Reality about Realty
he state of the state of our mind is in such a state that it takes a lot of courage to just state the facts since the facts we state have to peddle through the fake facts (aka lies) to reach it shores. The shores we are trying to reach are nothing but you – “Readers”. And by the time, it reaches its shores, it is so confusing which is real and fake that the confusion swallows everything leaving nothing for the readers who await. We are afraid the knowledge is not crossing the shores! For the sails have not left the shores, not set forth towards knowledge. Alas!
However we said – “Let’s persist!” This week we decided to bring to your notice a couple of newspaper articles that talk about returns from real estate. These articles appeared in Property Times supplement of Times of India
Here are they-
Before you proceed to read them, try to grasp these information from them –
- What area the Investments were made in
- When was the Investment made (to judge the “development” of the locality)
- Years that the person stayed Invested (Longevity)
- Returns they have given (to judge if the Investments are good and decide if we can delay the investment)
We do not wish to answer any of the questions asked above since we want the readers to impart prudence on their part. However to highlight a few things let us get to the boring (but essential) part of our life (no marks for guessing) –
So the returns in best case scenario are 12.8% and the not so good case is 5%.
One may point out that the rentals on these are not included. We would like to remind you that gain is offset with the depreciation that our apartment would have accrued in such a long period.
Well Guys! What are you trying to say then?!? Are you trying to Say – NEVER BUY A HOME?. NO NO, We are not trying to say that. We believe that ROTI, KAPDA AUR MAKAAN (Bread, Clothing & Shelter) are the 3 BASIC NEEDS OF A MAN. No Denying that fact.
But we would see that a lot of home buyers today Buy a home –
- Not because they need a own house right now but because of fear that prices will go up in future.(Which is not the case, see above)
- Not because they need a own house right now but because somebody is ready to finance them.
- Paying an interest of ~8% (As you can note above, the Appreciation does not beat cost of capital itself)
- as Investment rather than “Basic Need”
Hmm, What should we do?
- Plan well ahead and Invest in products that will give you “Inflation beating returns”
- Before you buy make sure you have at least 60% – 80% of the Home value as down payment.
- If you obey the above rule, then your house will also become an Investment for you earning an 8% P.a return rather than a commodity for somebody else to scrape that money away from you.
- Make sure the EMI is not more than 30% of your monthly Income. This will give much needed financial security/flexibility to choose the best employer for your money;)
Let us use common sense to answer the two most powerful persons in our life – Mommy and Wife (the Lord of our lives, ha ha!). Below is a screenshot from Grofers –
As you can see it list downs the price of Salt. One has the option to buy 1kg of Salt from Rs 17 to Rs 92. I am sure, Most of us will buy Rs 12/kg salt because it is what our budget for Salt allows us.(This is just a example, I asked my Mom, she says she buys King Salt @ Rs 5/kg). I am sure we are not so out of our mind that even if somebody gives us a loan, we will go buy a salt @ 92/kg. Are we?
Akin to above example – pls see below image –
Just like we don’t go buy a fancy salt because it is available or because our neighbor buys it or somebody is giving you the extra money to buy it, We should refrain from doing things in our Financial life that is OUT OF BUDGET!
Few Take A Ways –
- Real Estate grows only as much as inflation grows (5%-8%)
- If you buy a home on loan, You will transfer the appreciation on property to the financier in the form of Interest on loan (Even if you repay within 10 Years)
- The home is not yours until you pay the last EMI, technically its not “your Own house” but “Rented out” to you by the financier.
- By getting in to a home loan for 15 Years period, you are locking up your hard earned monies in the best of the Years in a inflation hedging commodity! (Take note compounding works wonder only in later years,the more years you give your money, the better it works for you)
Before you Jump on bandwagon of Home “loan” Owners, think twice, it quite a deep pit 😉 If you are lucky, you can jump out of it but everyday is not a Sunday! (Although today is)
For any financial Planning queries, Please contact Droplet Advisory @ 86101 72018 / 82483 69621.
Caution – Mutual fund investments are subject to market risk.