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The downsides of being a home owner – Indian Version
The Age old question
Time and again, this one strikes hard– Should I buy or Rent?
It’s an interesting question especially when you happen to live in India where buying a home is considered to be more imperative than buying anything else.
- “Stop spending on expensive clothes, you should be saving it to buy your home.”
- “Why do you need a car; buy a home first.”
- “What’s the point of buying stocks and Mutual funds when you can buy your own home?”
- “Your home should be your principal asset.”
These are little intelligences I keep hearing every now on then from my friends, elders and well-wishers. While there is no doubt about the constructive intents behind these advices, I do not agree to all of them either.
While I understand buying over expensive stuff and partying hard are unnecessary expenditure and should be kept to bare minimum. But giving up all luxuries and other investment ideas just to own a home, in my opinion, is excessive and lead to imbalance.
However in India, buying a home is more of an emotional decision than rational apparently.
- “What!! You don’t have a home yet?”
- “Makaan toh Ghar ka hai na?”
- “How long you gonna live this rented life, dude? Buy a home and get settled.”
- “You are confused. You don’t know where you are going in life.”
Here, a person is not considered successful in life, unless he owns a home. Even if he possesses a Private Jet and Yacht, if he doesn’t own a home, I am sorry, “he hasn’t done much in life.”
Let us compare today how logical is this conventional wisdom
Let’s assume you want to buy a 2 BHK Apartment in one of the Tier 2 cities of India.
Now let’s imagine, after 5 years, you want to sell the property and come out of this debt. How would your decision of buying look like then?
We all understand the concept of the utility of an asset, right?
The Utility of an asset is the value derived from its usage. In our case, it’s the ‘Shelter’.
Your cost of utility (Shelter) is Rs. 20,000 for this tenure or Rs. 333 per month. Not a bad deal, huh? Rs. 333 a month for a 2 BHK accommodation, looks like peanuts, ain’t?
Now let’s put on the Tenant’s Hat. Same property, same neighborhood, same month and Year; This time you’re renting.
While your monthly debit is Rs. 12,000 only, your Owner self ends up paying Rs. 49,000 every month. That bring you to a Monthly debits deficit of Rs. 37,000
Now even if you save 50% of this deficit which would be Rs. 18,500 per month (50% of Rs. 37,000), any idea how much would be your compound savings (even at a skimpy interest rate of 9% per annum) at the end of 5 years tenure? Any guesses? Rs. 1,400,000 approx.
Therefore below are your figures:
That means, you have earned Rs. 520,000 to stay in that house while your owner self has spent Rs. 20,000. Effectively you’ve earned Rs. 8,667 every month to use that 2 BHK accommodation therefore your cost of utility (Shelter) is negative.
Doesn’t look like peanuts anymore, ain’t? This negative rent concept changes your opinion 360 degree, right? Let’s analyze further.
If the above calculations are extended for a period of 10, 15 and 20 years, below would be the results.
While it looks like later in life our Owner self also catches up and starts earning instead of spending those peanuts. However it’s also noticeable that the Tenant always leads.
Life becomes interesting, right?
Now Let us understand the definition of an asset a little better.
An asset is only considered an asset when it can be liquidated. If it can’t be liquidated, then it’s more of a virtual asset of a theoretical book value; nothing practical.
We must agree to the fact that selling one’s home is considered to be a taboo in India due to the social pressure therefore this kind of investment is less likely to be liquidated while the assets which a Tenant holds in form of Stocks, Mutual Funds or any other instruments is more probable to be liquidated and turn into something of a practical value because neither there lies an attachment nor a it is social taboo to sell stocks.
All the above calculations only stand accurate when the property is sold and liquidated; if, due to the owner’s attachment with the property and/or social status, this isn’t sold, then everything paid by the owner is considered to be more of an expense than an investment; An expense for the Utility (Shelter).
Moments ago, we calculated the difference in the expense (for the shelter) of the Owner and the Tenant and it came out to be significantly low for the tenant. If we were to compare it again assuming the property wasn’t sold, the difference would be much much much higher.
Looks like being excessively sentimental is end of being rational, isn’t it.
The stated above were the hard benefits of Renting however there are a few soft ones as well –
- No House warming, No furnishing, no repairs, no yearly maintenance
- No need to stick to one property; change as you please
- Smaller commutes to work, lesser fuel, lesser stress, reduced loss of time
- Leaving city or country? No problem! Just vacate the goddamn house
- No working your ass off to pay off heavy mortgages while avoiding all luxuries of life and maintaining a mediocre living standard
- No fear of real estate market crash
However it isn’t as black and white as it looks. A few attentions –
- Renting is only advantageous if at least 50% of the Monthly Debit Deficit is saved/invested in other instruments wisely; and remember switching from a Hatchback to a SUV doesn’t count as an investment, neither does buying jewelry.
- If nothing gets invested and the entire difference is spent on luxuries, we’re better off buying, as it at least leads to some obligatory investments.
Our Hypotheses behind the study–
- Both the properties are identical
- No drop in living standard is assumed therefore price of property for buying and renting is considered equal here. While buying, people tend to opt for a more economical property than that of while renting. In that situation, these numbers would not stand true. E.g. If you’re renting a property worth Rs. 4,000,000 and buying a property worth Rs. 2,000,000, that wouldn’t be an apple to apple comparison.
- Mortgage Interest Rate is assumed to be 10% per annum
- Loan tenure is 20 Years
- Property appreciation is per market observation –
- 15% for Year 1 and Year 2
- 10% for Year 3, 4 and 5
- 7% from Year 6 till year 10
- 5% from Year 11 till year 20
- Property appreciation index also takes into account the present value of the property. A Rs. 2,000,000 property is likely to appreciate more than a Rs. 4,000,000 property
- Both the properties are situated in a established habitable zone; not in distant outskirts with no functional surroundings
- Rental surges by 10% every year
- The monthly investment of Rs. 18,500 is considered to be constant at every month; it neither gets impacted by the decrease in Monthly debit deficit (due to increased rent) nor by increased income every year
We have a conclusion here; Looks like the Tenant is our obvious winner (logically though).
However as I said, In India buying a home is more of an emotional decision (Remember the ad - Apna Ghar akhir apna hota hai), logics might not work here.
If you want to avoid the exclamation,”Kiraye ka makaan, kiraye kee zindagi” Do yourself a favor. Go! Buy today.
If you’re more like me and don’t give a shit, keep renting and laugh it off.