Buying a house is the dream of every person. It is one of the basic priorities in our life. Roti, Kapda, aur Makaan (Food, clothes, and shelter) are three necessities for our survival. But the real question is that should you buy a house right now by taking a house loan and paying EMI for the next 10-30 years? Or should you delay your plan to buy and live on rent? Most middle-class people don’t think another way. All just prefer to take a loan and buy their own house. But since you are the reader of our Website and I assume you are a little bit financially aware of your money. So you will make wise decisions and act against the crowd. Now stop wasting our time and let’s quickly do some calculations and find out what is the best financial choice?
We will find both the pros and cons of buying a home.
Recently I was given an offer to purchase a property near Delhi-NCR by one of my colleagues and I was fascinated to buy it. But once I did some calculations, I changed my mind.
The property offered to me was a 1 BHK flat at ₹20 lakh (₹2 million). HDFC provides house loans at 6.7% PA currently at the time of writing this post.
If you go to google and search EMI calculator, you will find a calculator on the home page or click here. Bank offers 80-90% loan amount of the property and the rest 10-20% amount is paid by the purchaser. But to make calculations easy, let’s assume a total of ₹20 lakh is paid on loan.
For 20 lakh @6.7% PA for 10 years, EMI paid is ₹22,914 per month. I asked the owner about the rent which I am supposed to get if I rent this property to someone else. The rent was around ₹6000-7000 per month.
Now with all the facts and figures, we have collected. Start digging into the matter.
Case 1 Buying the Property
Cost of the property = ₹20 lakh
EMI = ₹22,914 Per Month
Tenure = 10 years
Total amount paid = ₹27,49,680
Case 2 Rent and Invest
Rent for the same property = ₹6,000rs Per Month
Money left to invest after paying rent = ₹22,914 – ₹6,000 = ₹16,914
Expected rate of returns = 12-15% PA ( 14% to be precise, which is easily achievable by investing in a good mutual fund or index fund over a long time.)
Total amount invested in 10 years = ₹16,914×12×10 = ₹20,29,680
The total value of your money growing @14% PA for 10 years = 44,33,014
Here, let’s assume in the same period your original property is appreciated at price and is now double in 10 years. Now our property is valued at ₹40 lakh.
Still, you can purchase your house with the amount in the hand.
Now since we have discussed the outcomes of both the plan. Let’s compare renting & buying.
Buying a House
1) Some may argue, well the property rates are going to skyrocket in 10 years. You have only doubled it while it can go 10 times in the same period. Well, my dear readers, I have analyzed and talked about the nearby properties the rate of price increment is 7-12%. I agree that if a sudden govt project or some big news comes up then you will get a lot of money with the same property. But nobody knows if that will happen for sure. If you think that is for sure then my friend you are free to do whatever you want. After all, it’s your hard-earned money. But guessing these kinds of future events is pure gambling. You can do the same gambling in the stock market too in the Future & Options. Well, we will talk more about this topic in a future article. If in the same period you are lucky enough then you will get a lot of money on the same 20 lakh.
2) Rental Income will increase 10% every year, I know to make the calculations easy, I assumed the rent to be fixed. If you have a calculator then you can do the calculations yourself and find out how much these rents make an impact on your investment.
3) You are the owner of your house it will feel great to have your own house because no one is going to say anything to you no matter how you live or what you do in your house. It will be a source of happiness. If that’s the case then stop reading the post further. Because nothing is valuable than happiness itself. After all, we are doing everything to get happiness. May God bless you with what you are looking for.
Renting a House
1) You will always be under mental pressure to pay EMI on time. While at the same time you will feel less burdened and relaxed when you live on rent and invest in SIP.
2) As property rates can go higher, similarly your SIP can grow at a higher rate than we assumed.
3) Having cash in your hand give you the power to bargain. Hence, after 10 years when you have around ₹44 lakh in the bank account, and the same property is for ₹40 lakh. You can bargain with the owner to reduce the price. It will be another benefit that most of us neglect. The owner will give priority to the person having the cash in hand rather than a person who will take a loan.
4) If at the same time you educate yourself and study some good books on investing. You can improve your returns while enjoying the dividend income.
I have provided you with enough points to do some mental thinking on the facts. I know there can be many factors to change our future expectations. After all, the future is uncertain. But we have tried to assume the future outcome based on the analysis of the past. It’s on the reader to think and reflect on what is best for him and act on it. Because it is you who will be responsible for your actions.
But for me to speak, I left the idea of buying a house and prefer to do SIP for the long term. I don’t want to remain in fear to pay my next EMI.
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