Buying a home is a big decision for many. While it often gives a sense of security, it is also a huge financial commitment. Unfortunately, many of us jump into “investing” in home soon after getting a stable income, without even being “ready” for it. This is often driven by need for a sense of security, parental/ peer pressure, chasing capital appreciation, hopes of getting regular rental income and so on.
However, one may do well to look beyond the glossy brochures and promised returns, and evaluate if the “investment” is really needed.
Here are few thoughts on the factors you should consider before investing or not investing in a home.
When you should consider investing in home …
(I am assuming that you are expecting good returns & hence considering real estate investment)
- You are looking at home as a place of residence in long term and not as an investment. Go ahead, and buy a house if your financial condition permits. (Here, chasing ROI is not your objective)
- You have lot of spare cash which you can deploy across asset classes – real estate being one of them. This way you may not be hard pressed for liquidity if need be and may also be somewhat protected (due to diverse investments) if the resale price doesn’t increase.
- If having an EMI commitment leads you to practice more financial discipline (Ideally this discipline should come from within, but it may not always happen)
(Suggestion – You can consider buying a home if any of the above is true for you.)
You shouldn’t invest in home if …
(Assuming that you earn enough to be eligible for some home loan)
- You are looking to be mobile in foreseeable future. i.e. planning to move city/ country in near future.
- If your expected source of income is not expected to be consistent in times to come – e.g. planning to start a business, or likelihood of layoff.
- EMI burden is too high and creates several financial constraints for you. Most financial planners suggest that ideally EMI should not exceed 40% of your monthly take home pay.
- You are sorted on EMI front, but struggling with initial down payment (typically 20-25% of the value). This may also lead you to take a personal loan at a high rate of interest, which may be a spoiler for your investment math!
- Expected rate of returns are not too high. In Indian context I would look at at least 8-10% annual rate of return on my total cost, including registration – ((plus) Approx 3% rental yield + some tax benefit on home loan – (minus) – 2-3% cost associated with maintenance & wear and tear)
(You may also be interested in – What ROI you should be chasing while investing)
- If tax saving is the only objective you are looking at. There may be better tax saving alternatives for a part of home loan repayment. For the other part of home loan repayment, chasing that “savings” in context of overall investment size may not be worth it, if tax saving is the only thing you are chasing.
- If you are unsure of factors like builder’s reputation, construction quality & adherence to timelines. (assuming you have decided to buy a house & evaluating the options)
(Suggestion – Avoid/ delay buying a home if any of the above points holds true for you)
Buying a home can be a momentous occasion in your life. And given the financial commitment needed, it is highly recommended not to jump into this right away and do appropriate due diligence. Asking the right questions can be a good first step.
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