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Should You Buy Your Own Home in 2024 Or Rent It Manish Jain FOW 29 #wealth #homeloan #investment
Mar 17, 2024
This Video Covers following topics:
- Understanding why living on rentals whole life is not a good idea
- Bias in general advise against home purchase
- Balancing Retirement Plan with Buying a Home
- How to avoid buying an expensive house but enjoying it at peak life requirement
- Impact of Macro factors like Inflation and Currency Printing
//Creative Commons Attribution Licence video (Reuse allowed)
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0:00
When I started my career 25 years back
0:02
the biggest dream I had was to buy my own house. Most of my friends bought maybe an apartment or a piece of land
0:09
and within few years, the value nearly doubled. This led to a bad feeling of missing out
0:14
and I ended up finally buying an apartment somewhere around 2006. If you also want to live in your own house
0:20
maybe buy a second one, if you have also been awed by someone around you
0:24
who has doubled or tripled their money in real estate, then this video is for you
0:27
In this video, I'll talk about the typical problem with the rental model
0:31
Then we'll cover a controversial topic, is there any age when you need to live in the best house of your life
0:36
Should one buy their own house to live? Should one buy a house as an investment
0:46
If you watch videos on YouTube, you would have definitely come across someone
0:50
who would have said it is not a good idea to buy your own house to live or to rent out
0:55
I can assure you with 90% confidence that the person saying this
0:59
would be a successful businessman or maybe someone who is really successful in his job
1:05
and gets a huge HRA as a part of his salary. And both these categories can easily afford to buy a dream house at any point in life
1:12
and they have probably already financially retired. The problem is with average Joe like me and perhaps you
1:19
who can't just go out and outright buy a house whenever we want. With this background, let me talk about the biggest problem in this model of rentals
1:27
It is not difficult to rent out a house. The problem is renting out the house you want to live in
1:34
Typically, these dream houses or good houses near your offices, they come with a steep rent
1:40
The houses where rents are affordable, they are typically a bit far off from office
1:44
Maybe they do not have enough bedrooms. Maybe the amenities in that society are not very high
1:49
Maybe the neighborhood is not that great. Also, the rentals at any point of time can shoot up
1:56
For example, if in your area a major project is around, maybe something around the highway, maybe a metro line
2:02
the rentals may suddenly just double. What will you do? Your income is not doubling
2:06
Your HR eligibility is not doubling. Your passive income is not increasing
2:10
How will you give double rental or maybe 50% extra rental suddenly? I'm sure this would have happened to you or someone around you for sure recently
2:18
because rentals in cities like say Bangalore, Hyderabad, Mumbai, Delhi, Pune, Chennai
2:24
all major metros have shot up significantly in the post-pandemic period where work from home is ending or has ended
2:32
This is a big motivator to live in your own house. At least you will be safe from the problem of rentals increasing beyond your reach suddenly
2:41
You can't typically downgrade your lifestyle and go to a cheaper apartment
2:45
where rental is same as what you were paying earlier but the lifestyle is a lot lower
2:50
We all desire to move up in our lifestyle. Next point I want to talk about is
2:55
is there any age when you should be living in the best house of your life
2:59
I'll give you a very practical insight. There would be a time in life when your kids are getting older towards 8th grade, 9th grade
3:06
They would need a room of their own. Also, as they approach their respective college age
3:11
their need to study longer in the night time etc will increase
3:15
So if you have 2 kids, you will probably need 2 rooms. In the post-pandemic period
3:19
it is not uncommon for people to either work from home fully or partially
3:24
If that's happening in your house, maybe with you, your spouse or both of you
3:28
you probably need an office kind of setup where at least you can take calls, do some serious uninterrupted work
3:35
Many of us work in odd time zones. Also, as we grow in age
3:39
there may be a time when our parents want to live with us. Very often, when one of your parents expires
3:45
the second one moves with you. All those requirements typically peak somewhere
3:50
between the age of 40 and 50 for most of us where the requirement for a larger house is the highest
3:58
Once your kid leaves for college, they'll be gone for anywhere between 3 to 5 or 6 years
4:03
After that, they'll get into a job or start something of their own. They may be in the same city or they may not be in the same city
4:09
Eventually, they'll get married as well. They'll be visiting you in their holidays a few times a year
4:15
and gradually the frequency will go down. You will perhaps not need a very large house at that stage
4:20
I honestly know many of my friends who worked very hard and built beautiful bungalows, beautiful houses
4:27
But my friend and their spouse live in that large house alone
4:31
spending several crores and nearly a lifetime to achieve their dream. The point I'm trying to make is
4:37
the largest house is very expensive and it takes a very long time to achieve the goal
4:44
So rather than wait for that, maybe when your kids are in the 8th grade, 9th grade
4:48
rent out a lavish house which you can afford near your office
4:53
which can potentially increase the time you can spend with your family just before the age when your kids fly off the nest
4:58
Save the remaining money to buy the house you desire in the next phase of your life
5:03
The biggest question, does it make commercial sense? To live in your own house or even buy it for renting out for passive income
5:10
We'll not jump into any theoretical Gyan here. I have built an excel-based model with three scenarios
5:16
First is where you take maximum possible loan from the bank. Second is when you take partial loan and probably about around 50
5:23
and rest you fund from your own pocket. Third is you buy everything cash down, which means from your savings
5:30
For illustration, we are assuming that we have bought a property worth 1 crore rupees
5:35
and over 8 years that has increased to 2 crores in value
5:39
So if you see the table, year 8 has the value 2CR. We are assuming inflation to be at 6%
5:45
What that means is if in year 7, the value of the property was around 1.89 CR
5:50
then that is same as 2CR of year 8. So on in year 6, the number is 1.7
5:56
So on in year 6, the number is 1.78 CR. Year 5, 1.68 CR and so on
6:02
With this, we arrive at today's time value of money of 1.25 CR
6:07
which means that if the property is worth 1.25 CR today, then the value increasing to 2CR is not going to make any difference in terms of inflation
6:17
Now this is not the end of it. This is one aspect of the calculation. Let's jump to the second dimension
6:22
We'll discuss three case studies. The first one, we borrowed 70 lakh from the bank for the 1 crore purchase
6:28
which means we have paid 30 lakh from our pocket. To keep things simple, I have assumed 7% as the net interest being paid to the bank
6:36
With that in mind, a 70 lakh loan accruing 7% interest per year for 8 years
6:42
will mean an interest payout of 39,20,000 rupees, the cost of your money
6:48
So you invested 30 lakh from your pocket. That money, suppose you had invested at roughly 10% CAGR
6:54
then you should have earned 24 lakh rupees on that money. But probably you are going to live in that house or get some rental out of it
7:00
So there will be some sort of saving or income out of it. Average, we are assuming 40,000 of saving in terms of rent or getting money as rental
7:09
from the property over 8 years. That amounts to 38,40,000 rupees. The total expense in this case is 24,80,000
7:19
which means basically interest paid plus cost of your money minus the money saved
7:23
Similarly, if you had borrowed 50 lakh from the bank and 50 lakh you had paid from your pocket
7:27
the net interest paid would have been 28 lakh. The cost of your money would have been 40 lakh
7:32
The rent saved would have been same 38,40,000. The net expense for you would have been 29,60,000, slightly higher. Why
7:41
Because you earn at 10% in terms of CAGR and you pay 7% to the bank
7:46
In case 2, you have reduced the amount you need to pay the bank, but that also reduces the saving you have because you have paid more from your pocket
7:52
The third case study is self-funded, which means interest paid to the bank is zero
7:56
Cost of your money becomes 80 lakh rupees in 8 years. The rent saved or earned is same 38,40,000
8:04
The net expense in this case is 41,60,000. Let's jump to the third and final dimension now
8:10
which is what is the value of your 1CR realistically? In case 1, you borrowed 70 lakh from the bank
8:16
Cash received after you sell your property is 2CR. The cost of transaction, which we saw in case 2, is 24,80,000, which is cost of transaction
8:25
To earn this 2CR, you had to spend 24,80,000 from your pocket
8:30
Inflation cost is 74,51,753 rupees. How did we arrive at that? Cash received minus cost of the property after adjusting for inflation, which was 1.25CR
8:41
So, the inflation cost in case 1, case 2, case 3 will remain same
8:45
because the cash received is 2CR and the inflation adjusted cost is 1.25CR
8:50
In case 1, your 1CR effectively becomes 1CR 68,247 rupees after 8 years
9:00
In case 2, where you borrowed 50 lakh from the bank, remaining 50 lakh you paid from your pocket, the value is 95,88,247
9:09
which is 4 lakh approximately less than the value invested. In case of self-funded, the 1CR becomes 84 lakh
9:17
This is contrary to the general feeling we all might have that we should be borrowing least amount from the bank and putting most money from our pocket
9:26
The base assumption obviously is that any money you have in your pocket over 8-10 years
9:31
will be invested for at least 10% CAGR. Realistically, if we plan well and be patient, this can be as big as 14-15% CAGR
9:42
If the economy in general is growing, think of the real value of your 1CR in those cases
9:48
Moral of the story, if your economy is doing well, then it will not make economic sense to buy a house to live in
9:55
because the money can earn lot more in the money markets like equity
9:59
Does that mean you don't buy a house? No, it doesn't. In general, it makes more sense to take highest possible loan from the bank and not prepay it
10:07
Use your money rather into better instruments which can fetch you a lot higher return
10:12
You can download this excel using the link available in the first comment below
10:15
as well as in the description. Three very important points we should consider before taking a decision on buying a property or not
10:21
The first one being, how far are you from your retirement? The main idea is, when you retire, you should not be having a burden on your mind
10:29
of changing houses continuously or rentals becoming unaffordable. Also, we should not be living with the pain of paying EMI's
10:36
when there is no paycheck coming. How will you retire if there is EMI pressure? Second point is, based upon the years you have left to your retirement
10:44
how much control you have on the plan. For example, if you want to retire, say at 50
10:48
a lot of us do want to retire at 50 or maybe earlier, then have you made significant investments
10:53
Do you have enough corpus in place where you see the end of the tunnel
10:57
that yes, by 50 or whatever age you desire, you will be having enough reserves, enough investments
11:02
enough cash flow to sustain the lifestyle you desire. If you are not in control at all
11:07
then adding another pressure to your plan will actually delay your retirement
11:10
especially buying a very expensive house or buying a house beyond your budget
11:14
Now, how do you visualize all this? For this, I have already created a video with an excel-based model
11:20
It is about a financial stress meter that will help you calculate
11:24
the financial stress at every point in your life and at what stage it is best to take which financial decision
11:31
Please do go through this video. I'll leave a link in the description and at the end of this video
11:35
The last point I want to talk about is probably the most important in some ways
11:39
You have to watch out for currency printing and inflation. What does this mean
11:45
If a country prints a lot of currency, just for example, say, US probably has 10x of the currency
11:50
they had maybe 6-7 years back. India has 3x the currency they had just at the time of demonetization
11:56
When we print a lot of currency as a country, when the inflation is high
12:00
all assets get recalibrated to the new amount of currency in circulation
12:05
Think of it like if we are doubling the currency in circulation without increasing the GDP too much
12:10
then Rs.100 note earlier will be Rs.200 of now. Real estate prices also will recalibrate to reflect the new value
12:18
This will also reflect in rentals. This may be perhaps what's happening in the real estate market right now
12:23
whereas in some places, property prices have skyrocketed. Not understanding these two factors may completely, completely derail your plans
12:32
If you learned something new in this video, then do like it and let me know in the comments below
12:37
what portion you like best. Thanks for watching
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