Over the last couple of years, an alluring argument has been made that there is no time like now to purchase a house, positing that residential property prices have bottomed out, interest rates on home loans are at a decadal low and with a regulator for the sector in place, and there are no risks involved in taking the plunge.
While these arguments true, are these reasons enough for all prospective homebuyers to leave their rented accommodation and plump for their own houses? Not always.
Buying a home is typically the biggest, most expensive investment a person does in his/her lifetime. So, it is prudent to look at every aspect before deciding to do so. Apart from favourable market conditions, the decision to stay on rent or buy a house depends on various other factors, which are specific to each individual or family. Here is how you should proceed.
Why do you want to buy a house?
The first and foremost question a prospective homebuyer should address is the reason behind the buy decision. For many, property ownership signifies success and growth—the more lavish or the higher the number of properties, the higher the perceived success rate. However, the decision to buy a house based on such factors is more a social and emotional response and may not be the right approach.
“Buying a house is as much (if not more) an emotional decision than a financial decision alone. The decision to buy will result in blocking of liquidity and future cash flow (especially if you need to service the EMI, or equated monthly instalment). Since exit from this asset is not easy (and sometimes not desirable), it might be prudent to have planned the goals and cash flow requirements for the next five to seven years,” said Lovaii Navlakhi, founder and CEO, International Money Matters, a Bengaluru-based financial services and wealth management advisory firm.
Many financial planners are also in favour of their clients owning a house as it gives financial stability and security to the family. But the decision should not be arbitrary and all other goals and financial needs should also be kept in mind. Evaluate all the factors before you make up your mind.
How long are you going to stay in that house or city?
The question to buy should only arise if you have decided to settle in the city you are planning to buy the house in. “If not for the lifetime, at least for the next 10 to15 years or more” is the recommended timeframe, said Rishad Manekia, founder and MD, Kairos Capital, a Securities and Exchange Board of India-registered investment advisor. This is because once you buy a house, you lose the flexibility to shift to another city.
“Staying on rent gives you some advantages—easy to move to places which meet your requirements which may change during lifecycle changes, apart from saving of liquidity for investments and other goals,” said Navlakhi.
That’s as far as buying a property to live in is concerned. But buying a house hoping to flip it for a profit in a few years may not work. According to Manekia, the double-digit annual price appreciation witnessed in the residential market before 2012-13 is unlikely in the near future. “In the last decade real estate has given negligible returns,” he said.
Moreover, given the high transaction costs such as transfer charge, stamp duty, registration fee, brokerage and so on, which can easily be 15-20 percent of the property value, even if property price increases a bit, you may not be able to recover the cost, added Manekia.
At times it even becomes difficult to find a buyer who is ready to pay the reasonable market price so that you can exit your investment at the desirable time. “We must accept that real estate goes through market cycles which last long (five to seven years at the very least) and getting caught in a down cycle—not just in price, but also in the ability to make the sale—could seriously jeopardise the goals dependent on the sale of this asset,” said Navlakhi.
Can you afford the EMI?
The other important question is whether you have the wherewithal to buy a house similar to the one you have currently taken on rent. Typically, the average annual rental of residential properties in India is 1.5-2.5 percent of the property value. Therefore, there can be a huge difference between the monthly outgo in the form of rent compared to monthly outgo via EMI for the same property. For instance, if you are living on rent in a property with a market value of, say, Rs 1 crore, the per-month rent would be between Rs 12,500 and Rs 20,000. If you were to buy the same property, if you make a down payment of Rs 25 lakh and take a home loan of Rs 75 lakh at the rate of 7.25 percent per annum for a tenure of 20 years, your monthly outgo would be approximately Rs 60,000 per month in the form of EMI. This works out to be three to five times your rent. “Ideally you should not be spending more than 30-40 percent of your monthly take-home as EMI,” said Manekia. Some financial planners are of the view that one should not buy and continue to stay on rent if the current rent does not cover at least 50-60 percent of the EMI you are willing to service.
Look at impact on other goals
Buying a house is an important objective, but not the only one. Before you decide, make sure that the amount being paid as down payment or EMI for the home does not jeopardise other goals. “Since, a home is a big-ticket expense and the EMI can be substantial, it can affect other goals,” said Suresh Sadagopan, founder and principal officer of Ladder7 Wealth Planners.
While calculating how much of your funds can be used to make the down payment on a house, provide for emergency and unforeseen events (typically it should be three to six times your monthly expenses), and do not tap into the corpus meant for other ends. “When planning for goals, we need to prioritise them. We need to keep aside money for upcoming goals like children's education, vacations, vehicle or white goods purchases, along with providing for property purchase. This should be provided separately, at least the important ones,” said Sadagopan.
Ideally you should remain a tenant if the annual rent is below 3-4 percent of the property value.
When to buy?Most financial advisors and real estate experts say that for first-time homebuyers, it is always a good time to buy if you are financially comfortable in doing so, that is, you can really afford to and you have sufficient funds to meet other goals. However, before you arrive at a decision, ensure a few things—buy only if you have found the right house in the right area within your budget and you have decided to settle in the city for a long time. Make sure you have good credit or ample down payment money. But be very careful in selecting the property you are buying.