Should I rent or buy a house in Mumbai?
It does NOT make sense to buy a house in Mumbai if all of your money is WHITE.
Financial Reasons ( Pure Maths ):
- The return on investment i.e the rate at which the price is increasing is extremely slow. This is the case not only in Mumbai but all over India in general. Reliable funds like investment in ETF can get you better returns close to 15–16% without fail.
- When you buy a house, you need to pay for Stamp Duty, Registration and GST. This can cost upto ~13% of your house base cost. More expenses further driving down your return.
- In case you sell your house within 1 year, you will have to pay Short Term Capital Gain, STCG which is 10% of base price. This means you can’s simply treat house like a share and buy and sell frequently. Govt has forced you in a way to stick to your decision of buying a house for long time.
- When you sell the house in long term, you need to pay Long Term Capital Gains, LTCG calculated by considering CII (cost inflation index). This tax is 20% of your profit after considering inflation. This further drives down your return on Investment.
- When you own the house, every year you have to pay Property Tax. Try not paying Property Tax for a few years and you’ll know who really owns the house — you or the government!
- On the rental income, you need to pay according to your tax slab which can be ~30%. In addition to this, rental Income itself is extremely low which is around 2.4 % of the base price of house.
- As far as tax saving is concerned, let’s assume you are saving on 80c somewhere else like PPF or ELSS. About section 24b where you can save tax on 2 Lakhs interest paid which is let’s say 60k. This makes the calculation friendly to home buyer to some extent but not enough to compensate for other tax burden imposed by the government.
After paying taxes in different forms to government, you will find out that Real Estate sucks as an investment. It’s a Trap.
A personal story — Opportunity Cost Calculation.
One of my friend was planning to buy a house in Ghansoli at a prime location worth 1.5 Cr. He had liquid 75 lakhs and was planning to take a loan of worth 75 lakhs. We did a projection of costs and return that how will finances look after 20 years i.e. in 2039. After paying all the taxes etc as mentioned above, we deduced that the “Final Value” of assets will be approx ~12.5 Cr (Excluding the LTCG tax when you sell the house). If he had simply invested whatever he had in a safe Mutual Fund or ETF which can fetch a CAGR of 15%, final value of assets will be 20+ Cr.
Visualise the difference between 20 Cr and 12.5 Cr. Add to this the continuous pressure of paying the EMI every month and lack of freedom that comes with tight money decisions you will have to make for 20 years.
History
For the savvy investors who are wondering why returns on real estate are not good, this is because real-estate has already seen a bull run in 2003–13 and now market is in correction mode. So, buying a house because it has given good returns for our parents makes you feel that if price of something is going up, it will keep going up. But reality is that if the prices keep going up at the same rate, it will become a bubble i.e. overvalued assets. So there are two path for real estate prices: First is to keep rising relentlessly and become a bubble and burst eventually. Second, decrease the appreciation rate till the economy catches up. Second option seems to be happening.
Another evidence of overvalued price is that rental yield is around 2.4%. A healthy rental yield should be around 4–5%. For the benchmarking, UK’s yield is 3.2% and Canada is 4%.
Conclusion
Real-Estate is an illiquid, overvalued, overloaded with Taxes and a low return fetching investment vehicle. It is not an asset worth having — not anymore. It only serves the false pride of owning a house.
Note: This is ported from my answer on Quora — https://www.quora.com/Should-I-rent-or-buy-a-house-in-Mumbai/answer/Mayank-Jaiswal
Bibliography:
- Coffee Can Portfolio by Saurabh Mukherjee
- Let’s talk Money by Monica Halan
