Most of us travel away from our hometowns to one of the busy traffic laden cities for jobs. I have had conversations with many friends on whether to buy houses in such in a well-developed city. From the top of the head one can quote many reasons as to why one should buy. It would be a great investment. Real estate prices in these towns always keep on increasing. Tax breaks on interest. Doesn’t have to pay rent anymore. The joy of being the owner of a house. It is not easy to list negatives. Tope of the mind people said investment upfront is very high.
I tried to search of mathematical and subjective reasons for why one should not buy a house in busy towns. Lets talk about numbers first. I have attached a simple excel sheet also for you to play around (https://spreadsheets.google.com/spreadsheet/ccc?key=0ApsenRMGKBIgdEs4X2hVYkJOdHdWV2ZxZzBrX0dDcGc&hl=en_US&authkey=CP-a0-UI). I am posting an example case here
Loan 5000000
Number of years 15
Interest rate per month 0.7500%
Monthly Installment 50713.32921
Rent of the same house/month 10000
increase every year 6.00%
Number of years 15
Total rent paid 2793116.386
Present Value 967282.6116
If I am buying say a Rs. 50 lakh house in Bangalore I will end up paying around 50 k per month in installments if I plan to clear the loan in 15 yrs. While at the same time if I rent a similar such house I may be paying Rs.10 k per month. Lets assume that this rent increases by 6% every year. By the end of the 15th year I might have paid close to Rs. 28 lakh in rent. But this is same as investing Rs 10 lakh today in a bond that yields at 9% and paying of the rent with the returns. Now my Rs. 500000 lakh house has to be worth at least 1.82 crores for it to break even with bond returns at the end of 15 yrs. If for any reason the real estate price fetched me less than this then I would have wasted a considerable amount of money and energy. To more subjective reasons. Is it worth forgoing a huge amount of salary and live in austerity for a long time just to have a house in a big city? Can the youth life be returned to me at the end of 15 yrs. What if at the end of 15 yrs I wish to go back and settle in my hometown or some other calmer place. Is it worth it? These are some questions to ponder over.
1 comment:
Good article dude! Very relevant points! I would not buy all of them completely though!
One thing that was probably missing was that you haven't mentioned which segment you are referring to.
The well -to -do might not even contemplate living in rented places. While the poor have but no choice. The premise would have done the article a world of good. STP dude :). Keep posting!
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