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Your House is Your Best Investment. Really?

This post has been written by Nishanth Muralidhar, a Safal Niveshak tribesman.

One of the great enduring myths of the Indian middle class is that an investment in real estate can never go wrong, and that buying or constructing a house is the best investment that you can make.

I believe Vishal himself wrote a post on Safal Niveshak stating that his house was the best investment for him.

———————–Safal Niveshak Value Investing Unconference 2013——————

Announcing “The 2013 Safal Niveshak Value Investing Unconference”, a 2-day meetup of Safal Niveshak tribesmen where we discuss and debate unique and profitable investment ideas and get to know other members of this tribe better. Click here to Register
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Well, we are here to see if that statement holds true regardless of age, life situation, and individual circumstances for all investors. But first…

What is an investment?
If you were to avoid Ben Graham’s definition for some time, in simple words, an investment is something where we deploy our money, time and effort into, so that it can generate a reasonable amount of return or create wealth in a reasonable time period.

By that yardstick, your education is an investment, the fee you pay for a certification which helps you to get a better job is an investment, and the subscription you pay to a stock newsletter can also be an “investment”.

However for all investments, there is one common factor which determines the future returns you derive from it. That factor is the “price” you pay for the investment.

I believe no long-time reader of Safal Niveshak will say that we can buy an “investment” at any price and expect it to be successful.

This brings us to the main point of this article – Is real estate really your best investment?

Real estate is the perennial favourite of the Indian investor. But is buying a house at ANY price a wise investment?

A house is an essential need for an individual, not an investment, exactly like insurance. But the guise for the vast majority is that it is an “investment”.

Do they plan to sell the house after 10 years? No. Do they intend to run a reverse mortgage on the house? No. Then how exactly will this house be an investment?

Clothing, food, and shelter are the basic needs of any individual, so buying a house or flat as primary residence makes sense.

However, buying at any price due to the fallacy that “real estate prices never go down” does not make sense. But, look around you, and that’s exactly what is going on!

People are willing to throw money at any substandard flat, in any remote location, without proper roads, electricity or water supply, but just because ‘real estate is safe’.

They are also willing to take loans at inflated prices from banks and willing to spend 10-15 years of their lives as corporate wage slaves. And they call this an investment!

If one is sure that he/she will live in a city for a period of 5-10 years or intends to settle down in that place – for work and/or retirement – then yes, it stands to reason to buy a house or a flat.

Otherwise, a house property acts as a shackle to the individual, forcing him to curtail his career moves and flexibility.

Another argument is that buying a house acts as a forced saving. Well, I can buy this argument if this is for a house for residential purposes. But if it is for investment purposes, it might be better if the money were invested via a SIP in a well-managed mutual fund for 10-15 years.

Case for real estate investment
We can distill the case for real estate investment as follows.

If you need a house to live in, you are reasonably certain about the city you want to live in, and your career, plus you can muster up at least 30-40% of the price as down-payment, please go ahead and buy.

Else, rent and invest the surplus in a well-managed mutual fund on an SIP basis.

And please, don’t create arguments like, “…the rent will be equal to the EMI in any case.”

I have rarely heard of anyone paying rent of Rs 40,000 per month for a rental apartment for reasonable living accommodation (I’m talking about an average Indian middle class here). Especially if you are not sure, please invest your surplus in both equity and debt, based on your asset allocation.

Still, if there exists a need for residential property as an investment, then make sure that your income from other sources (salary, dividends, interest income) exceeds any potential EMI payments that you might need to make.

To conclude, real estate is a great investment…but it is not a great investment at all times and at any price.

“Buyer beware” must be your motto, dear tribesman.

About Nishanth: Nishanth is a middle-class 30-year old IT software engineer, hailing from Kerala and currently residing in the US. He has been investing in the Indian stock market for eight years now and is a keen follower of value investing.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Totally agree !

  2. Shiva S says:

    Thanks Nishanth, the article is really good. Usually we hear two extremes of the argument but your’s is a practical advice. Your article helped me a lot! Thanks!

  3. Akshay Jain says:

    It amazes me that people are willing to travel hours away from the city in order to buy land or property in areas that they have barely heard of. So confident are they about the capital appreciation that nobody cares about cash flows (rentals) any more. Its like people don’t want to miss out on this phenomenal money making opportunity…and obviously we all know that when everyone thinks that way, chances of bubble formations are very large. I would probably extend the same ‘Pay any price’ logic to gold, most listed FMCG and Pharma companies at the moment. My feeling is that 5-7 years of consistent performance will take something substantial (decline – pricewise or timewise) to shake-up

    Regards
    Akshay

  4. Roshan P. D'Mello says:

    Those who thinks home is an investment, Must read this!!!!

    http://moneyoga.com/does-buying-a-90-lakh-apartment-make-sense-as-an-investment/

  5. SG Jaclyn says:

    Absolutely valid argument and most of the SN tribe would agree to it. And for others, if they read this article, they will stop coming to SN as it goes against their belief.

    Even if it is an investment property, no one applies the annualised return formula to calculate their returns. Even if they applied the formula, capital gains taxes, stamp duties, maintenance charges and all other expenses are overlooked to arrive at a great return figure.

    Some of the road side properties which were literally useless to some of the families have appreciated beyond everyone’s imagination. With the same assumption, people like to buy the god forsaken properties with the expectation to turn them into gold. Some will some succeed and some will fail. No one can help them.

  6. Akhilesh Pathak says:

    Dear Tribesmen,

    There was an article in Economic Times echoing similar thoughts.

    Buying a primary residence (flat/house) might not be a great investment always but it gives us unmatched sense of security.I also agree with Vishal’s view points of “Important secondary reasons” for buying a house in his earlier article “Not Stocks, Your House is Your Best Investment”.

    Buying property for only investment purpose might not be one of the great decisions in long term. In the book, “Once Upon a Wall Street”, Peter Lynch, one of the most successful mutual fund managers the Wall Street has ever seen, narrates a story. “Consider the Indians of Manhattan, who in 1625 sold all their real estate to a group of immigrants for $24 in trinkets and beads. For 362 years the Indians have been the subjects of cruel jokes because of it – but it turns out that they may have made a better deal than the buyers who got the island. At 8% interest on $24 ( note: let’s suspend our disbelief and assume they converted the trinkets to cash) compounded over all those years, the Indians would have built up a net worth just short $30 trillion, while the latest tax records from the Borough of Manhattan show the real estate to be worth only $28.1 billion. Give Manhattan the benefit of doubt: That $28.1 billion is the assessed value, and for all anybody knows, it may be worth twice that on the open market. So Manhattan’s worth $56.2 billion. Either way, the Indians could be ahead by $29 trillion and change.

  7. Senthil says:

    I have tried to come up with an excel sheet to compare buying vs renting. Did not consider HRA and Tax deduction for Interest payment for simplicity. You can download and modify it as per you need.

  8. Everything in investment depends upon the price you pay.There are no broad class of risk free investments in this world including FD’s.

  9. Nishant Sahay says:

    I do not agree to the theme of the article.
    There are salient points which one must consider before real estate can be downgraded as an “investment option”.
    1) Price Matters – Due research should be done to determine the correct price of the property. I am staying in Hyderabad and managed to purchase a flat for at least 20% less than what others were paying for a flat in the same locality.
    2) Asset Building – This is one investment which will stay with you for life. If you have a single house and pay an installment of approx. 25000 for your flat (loan amount being 25 lakhs), you may end up paying 214 installments. Provided you have a stable job, there should be no problem in paying the amount, that too when there is (more or less) guaranteed increments every year.
    3) Long Term utility – Given that you start the loan at an approx age of 30 and clear it off in 10 years (I am factoring the annual increments in the repayment of loan), you still get to use the flat for another 15-20 years, saving on the monthly rent. Mind you, the trend of the monthly rentals has been anything but linear in the metros. I cant even imagine how much rent will a similar flat owner demand 5 years from now.
    4) Uncertainty – Refer to an earlier post by Vishal where he himself said that he look the entrepreneurship plunge after making sure that he had cleared off his home loan (zero liability). There is a huge amount of uncertainty in the markets. You can not deny or predict a black swan event. However, even if the markets and real estate prices crash, you will still have a roof over your head.
    5) Goals – It will definitely depend on your goals and objectives if you prefer to buy a house or not.

    Please do note that in case you are planning for a second/third house as an investment, above logic may or may not hold due to multiple reasons.

    On a lighter note, education is definitely an investment. However, a case can still be made for the humongous amounts being spent on MBA courses and if such huge “expenses” are justifiable or not. 🙂

    • Nishanth says:

      Dear Nishant Sahay, I agree with all the points you have mentioned above….The theme of this article is contained in this sentence “To conclude, real estate is a great investment…but it is not a great investment at all times and at any price”..I have invested in real estate myself , using own funds ,zero loans and reaped inflation-beating returns.Is real estate my only asset class? No, i invest very heavily in equities and equity MFs and have generated inflation-beating returns there.The point of this article was to awaken the average Indian investor from the blind obsession with real estate and gold , and to show that there are other equally good investment avenues provided one takes the time and trouble to learn about it. I firmly believe everyone should own their own home , plus an investment piece of real estate.But buying at exorbitant prices, that too with loans at high interest rates doesnt make any sense at all if it is an investment. I rest my case.

      PS: Unless the home loan is completely paid off, it is not your roof over your head, it is the bank’s roof over your head 😀

  10. Stumbled upon this website while reading some forums, and I must say I m lucky. Vishal , I appreciate what you are doing through this website. As I was reading your ‘more about me’ page , I was stunned to find you exactly like me. Very difficult to find like minded people anywhere in the world . Glad to find some here. Looks like this will be my hangout place now -:)

    I totally agree with the article. I couldn’t justify myself to buy real estate in India . The prices doesn’t make any sense. I couldn’t understand how one can afford a 1cr flat on a 15-20 L salary. This is in gurgaon (NCR region) .

  11. Housing is a necessity for most people, so having one primary residence of your own is essential for most people – either you want to live there or want to stay with parents, or with your spouse, kids, etc. The reasons can be different but everyone needs that shelter or house/property of their own where they can stay anytime.
    Lets assume that the first property that you buy is for your own use but lets also consider it as an investment because though its for own use you are spending millions on in from your own pocket either in down payments or EMIS or combination of both. So calling it a major investment committment is not wrong.

    The positives of this move are
    – You have a property or shelter for yourself, where you can live in case of any eventuality (say loss of job, accident, calamity, old age, health issues, etc.) Sounds like boring advise, but you need a place of your own where you can stay – neither your landlord nor your son, daughter, etc can send you out – these things are becoming important in today nuclear family set up.
    – You have tax sops on interest payments which dramatically reduces your tax out go. This is particularly for those earning Rs.5 lakhs p.a. or more.
    – Property prices increase gradually overtime, and that provides a steady capital appreciation. Dont jump and say prices will come down. True like any asset – stock, gold, etc prices move up and down, but if the market is good and fundamentals are fine then property prices have to gradually move up (despite intermittent ups and downs)
    – Whether you live in the property or rent it out you gain in terms of rental savings or rental income as the case may be. I’m not saying buying is cheaper or renting is cheaper – thats a different topic. If you live in your own property you save monthly rentals plus deposit too, which is a huge savings if you see over a 3-year period.
    Say rents for 3 years, 15k for 1st year, 16 in the 2nd and 17 in the third. The total rents will come up to Rs.5.7 lakhs.
    All said and done you need to maintain the property well to preserve its quality and value and this is also essential for rental properties to ensure you get decent rental income and quality tenants. Yes there are negatives that are obvious – high capital, less liquidity, market cycles, high maintenance, slow growth in the location, etc.

    When you think of investing in your fist property you can definitely go ahead if most of the factors are in your favor. Because the main benefit here is going to be a primary residence which is essential for you and your family. If you have additional savings you can surely invest in equities, which are more flexible, easier to manage, highly liquid and divisible in to smaller sums or amounts as per your needs.

  12. Hi,

    As Mr. Parag Parikh recently said in an interview, people think that buying a house using a loan is an investment (specially 2nd and 3rd Home). However they are actually buying a long term liability. Unless you buy it with your own cash in full it is not a investment at all.

    In my opinion this is the only investment/liability for which you can get a loan easily and that’s why people are misguided that they are investing. Added to that the recent boom in real estate that had virtually taken off the risk of investing in realestate from people’s mind. It is as if real estate will never come down. Also a nexus between builders, politicians and banks are also a main reason for the boom.

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  1. […] In its recent post, Safalniveshak busts a prevalent myth in the Indian middle class – Is your house really an investment? It is a must read for every middle class Indian investor who things “real estate is safe” and commits huge amounts of money/ loans in buying flats. […]

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