Purely due to luck, and a gentle nudge from my wife, I bought my house in 2006.
Why luck? Because since the time I’ve bought this property (and I thought it was expensive then), the capital appreciation has been almost 250%!
In short, my house has been my best investment till date. And this must be true for you as well.
In fact, I’ve rarely met anyone who has not made a profitable investment in a house. In other words, a house (at least, the first house) is the one good investment that almost everyone manages to make.
I’m sure there are exceptions, such as people who bought disputed properties or houses at super-inflated prices. But in more than 90% of the cases, a house will be a money-maker.
A house or a windfall?
Apart from the fact that you can get a good capital appreciation on your house in the long term, it’s a profitable investment since the very time you buy it. Here’s the explanation.
Assume you want to buy a house worth Rs 50 lac. A bank would be willing to lend you 80% of this amount, or Rs 40 lac. In other words, your original investment in this house is just Rs 10 lac (down-payment).
Now if the value of this house rises by just 5% in the first year, or by Rs 2.5 lac, the return on ‘your investment’ (the down-payment) is an amazing 25%. As simple as that!
What is more, the 5% gain (average annual long-term gain in India’s house prices) you will see on your house price in the second year will be on a base of Rs 52.5 lac (Rs 50 lac of original cost + Rs 2.5 lac of first year gain).
This 5% gain would amount to Rs 2.6 lac, which means your return on investment would rise to 26% in the second year.
Apart from this, the interest that you pay to the bank every year gets you an additional tax benefit.
I’m not sure you can do so well so easily in the stock market…because if you can do this with stocks, you can become wealthier than the wealthiest of investors out there!
Also, when you sell some stocks to buy other stocks, you must pay a capital gains tax. This is not true with houses.
When you sell your older or smaller house to buy a bigger one, the government doesn’t tax you.
Apart from these monetary benefits, your house provides you an emotional support during times of turmoil (the ‘roof on the head’ theory).
The magic doesn’t stop there!
There are important secondary reasons you will do better in houses than in stocks.
It’s not likely you’ll get scared out of your house by reading a headline in the Sunday real estate section of your newspaper: “Home Prices in Bangalore Take Dive” or “Property Prices in Central Mumbai Crash”.
They don’t have a ticker tape on house prices running 24×7 on business channels, nor do the anchors call in experts to make wild guesses on next day’s or month’s house prices.
So, while providing you a good emotional support, you house won’t make you emotionally stricken every time you open a newspaper or (accidentally) switch on a business channel.
Also, while it takes just a phone call or a button-click to move out of a stock, it takes a moving van to get out of a house, which is troublesome. So you are more likely to stay with your house for a long-long time, thus avoiding the transaction costs.
Finally, you are a better investor in a house (than in stocks) because you know how to poke around each corner of the property and ask the right questions.
No wonder people make money in the real estate market and lose money in the stock market…simply because they don’t ask questions and don’t wait a moment before buying stocks.
So this is the lesson I’ve learnt over the years – Before you buy your first stock, save some money for down-payment, and buy your first house.
You have my best wishes.
Note: All the positive reasons of buying a house that I discussed above must not lead you to speculate in house prices and make uneducated property investments. Speculation, in any form or in any market, is destructive!