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Not Stocks, Your House is Your Best Investment

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!

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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. is the first house an investment or a need and how do you use it towards your goals…

    • In fact, Vipin, your house is one of your goals. Isn’t it? Some people accumulate money to meet their goal of buying their first house 20 years down the line. Some do it within 5 years of getting their first paycheque.

      As for your first point, every investment is done for a need. So your first house is your investment plus your need. The second or third house is purely investment (or in several cases, speculation).

      This is how I see it. I’m sure other readers of Safal Niveshak might have more interesting and important views on this.

      • Valid Point says:

        I am living on rent in a house for 5K/Month. The market price/the price that owner wants to sell it to me is 16 lacs. Why would I buy this house then. If I keep 16 lacs in bank or even 8 lacs in bank in FD I would get around 120000/64000 every year at 8% interest which is more than I pay in rent.

  2. Absolutely right…..When I bought a second house and said investment…people did wonder what i was up to. the real estate rules are so lopsided that capital appreciation in India is the highest.
    The first thing a girl serious about a guy will ask if he has a house…..so there is the best reason.
    And bank loan are a great help if you choose the right one……..

    • Well Ramesh, even in my case the girl pushed me to buy the house, though 3 years after our marriage. 🙂

    • Mr Vishal has a lot of time to write Great artilces each is god in some way but if you keep reading the articles there are contradictions time and again and some where there is a lack of direction This happens when one tries to give advice in general and free of cost.

      • Hi Rajesh, thanks for you feedback! Indeed I take a lot of time (and thought) to write each article so that I can do complete justice to whatever I write.

        Anyways, I would be happy to know where you’ve found contradictions in what I have written so far. Also, let me know where have my articles lost direction. You feedback would help me in making the content better.

        Also, by the way, would you be happy to pay and read my articles in case I were to make them paid in the future? 🙂

    • Valid Point says:

      If your girl marries for your house or rejects for your house she definitely is not a marriage material.

  3. Mansoor says:

    Excellent article Vishal, the correlation between investment in a house and stocks is priceless.
    I am of the same view that investment in house will give decent returns in India although the conspiracy of this bubble bursting has been floating around for sometime with no luck. My belief is based on the supply/demand of houses in this country. Affordability is still a question due to ridiculous pricing of property, even in infra-structurally poor areas.
    Ramesh’s comment is also right, it’s seen as a big achievement if a bachelor has a place of his own.
    Although your calculations on house investment is tempting, should we not consider the interest payment as well. Like you have said rightly, house and gold are India’s favorite.

    • Thanks Mansoor! Indeed affordability remains the biggest issue today. When I look back now, I think I was very lucky to buy my house at a low price in 2006.

      As for your question about interest payments, well I seen them as the cost of being ‘under a roof’, which I would have anyways paid away as rent if I did not own the house.

  4. Ramanand says:

    One other factor in higher real estate returns (esp. Housing) is the high population growth in an area (urban areas witness high influx of people). As per my calculation, in Mumbai, property rates have appreciated at a CAGR of 14% per annum over the last 25 years. This is phenomenal by any standards! An Rs. 8 lac house purchased in 1987 is worth Rs. 2.5 Cr today.

  5. Ramanand says:

    Update to my earlier comment. Again taking the Mumbai example, if you go even further back, say 1970, the appreciation rates have been even higher. So a house on pagdi (Bombay Rent-control act…tenant was as good as the owner) taken for Rs. 15,000/- in 1970 was worth more than Rs. 5 lac in 1987. That’s a CAGR of almost 23% pa over the 17 year period!
    Are these returns sustainable over the next 25 to 40 years? As I said earlier, it depends upon the population growth rate in the particular area. In the last 40 years, the Metros were the growth hotspots. I believe that in the next 40 years, Metros will not be growth hotspots. Of course there will be growth, but it will be below the national average, and other tier 2 and tier 3 cities will give better investment returns percentage wise.

    • That’s a good point you raised. I was recently at my hometown in Rajasthan. It’s a small sleepy town as it was when I stayed there 15 years back. But when I heard about the real estate prices there, I was shocked to know that they were almost near prices prevailing in Panvel here (a Navi Mumbai suburb, and just 50 km from South Mumbai).

      The fact is that people, especially businessmen in small towns and cities, have made a lot of money (from their businesses and speculating in stocks and commodities) over the past 5-10 years, and are bidding up realty prices like crazy.

      So yes, you are right that the next round of surge in property prices will come in non-metros. In fact, it’s already happening!

      As for average returns from real estate in the future, I don’t see them rising at such a fast pace as in the past…simply because we are on a high base everywhere.

  6. RichFellow says:

    On a lighter note Vishal,
    Value of house 50 lacs.
    Bank Loan 40 lacs.
    For down payment, I take 10 lacs interest free hand loan from my father in law.
    House is mine for zero cost.
    Now if value appreciates by 5%(2.5 lacs) return on my investment is whopping 2,50,000%….LOL
    You own a house in city like Mumbai, u live in your house, u r happy, there cannot be better returns than that, why to break head calculating returns, returns etc……Just enjoy.
    PS: U did not consider the principal amount for the first year from your EMI to calculate the rate of return of 25%.

  7. The housing / real estate industry is an ugly cartel for which the middle class toils and toils and then also feels very happy once they get possession/ are able to buy one. What is the choice after all, you need a roof on your head but at what price ?
    How absurd / weird are the prices in Bombay can be gauged by comparing it with London and California, just click on a few real estate websites to get a idea. Here you are greeted with shit and slums right after you come out of your colony and there, well maintained gardens.

    The toll on humans is not calculable or should I say / we are blissfully unaware what life can be like in clean green well planned cities and villages, for we have seen none and are unlikely to.

    Read the books “Freakonomics” and “Super Freakonomics” in case you get time, it will explain certain complicated heinous (I say so since I feel the crap that we are given in the name of cities/ towns/ villages are a curse) reasons as to why real estate worldwide is costly – just plain cartels (restrict supply) and blatant corruption.

    The next time you flight is circling over Mumbai see the amount of shanties and you will notice a few highrises which will tell you how brutal is this cartel. There is a very large expanse of shanties and a few high rises/ brick and mortar structures (which probably occupy just about maybe 10 to 20% of the total area seen from the top) , all maintained as status quo in the name of poor. LOL.

  8. Vishal, For 40 lak loan @ 10% interest for 20 yrs. I have to pay approx Rs.38,600 pm. So after one yr, i have invested 10 lac+4.63 lac (EMI) and i have got tax benifit of 50 K ( 33.3 % cut ) for the interest. ( upto 1,50,000 ). but the house price rises by 5 % to 2.5 lac. Its like total investment for the year is 10+4.63 lac and the benifit is 50K+2.5 lac. Return is approx 20.5 % for my investment….?????

    • sriganeshh says:

      @loordh,
      you get deduction for interest on loan upto Rs.200000 if it is self occupied plus principal portion within the limit of Rs.150,000 under 80 C. Rework your calculations, your returns might go up.

  9. Aravind says:

    Even Peter Lynch had the same ideas. He recommends in his book, “One up on Wall Street” that it is better to buy a house first and then concentrate on other investments. However, from a US perspective in the 1980s-1990s, it was great advice. Now the home prices are so high that it will easily take about 20-30 years to completely own the house. Don’t know if it is good for a guy earning INR 5 lak/annum to buy a house worth 50 lak (ratio of home price to annual income is 10:1). In the US the ratio between income and home price is far lesser, the interest rates lower (You can get a decent home for USD 300k … assuming a salary of $70k, the ratio is just 4.28) . For 50 lak it is very difficult to buy a good house.

  10. Shiv Kumar says:

    Vishal,

    Like in stocks, paying the right price is important even for a house. A flat purchased in 1992 at Borivali/Dahisar would have been underwater till 2005. I know people who purchased a 1 BHK at Dahisar for around Rs 18-20 lakh in 1992 and were paying EMIs through their noses. (Remember, adjusted for inflation salaries were much lower then). The price touched their buying price only in 2006 or thereabouts and by that time their properties had become quite dilapidated.

    A similar flat in the year 2000 cost around Rs 9 lakh which caused a lot of heartburn among the early birds. Many of them simply did not even bother with the painting of their buildings and the property simply got cheaper than the market. Only after 2006 that the residents began taking up maintenance. Talk of anchoring effect and the sunk-cost fallacy!

    I think one should not look at own use residential property as an investment at least in Mumbai. The cost of shifting every 11 months and the severe restrictions imposed by housing societies far outweighs any financial benefits. Having said this how many people can plonk down 150 months’ salary on a flat in the distant suburbs?

  11. Though this might fall on deaf ears after such a long time of original post, I beg to differ with a saying that house is the best investment. A house (aka flat) in which u live is a liability as u are not going to sell it( hope nobody has to face such a bankruptcy).
    Secondly value of a flat depreciates in the eyes of bank after 5 yrs of the construction. If u want buy a resale flat with age above 5yrs except for some parts of Mumbai bank will not give u 80% of loan.
    Thirdly, it had nowadays become very hard to resale a flat due large number of construction in around teir 1-2 cities.
    Lastly, the best investment if has to be then definitely it will be the land with ur name plate on it.

    • Yougander says:

      Currently i’m renting a house in Bangalore and very confused weather to buy a apartment now or wait for prices to come down. Currently the prices are too high in Bangalore. In a decent area the prices are 6000 to 7000/- psf. For a plot its touching 15000 to 18000/- psf. Recently read a book “Rich dad and Poor dad” by that logic buying a house is liability since we need to pay the bank for a long period and which will flush out the Earnings to liability section and reduce the Investments for assets. It would be great to know your viewpoint Vishal. Thanks.

      • Dear Yougander, I know how tough a decision it is because I’ve gone through it myself. Just see what is the % of EMI you’d pay if you were to buy a house at these prices. It should not be more than 30-40% of your net take home income. If that’s the case, avid buying the house. Hope this helps.

  12. Jagan Narayan says:

    HI
    I’m not able to understand the mathematics here
    1) Price of house Rs 50 Lakhs
    2) Equity capital – Rs 10 Lakhs
    3) Interest paid during the year – 4.63 Lakhs
    4) At end of year appreciation – Rs 2.5 Lakhs
    5) This Rs 2.5 Lakhs is lesser than the interest that I have paid
    6) At the end of year when I sell the house then there will be a loss and infact negative return …. Am I missing something
    7) I see in your calculation that the interest paid does not figure is that reason for the difference

  13. Ayush Jain says:

    Hi Vishal,

    While the calculation doesn’t take into account home loan interest rates, i appreciate this post.

    There is a tendency amongst the financial blogging community to run down home purchase. Just like equities, real estate is an asset class that should be considered by every niveshak. Given reasonable purchase price, home loan interest rates (they were lower in the past and cycle will repeat in the future) and annual rental increases, home purchase can turn out to be financially rewarding.

  14. I disagree with pretty much the entire premise of this post, and it’s astonishingly bad investing advice. Here’s why:

    1. The return calculation in this post holds only if you get a 0% interest rate loan from your bank. With a 5% annual increase (as suggested in the post) in asset price versus a 10-11% loan interest rate, the idea that you will be “making windfall gains” should seem doubtful even at first glance

    2. The math: Assume you hold the house for 7 years before selling. 5% annual increase in price means a selling price of Rs 70.4L. Loan of Rs 40L at 11% means an EMI of Rs 41,288 for 20 years. The actual return of this investment should take into account the cash-flows for all those 7 years, the 84 EMIs paid in addition to the down payment of Rs 10L

    XIRR in excel gives you the return: -5.33% (yes, that’s the annual return on this real estate transaction) Not so hard to believe, considering you’ve paid Rs 34L in EMIs over 7 years in addition to the 10L.

    Let’s double the annual price increase to 10%. That translates to an annual return of 7.4% annually over 7 years. Now you’re just about competitive with post-tax FD returns.

    3. For a new professional, renting a house in most major Indian cities is a fraction of the EMI cost of buying that same house. The investing surplus is much better deployed in equities.

    4. A house one lives in cannot really be considered an asset unless you might consider moving out to sell it and move into a rental home to capture the gains. It’s erroneous to consider your house as part of your net worth, unless you happen to own a super-premium property (like in Colaba in Mumbai) which you can sell to move into an equally or more comfortable home elsewhere in the city.

  15. Dear Vishal,

    We have posted and article on Mutual Funds Vs Real Estate – Which is better for Investing in India and the same can be accessed here.

    I would like to have your opinion in the comments section of this post…

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