From ET Realty
I am no fan of real estate, and certainly won’t advise investing in property to earn rent. However, I strongly believe that one should own a debt-free house in which one will live in. Most of us have read about how Rakesh Jhunjhunwala sold his Crisil shares in 2005 for Rs 27 crore to buy a flat at Malabar Hill in Mumbai. Had he remained invested, his shares would be worth Rs 600 crore in 2015. The flat, on the other hand, was only worth Rs 65 crore. This story has hindsight wisdom written all over it. If instead of Crisil, Jhunjhunwala was holding Hindalco shares, his Rs 27 crore would now be worth Rs 18 crore. This story has too much of survivorship bias.
Putting all your eggs in the equity basket is not a good idea. Another ludicrous suggestion is to invest in equities in the formative years and then buy a property in the late forties, assuming that you would have built wealth by then. The assumption that you will continue with your job and draw a high salary to pay EMIs in your late forties or early fifties is quite cute, especially when I see voluntary and forced retirements all around. By the late forties, you may have gotten used to a certain lifestyle which could be difficult to cut down with the huge home loan EMI. If the house is bought early, you learn to live within your means.
Leverage is a beautiful financial concept. When used to buy a property, leverage fetches us tax exemption. But the same leverage used to buy stocks (popularly known as derivatives) is a dangerous game. Can you imagine leveraging heavily year after year to buy the most convincing stock ideas? It is an extremely specialised field and requires phenomenal skill to make money out of leverage trades in the market. But owning a house does not need any special skill. After paying a certain number of EMIs, there is surety that you have a roof of your own.
What is important is to keep the leverage multiple in check when you buy that mortgage. Stretch it too far and suffer sleepless nights. Keep it too low and you will probably look foolish a few years later for having bought a property much below your aspirations. On the other hand, rent is nothing but a sunk cost. Even if you are claiming tax benefit, it remains money spent which did not build you an asset. Staying on rent forever with a great equity portfolio sounds quite exciting when you are young. But when you get old, the idea may sound criminal. One does not have the energy, patience, willingness or strength to endure the burden of a rental home. All said and done, you are at the mercy of your landlord who may send you packing.
Another argument against owning a house is that a young person may relocate in future. It’s a valid argument, but once you decide to settle down in a city, buy a house quickly. Of course, this will also depend on the buyer’s occupation and income. If he is a salaried employee with a regular income, buying a house makes more sense. But if you are living by the adventures of self-employment or upcoming business, it is more logical to live on rent. The return on capital employed in your business will be far higher than blocking money in a house.
Reverse mortgage is another fantastic financial innovation. A couple gets a stipulated amount every month depending on the value of their property and when they both die, their heirs repay the lender the accrued interest and principle of the annuities given to the owners. This may not be the most efficient or cost effective tool, but it is very useful. It allows a couple to live a better life even when they get old without burdening their children.
Your wealth can dwindle, plans can go haywire, money can be philandered or lost, businesses can get wiped out, medical ailments or court cases can leave you broke, but a house remains. When I was a child, my dad suffered a huge business loss which stripped us of our savings. But the house which he had bought earlier stayed. He was desperate to sell it to repay debts, but my mom did not allow it. She would send prospective buyers away, saying the house was not for sale. The house gave us a reason to fight it out, giving us comfort. The house was our strength. It can be yours too.