For example, ask an innumerate person how wise is a decision to invest in a house. Most probably, you will get a answer like "It is the best investment you can make". On the other hand ask a financial expert, definitely he will not be thrilled as much you expect. Well, he can figure out the pros and cons, but an yes or no depends on many factors.
I purchased a three bedroom flat three years ago. I was not a money conscous person at that time, so definitely I did not do my maths. But now I am, so I decided to analyze that decision. It is purely based on my personal experience.
I have a made Rs 10 Lakhs as down payment. and I went for a loan of Rs. 25 Lakhs for 20 years. I have to pay Rs 21,700 as EMI for this loan. Is it a wise investment? Assume my flat appreciates 15% Compound rate per year. So, at the end of 20 years, it will worth Rs 5.72 Crore.
Besides this, I can claim income tax reduction. I am in 20% tax slab, and assuming the tax laws will remain constant for this 20 years, I will save Rs 10 Lakhs.
So, my gain is a total of Rs 5.82 Crores
Now, see how much I paid?
- Rs 10 Lakhs downpayment
- Rs 52 Lakhs as loan repayment
- Approximately Rs 10 Lakhs as maintenance charges
Now consider another scenario. I had decided not to purchase the flat. and decided to invest the money in a bank recurring deposit. Assuming interest rates keep constant at 9%, let's recalculate.
I have paid Rs 10 Lakhs as down payment. I invest that right away for the 20 years. Also, I decide to invest Rs 21,000 that I pay as loan now. Wait, I cannot pay 21,000. If I did not purchase the flat I should have to pay rent. Also, more Income Tax.
However, if I decide to invest the Rs 10 Lakhs (which I paid as down payment) in an NBFC at 1% interest rate, I will get Rs 10,000 monthly. So this, can cover the rent. So, I am ignoring rent, but I have to pay income tax. Reducing that Rs 18,700 is left for investment every month.
So I invest 17,000 per month. This will be accumulated to 1.2 crore. Definitely this is not attractive as first scenario. But in both cases, we have made a few assumptions.
In first scenario
- The price of your flat appreciates at 15% per year. Really? Think after 10 years, your flat will be old and obsolete.
- There is no major maintenance
- No insurance is not needed for the house (you know it is not true). Insurance charges are not considered in the calculation.
- The rates of return is constant at 9% through out the years
- You get 1% monthly return for the Rs 10 Lakhs investment you made for the next 20 years.
- You invest in tax exempted schemes, so that no tax is not levied on the returns.
- The effort you put to find out an appropriate flat, background checks, and maintenance
- Freedom and peace of mind of living a debt free life.
- The pleasure of seeing your wealth getting accumulated.
- The freedom of life - If you don't like one rented house, you can move to another.
Please let me know your comments.