property unless he plans to live there for over 10 years. Given that the bull market of the recent past can no longer be taken for granted, might it not make sense for Bharat to consider buying a Rs 40 lakh property somewhere outside Mumbai (it’s difficult to find one at that price within Mumbai) while renting the one he wants to live in? He gets an asset without incurring any debt and keeps his outflow low at the same time.
At times like these, assuming a continuous 10% increase in property rise every year should only be done if there’s a combination of several factors like a highly reputed builder, a very well done project, other developments in the vicinity like malls coming up, metro station starting up next door etc. Else, it pays to be conservative.
The author is a Co-founder & CEO at Bigdecisions.in (platform that helps take smart personal finance decisions)