When should you buy house?


Really I mean it is big Question. But interesting thing is no one is, at least on internet, is giving you the answer. All what they are trying to tell you weather you should Buy or Rent and in what area. Etc.

So I, Ashutosh Tilak, Decided to search the Answer.

When Should You Buy House you can call your Home ?

Now first, Home is very great thing, in any perspective. As an investment, As property, as emotional attachment etc. There are many factors which may affect you decision to buy house.

You can talk about many people about their dream. I am sure. Buying home is one out of many.

 

Even politicians also knows the importance of it and it affect Politics, Economics and many other things. Giving shelter and employment to their voters is very important for Leadership. It is not only limited for any one country, but all over the world. You can understand how big effect of it makes when you realised that Real estate was real Villain behind 2008-09 financial crisis. Freddie Mac and Fannie Mae, Two Big US Govt supported, or you should say, owned companies collapse or affected badly. If there was no Govt support, it was impossible for them to even survive. Lehman brothers, Bank of America, Goldman Sachs and many other also felt the heat. The crisis, its reasons, what happened and what not, who is behind it may be whole lot of different subject and may prove one more subject for different post. I don’t want to go into that here. But what was reason? Whole System developed upon giving loan to people, sometimes not taking into account their ability to repay it. And then they developed so many Derivatives on that. At the same time, Risk appetite and Capital Adequacy was also ignored. So first Lesson we should know here is

1. Buy home when you have sources or you have the ability to pay the cost.

But a home is not only an investment. It is shelter for you also. It is that place where you will start your family, you can live with your family, you can see your children growing. So?

Rent, lease or hire purchase or whatever is the right word for it. The question is weather it is efficient.

But how to say that weather house is efficient or not. The scale use is Rent pay to Market Price. What is the answer and how to analyse it it different with your geography. In fact, even in India the outcome may differ with different city. My view, check the NPV of the Rent paid to owner for next 3-5 years (You may change this if necessary). If that amount is coming to near 50% of the Price of Home, then its right choice to buy it.

As we are talking about NPV, you will defiantly ask me about the rate at which it is supposed to discount. My view is ‘Between the Govt Security and Capital market minimum average return.’ Say in India, while writing this 10 year Govt bond is trading around 7%. With some calculation you will find out market return. Let’s say its 13% so 9-10% will the right rate to calculate. Discount your rent paid with it. If the NPV is exceeding 50% of Price, which is difficult in many country, but may be happened as low interest rate will help.

While searching on internet, I found something very interesting about Rent-or-buy decision. Let’s have look.

Housing pays something like a dividend in that you can live in it without paying rent. To be as good as stocks (on average), the benefit from living in a house has to pay an “occupancy dividend” of about seven percent. So if you’re thinking of a $200,000 home, you need to get $14,000 per year of benefit from living in it. That’s comparable to $1,167 of monthly rent, before we get around to the pesky details.

When you rent, the landlord picks up the taxes, insurance, maintenance and sometimes utilities. If you buy, plan on replacing the water heater some years, the back fence other years, the roof occasionally. Hope that you don’t need to replace all of them the same year. If you are going to hire out all of the maintenance, you’ll probably pay more than your landlord does. The landlord is in the business of maintaining properties and is probably very efficient. However, if you can do some of it yourself, your cash outlays will be much less than the landlord’s.

So what we learn hear?

 2. If possible rent the house. It is not wrong in some situation.

But now let’s say you want to buy it in any way. Next question is Mortgage or Equity?

You may think that I will tell you “Defiantly Mortgage.” But wait. Mortgage is very good in some cases and bad in some cases.

While I am writing this, Real estate prices are coming down in major economies including in India. In such situation if you want to buy then the case is if you mortgage, then home equity or Down payment paid will not yield any big amount.

But If you found good property. Price trend is also up word. So?

As a finance student who is searching and learning new things for blog, I know that there are some over rated thing in mortgage.
First thing is, they say, interest paid is tax free. So? You can save tax on many other things. Why buy home for it. But Big plus for Buying with mortgage, or Taking Home loan as we call it in India from Housing Finance Companies or banks, will give you big plus as return.

With comparison to that, when you buy home with Whole equity, you loose the chance. In fact it is very big plus sign for bank also. When a bank lending money, it is taking ownership in its hand. If you don’t pay and make it NPA, bank can simply sell the home, which is valued more than your remaining amount.

So what we learn here?

3. If decided to buy, check the trend of property price. If Down word, don’t buy. (Assuming if you are not buying for financial decision.)

Now the Final Question.

When should you buy it.

Before writing this, I made Some research. First I talk with some Bankers, Real estate Developer, Financial Expert and some advisor related with Real Estate based In Pune Maharashtra. As the city is famous for IT and One of the fastest growing city in India, many people highlighted that tendency to buy home is increasing. Largest Group which thinks about buying home is Above 35. Though IT hub in India, Credit Rating of many of them is big issue. Finance for Home is easy and also if you are ready banks will show you House from their own contact or from the portfolio which was their because not paid EMI. Recently there are some schemes from Govt of India also which helping people to buy their first home.

When asked why 35? Utkarsh Jain, Chief Learning Officer, FinTree answer the question.

“Buying home is helpful when you want to settled and you are not thinking it as Financially. Generally speaking 25-35 is a time when one is either settling in life or trying to settled. That is when most people have the resources to Buy or Rather Invest in house.

I am of the opinion that buying a house in current economic environment doesn’t make sense.

The lease yields have come down to as low as 1.5%-2%. To offset the bowering Cost of 9%, we are looking at capital appreciation of at least 7-7.5% , which I don’t see happening in india markets.”

But what about the interest rate which are not low compared to earlier Generation. (At least in India, I know in US, the move is up word while writing this.)

Best way to answer this question and the question with which we started is what is your monthly income. Say X. Now make it half. X/2. This X/2 is your EMI. Even some Websites, Advisor and banks keeping it 43%. Reason? Emergency Fund. You need to take care about emergency in your life also. What is added in this 43%? Tax, interest payment, home owners association fee for maintaining building, property tax and other miscellaneous expenses. I found Are you ready to buy house? From Investopedia great on the subject.

So what is the Final Out come?

Buy Home when you have resources or its possible for you to repay the mortgage or loan. Rent is not bad option if you don’t want to settled. Rent can save your big expenses.You may think buying house is very dynamic decision as it may prove your investment also. But if you are thinking to make it as investment, then think about return also.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter