Are you someone who thinks that buying a home is an investment? Do you hear from elders and random relatives about being an intelligent investor and buy a house in some place where you have absolutely 0% idea of relocating to? Buy it now, property prices are soaring, you can make a profit in future – this is the standard dialog you will hear almost all the time. Every month there is a property show or property exhibition by large builders in major cities where they sell properties like cakes and cookies. It is easily possible for the normal individual to get tempted by all this hoopla about property investing and even think about buying a house that we don’t need. If you are one of those guys, this article is just for you…
Who this Article is Not For:
This article is not for the first time home buyer. Every individual dreams of owning a house, something they bought or built. There is nothing better than being able to fulfill this dream. If you are someone who is planning to buy your first home, this article is definitely not for you.
This article is for all those guys who already have a home (where they are living) and are contemplating buying a property just as an investment – esp on Loan.
Is Buying a Second or Third Home a good idea?
YES – If you are paying Cash in full to buy the house
NO – If you are going to take a loan to buy the house
The YES part is a no-brainer. So, let us concentrate on the NO Part of the answer.
Buying a Second or Third Home on Loan – A BAD IDEA!!!
Whatever I am going to explain below is just simple mathematics. Let us say you are buying a home worth 60 lakhs. As part of the standard process, banks offer loans worth 80% of the property value and you fund the remaining 20%. Let us assume that you were approved a loan of 50 lakhs and you came up with the remaining 10 lakhs and are thinking about buying this property that you feel is an awesome deal…
Rate of Interest on the Loan:
Home loan rate of interests vary from bank to bank but they are usually in a certain range. Depending on whether you want a fixed rate or a floating rate loan, your rate of interest and EMI will change. The average interest rate for floating rate loans in India currently is in the range of 10% to 12% whereas for fixed rate loans it is 12% to 14%.
For our calculation purposes – let us assume your home loan is at 12%
Buying a home is a huge investment and the EMI is going to be significant. So, most people choose a long tenure so that they can repay the money in smaller amounts every month. For our calculations, we will check three tenures – 10, 15 and 20 years.
Tenure = 20 years
EMI Per Month = 55,054/-
EMI Per Year = 6,60,048/-
Total Money repaid = 1,32,12,960/-
For a 50 lakh loan, we are repaying 1.32 crores at the end of 20 years
Tenure = 15 years
EMI Per Month = 60,008/-
EMI Per Year = 7,20,096/-
Total Money repaid = 1,08,01,440/-
For a 50 lakh loan, we are repaying 1.08 crores at the end of 15 years
Tenure = 10 years
EMI Per Month = 71,735
EMI Per Year = 8,60,820
Total Money repaid = 86,08,200/-
For a 50 lakh loan, we are repaying 86.1 lakhs at the end of 10 years
If we consider the 10 lakh initial investment you made, the amount you incurred at the end of the loan to buy your property (that was worth 60 lakhs at the time of purchase) will be:
• 96 lakhs at the end of 10 years – Almost 60% appreciation from purchase valueDo you really think your property will be worth that much at the end of those durations? I don’t think so..
• 1.18 crores at the end of 15 years and – Almost a 100% appreciation from purchase value
• 1.42 crores at the end of 20 years - Almost a 125% appreciation from purchase value
What if Property Prices continue to rise like the past 10-15 years?
Yes, that is a valid question. If and I mean a big IF property prices continue to rise like what it has in the past 10 to 15 years, then your property may be worth much more than what you will end up paying for the loan. But, this IF is a really big IF due to the following reasons:
a. The boom in property prices was fuelled by the industrial growth in the country. This has been happening for close to 15 years now. If you watch the market price movement of properties closely, you would’ve realized that the rise in property prices isn’t as sharp as it was just 5 years ago
b. Builders and Promoters are making a killing profit selling properties which many intelligent buyers are able to figure out. As a result, people aren’t buying properties when they are launched. Builders make never-before-never-again kind of offers at launch to attract customers but if they cant attract enough people, they reduce the price and offer better deals as time goes bye. People who book apartments at launch are paying around 4-5% more money than guys who book a few months later, esp in cases where the demand for the apartment is lower.
c. The price of property has been fuelled by industrial growth only to a certain extent. The remaining price rise has been artificial inflation done by our businessmen and agents. Just because people claim that property prices are going up doesn’t mean it is actually going up. It is being pushed up by our crooked businessmen and agents so that they can make a profit.
d. The Indian housing bubble may burst any time… The indian housing market boom is closely resembling the US Housing Market burst that happened 4-5 years ago. In spite of inflated prices, the demand for houses still looks like is pretty good but this isn’t permanent. The builders and banks in india are doing the same mistake that our friends in the US did. It is easily possible that the Indian housing bubble will burst very soon and if it happens, you can surely see a solid correction in property prices.
If you still feel that property investment is safe and you feel that property prices will rise invariably, you should read one last comparison.
If you invest the same Rs. 6 lakhs (50,000 per month) in yearly fixed deposits that pays 8% interest per year and let the deposits cumulate for 20 years, your deposits will be worth as follows:
a. At the end of 10 years – 94 lakhsEven in the case where your property values surged to these numbers, are you really making all the profit? The bank is going to eat a huge portion of your money – between 46 lakhs and 92 lakhs depending on your tenure. Why pay the bank so much money just because you want to see a meager profit at the end of 20 years? If you rather invest in a bank fixed deposit, you will end up making more profit.
b. At the end of 15 years – 1.76 crores
c. At the end of 20 years – 2.96 crores
The cost of property 20 years down the line is not your profit. You need to deduct your initial payment of 10 lakhs and the repayment you made to the bank from it and the remaining amount will be your profit. Some people ignore the bank repayment part. I bought the home for 60 lakhs and sold it for 1.2 crores after 15 years. A 100% profit – right?
Unfortunately No. If you just scroll up and see the calculation, your cost incurred on the house for the 15 year loan was 1.18 crores. Do you really want to invest 1.18 crores and get a 2 lakh profit after 15 years?
I am sure – your answer is a NO.
What if I am going to rent out my second house and/or Avail tax benefits on it?
In this case, the whole calculation may change but not by much. You will get a rental income that will be around 20 – 30% of your EMI payments which is good. But, considering the amount of money you will end up repaying the bank and the property value after the loan, it may not be that good a deal. Even if you manage to get tax benefits on the second house, the actual profit you will end up making at the end of 15 or 20 years will only be mediocre at best. It can never equal the kind of returns you will get if you actually invest the money in proper investment options like Bank Deposits, Equities etc.
Some last words:
This article was not for first time home buyers or for people who are buying a home by paying full cash. For you guys the above logic does not hold good because – for the first time buyer, a home where you and your family will live far outweighs these calculations. Similarly, for the cash buyer, you will end up making a good profit nonetheless because you aren’t paying anyone, any interest.
Let me reiterate my opinion – I am not saying that don’t buy a house. I am just saying that don’t buy a second or third house on loan. For your first house, ignore these calculations and buy your second or third house only if you can pay cash for the house…