House Math: BUY/RENT/BUILD/ INVEST?
last updated 18th Jan 2021
Will you buy a house or build one or neither(rent)? How much do you actually need? NEED: Depending on people living in the house. (Or माज 😄)
TIME
What is your age? Ambani started to build his house at the age of 49. Is it the right age to think about purchasing a house? If you are at your entry job level you might need to focus more on your career or business or increasing passive income.
Broadly considering in Indian context referring to weekdays.
- 2 Hours in Travelling “7% of their day in commuting to the office” (IndiaTimes, 2020)
- 4 hours daily on Social Media (IndiaTimes, 2020)
- 6–8 hrs of Sleeping [Home]
- An office would be mini 8 hrs [maybe Home if you work remotely]
- Other activities 2 hours
So one might spend approximately 23 -10 hrs at home. If you are spending more than 16hrs you should have a medium-size space at home that might prove to be healthy; now that you see its impact on your life you might design it more detailed. Factors to consider: Air Quality Index, Price, Space, Utilities, Accecibilities, Office distance/time.
Ideally one would consider buying a home at 39+ without taking a big loan.
RENT
Considering to stay on rent one would think it is better to pay an EMI instead of paying rent and would eventually own a house. But carefully considering, what we are signup for?
Downpayment + EMI
That downpayment you could have invested somewhere to get a considerable return over time. One can have an 80% loan you will pay approximately 60% of your salary income that keeps you tied to a job, limiting your thinking and scope.
If you choose to stay on rent you are only paying 1–2% of the amount which you would have invested. Also, there are benefits such as Freedom and Flexibility. One can switch jobs start a startup and whatnot. (Youtube warikoo 2021)
Example: Consider a 1BHK flat that was purchased at a price of 29Lac rupees in 2016 by paying 6Lac in downpayment and other 80% loan. For this same flat, the current market (2021) value rent price is 5K/month after deduction of maintenance and tax. So technically you are earning 5k-8K (depending on location) on a 28Lac investment which is too low.
BUYING
HUGE TIME saver but at what cost? Is it really worth living in one place for life? Considering a 30yrs term loan you agree to pay up to 60% of your income for this space which is going to keep on compounding ending up taking up to 60%+ of principal loan otherwise, you can save up to 30%-40% on housing plus you might get 10x valuation when you invest in building your own house. Compromise with space and pay maintenance that you might not require otherwise. In five years you might feel any considerable appreciation whereas if you had invested the same amount in stocks or business you will earn better.
Example: You purchase a flat for 35.5 Lac including registration. Term loan for 30 yrs on floating interest EMI would be ~20k-23k per month based on the interest rate (usually ~8–9% currently few offer as low as ~6.50%). You may save some amount in income tax up to 5lac deduction if applicable. Consider you choose to sell your home after 5yrs and you gain up to 42lac in return but how much interest did you pay over 5 years? i.e 5*12*26k*amount that got compound over time = 15Lac+ whereas if you live on rent you would just pay half of the amount.
BUYING OR RENT based on Property Valuation
Consider an investment for 15 years the investment. Assume downpayment amount gives min 10% ROI which can vary based on your investment. Now if the property valuation bought is expected to be greater than 9% only than its profitable. (CA Rachana Ranade, 2021)
Calculator Sheet
BUILDING
The traditional ways of building houses cost more and it adds to greenhouse gases indirectly. Based on the type of house you wish to build price may vary. Minimalistic, Mediterranean, Contemporary, Tropical, Colonial, Modern, Sustainable, European, and Indian have their own advantage so, how much space actually a human need?
Comparing with resources (energy consumption), time (can save up to 6–12 months of time), and price (difference of up to 10x), Traditional >>>Prefab House. Plus if you think of Prefab Engineered house you are taking a step towards sustainable eco-friendly life. Check out the video below featuring Melbourne’s Prefabricated Super-Slender Skyscraper.
Example: Buy plot for ~7lac per 1000 sqft so ideally, 2k-3k sqft might be enough for a micro family totaling up to 15–20lac including registration. If you choose to go with a prefab house/block module you can get a decent house starting from 10lacs (There’s always room to expand when you have a good budget or at right time.). This can contribute towards 50% saving when you are able to find good land else it’s the other way around.
You can find more on “beautiful shipping container homes”, I’m sure you will be amazed when you check out videos and resources consumed. There are many alternatives for prefab housing one of them is below:
https://aashiyana.tatasteel.com/
INVEST
Invest in another real estate (land), business (franchise ROI between 6%–50% or zero in the worst-case scenario), or stock. The average rate of return for the S&P 500 has been about 8%. According to industry group NAREIT, though, the average compounded annual growth rate for REITs over the past 20 years is 9.9%. (Forbes 2020)
Note: Every article might get even better if you choose to share your opinion or findings that relate to this topic.
