Why NOT to buy a house - II

I received some comments on my earlier post. Jyoti said :


Your post lists all the valid points for "Buying a house after taking home loan at very high interest rate". But one point is missed - taking a house a investment and selling it after making decent profit and in process accumulating some fund.


I did mention this point in my earlier post


If you really had all the time in world to buy a house and sell it after 2-3 years, then I think you should go ahead.


Jyoti pointed out that a house can be helpful for old people who have no one to take care of – Sell the house and live on interest OR put the house on rent.


Well first thing, if you are old with no earning and entirely dependent on your children to support you, then it is for sure that either you really goofed up prioritising your financial goals OR you had blind trust on your children for support. I agree that there are lots of people who fall under this category and this is an important lesson of all of us in our generation.


Let me tackle her options (assuming I am that old person):


1) Put the house on rent


If I put the house on rent, then I too have to live in a rented apartment, unless I have more than one house. I can gain only if my rent is less than my tenant’s :) Simple maths. If I want to do that I have to lower my living standards. For example, if I have a house which can be put on rent for 14K, then to successfully live on that rent, I need to stay in a house with a rent say 4K-5K. If I as flat owner want to charge more rent, so will be my flat owner :) Doesn’t make sense…. (Another option exists, you rent out the flat in a metro and go and stay in your village/small town, but that is my whole point, if you have to do that why not purchase a house in the same village/small town, it wont cost much and you can use the money earned during lifetime in some better investment avenues)


2) Sell the house and live on interest


This is only possible if you earned a handsome while selling. Imagine for example, today you buy a flat in Bangalore costing 25-40 lakhs, when you retire (30 years from now) how much you expect the returns? Keep in mind that when you sell, so many factors can kill your calculations. Imagine the plight of people who bought houses near old airport (in Bangalore) few years back, now with the airport shifting, the prices have come down, and no guarantee that prices will bounce back and to what levels. I was talking to one of my office-mate who works in Fremont (USA). He was telling me about his friend who bought a house in USA few years back and now when he wants to sell he is finding no takers, he is now even willing to have a loss and sell it. Yes, ofcourse you can gain a lot, but basing your entire post-retirement life on this is not a sound idea (unless you have other investments which can take care of that). BTW, we have not factored the amount of money you have invested over the period in home loans (A 40 lakh house post home loan interest can cost you even 60 lakhs or more based on interest rates). And what about the inflation? Say your 60 lakhs house (including interest) sells at 5 crores (just a random number), do you think that would be enough after 30 years?


As an example, my dad started earning Rs 500 per month 40 years back and lived handsomely (he used to say lavishly) despite the fact that out of Rs 500 he used to pay Rs 200 for his brother’s studies. So essentially he stayed lavishly in Rs 300. After 40 years, i.e. now, if you want to stay that lavishly probably you need around Rs 1 Lakh (just a guess) in a metro. Let me lower it to Rs 50000 [post tax]. If you want to be more conservative in your living, you can even live in Rs 25000 [Rent, travel, grocery etc etc assuming no liabilities] That is close to 50 times. So to maintain current living standard you need may be 50 times that you earn per month. So Rs 25K now, would translate to Rs 12.5 lakhs per month (what about inflation causing rupee depreciation). This is the interest you need per month, so you need a whopping Rs 150 lakhs per year as interest with investing Rs 4.4 crore (34 % per annum). I hope my calculation is correct :)


But at any rate assuming at old age and no responsibility exist, just to live at the same standard, you can not do it alone on a house.


Conclusion:


  • Buy a house for living in it, at old age.

  • Don’t expect your children to stay with you (unless you keep them dependent on you)

  • Don’t just buy because everyone is buying, think long term, where you want to settle in your old age. Timing and location are important.

  • Buy a house which you can maintain. In old age, it is difficult to spend huge money on maintaining big house. Security is also a concern.

  • There are so many investment avenues other than house, think about that. In old age, big house won’t help, but surely the life long memories of your world travel can help. Spend money to enjoy life, and not to get imprisoned by the enormous house loan burden.

  • Keep accumulating small portion of money and buy a house when you are in your forties. At that age, your will be at the peak of your responsibilities, you can have your priorities clear.

If you are earning in dollars or have loads of money, then only buying a house makes sense as investment.

8 comments:

  1. Hi,

    A great post, although I beg to disagree with the copnclusions :-)

    A very good option for old people would be reverse mortgage, which has been introduced in India for a few years now.

    They can get a steady flow of monthly income while still staying in the same house.

    you can check out more on it at An Introduction to Reverse Mortgage

    Reverse mortgage is a really viable option, especially in this day and age when kids do not want the house that their parents have built.

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  2. Nice post..

    In fact I too was thinking on the same lines, but couldn't get my thoughts streamlined.. even now I cant..

    For a family of my income, I probably could buy one decent apartment (less likely a house) in my lifetime (in bangalore) and just pray to god that things will be stable till the EMI gets finished :) True! we will be more or less on a house arrest !!

    But there are other non-financial issues to make matters worse.. First House, wont be an investment.. its a possession. There are emotional and comfort issues as well...

    in short, I am still in doubt, whether to go for it or wait..

    Joe

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  3. There are some disadvantages of staying in a rented house:
    1. You never know when you will be forced to vacate.
    2. You cannot personalize your home too much. For example, you like an expensive carpet... but for a rented house... no... Or, you liked a great fancy wallpaper... but you just can't put it.
    3. House owner's torture
    4. A strong address proof.
    5. An investment that is not easy to liquidate is also a good thing. I may be tempted to destroy my FDs sometimes.
    6. Your rentd apt requires some fixes. But, you dont want to do all of them even if you can afford it. This translates to lower standards of living even if you can afford a better one.

    All said and then, I still agree with you fairly on most points... don't just hurry to buy a house. I will buy one if I feel a 'home' in it. And, that is very difficult :).

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  4. Valid points.
    We are all in the rat race, and in the feeling that, since others are buying house, I too buy. Also people say that, person "X" has bought a house 10 years back for 5 L and now it is 10 L, something like that. Some buy house to get rid of the landlord torture when living in a rented house. I face similar situation like this since I am staying at the rented house in Chennai.
    Just to add something to your post, "if one's house is his biggest asset, then he should be careful about his portfolio, because he is in trouble". I am working on some formula to prove why paying EMI for a house is very costly in the long run, simply speaking, if you are paying 25000 as EMI for 20 years, don't think that it is (25000*20*12), just think of the returns you may get if you invest it monthly in a good investment product, even the bank recurring deposit will pay you much. I am trying to calculate and put the difference. I bet that will be a huge difference.

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  5. Dont u think that staying in a rented house for long run (say 5 yrs) means waste of a huge ammount. If u take 10k per month as rent for 5 yrs, then u r spending (5*12*10000) 6 lacks for nothing. Please share ur view in this regard.

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  6. Anonymous8:45 PM

    Thank you all for replying...

    Tarak thanks for posting your thoughts. I will surely write a post on this.. small answer, you are just calculating from pure financial terms... and 6 lakhs over 5 years is not for nothing, you gained a decent place to live without any hassels of owning it...

    blogger

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  7. I will wait for ur reply :)

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  8. Your post surely gives relief to the guys like me who cannot afford to buy home :) but people who already bought may not agree to your view points. Anyways, good post bro. Keep it up.

    Regards,
    Ganesh

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