Assume there is a 2 BHK Flat for sale at Kharadi (in Pune – for that matter you can assume your locality). Considering the cost of the flat between 60L to 80L. Assuming 70 L as a total cost of the flat. After US housing loan fall, no bank will give you more than 85% of total cost amount which doesn’t even include local taxes from certain banks. Assuming you have taken a loan for 20 years. Here is the calculation.
Base payment 15 % = 10.5L (this will rip you off with all your previous savings)
Loan amount = 59.5 L
EMI per month Rs.59,000 per month
Maintenance charges approx 24K Rs per year = 2000 Rs per month
Average property Tax per month = 1000-1500 Rs per month
– Tax benefit is discount on the Interest amount = 50K per year = 4K per month
That also for first few years as most of the EMI goes in interest.
– 1 Lac in base amount is any way settled for PF, 80CC and LIC contribution
– Total EMI comes to approx Rs 65,000 per month for next 20 years.
(Society maintenance, water taxes and corporation tax will increase with inflation).
After paying this much money per month.
- You have to say no to your family for shopping (even after a CTC of 12 Lacs)
- No holiday trips, no gifts to parent, skip friend’s marriage, no new Car for initial few years and lot of cost cutting measures.
- If you get fired from the company, you are doomed. or what If recession hits. Days are not far for such crisis to hit the market. China market and Greece are examples of it.
Hence, total cost of ownership for 20 years = 65,000 X 20 X 12 months + 10.5 L = 1, 66, 50,000 (approx 1.67 crore)
What have you got:
“Home for 20 years”, and after 20 years you will have a 20 years old flat in 20 years old society in probably a congested location(dirty and filthy )
– After 20 years if the cost of your 2 BHK home is say 2 Cr by market value ( I doubt because it will be very old flat in the middle of crowded city). You make nothing out of it.
– Secondly, even if it values so. I doubt how many buyers will be interested in a property ageing 20 years for 2 crores.
– We are predicting 20yrs hence. Wasting / suffering our today for future. That too a long term future, we have never seen.
-With the rising suicide rate world-wide, who knows something unfortunate happens at our floor and you will end up selling it at a lower price.
-With the heavy infrastructure development in Pune and Pune dependency on few lakes for water, I am certain of water shortage in coming years.
– Lastly, for Indians at least buying a house is an emotional decision. What I mean is, even if the house is worth 5 crores tomorrow. House owner will never ever think of selling to book a profit of it to enjoy his life. It’s worst that we just boast of investments and businesses but are emotional at heart. Even our share market BSE, NSE run on emotional atyachaar. A Ban on meat can topple the market by 500 pts 😛
Let’s talk about rented flat
If you take the same flat on rent or say next door flat, at present rent for 2 BHK is Rs 14,000 all other things including.
– Assuming rent increase at 10% (very unlikely it will be less). Year on year you will pay rent approximately 1.44L, 1.58 L, or 1.74 L , at 20th year you will be paying 1.44 X 1.1^(20-1)= 8.8L
Total rent you will pay = 1.44((1-(1.1)^20)/(1-(1.1)) = 82L
1. You can change home any time, even for small reason like neighbor’s wife is hitting on you (I will not leave in that case 😛 )
2. Better job in Bangalore or US or Mumbai (I just love it… am dreaming of getting a job in Silicon Valley or Wanna to sit in a office near Powai lake :))
3. Better Job in Yerewada (do you want to manage the traffic in case you buy the flat in Kharadi, already BRTS has increased a lot of trouble on Pune roads).
4. Growing family need a 3 BHK. (Think of future need also) or villa.
5. As your rent grows so will you HRA so more tax benefit? – Apparently rent receipts have more benefit in taxes than a Housing loan.
6. A new cosmopolitan area is coming up in the city which is better than where you stay now ( I would love to stay in Vimannagar than in Dhanori 😛 )
7. If you move out of the city, finding a tenant is a problem. A tenant who may convert your dream home into filthy home(sounds scary right?)
So what should I do?
Now if you are smart enough you will put some money in Market /Mutual fund etc.(Mutual funds are subject to market risk 😀 ) or SIP Because you are paying only 14, 000 rent and not 60,000 EMI.
Assuming you put 25000 Rs in investment for 20 years at an annual return of 15 % or 1.2% a month (buy plot in tier 2 cities, Mutual fund, SIP, Bank FD, PPF) you can reduce the investment amount as your rent increase. Still by my personal calculations, You can make anything between 3-5 Cr after 20 years 🙂 depending on your Smartness.
Then you can purchase the above flat as second home for your kids and spent some money on cleaning it up 🙂
Moreover, after 20 years you will be sure enough where you want to settle down and hence making an investment after 20 years sounds more wiser than investing now in flat. This is the time to enjoy your life to the fullest, doing mistake, learning from it, going on an adventurous trip, checking out bucket list and list goes on and these all will be possible only if you’re not under a heavy loans. I agree that your salary will also increase which you may use a counter to this article but by the time it will increase enough that you can do anything, you would have reached an age of 40 and you won’t feel like enjoying anymore at 40 (exceptions exist)
Decision is yours and life you get once So, Make a wise decision.
References: 1. Inspired from a random Email.
2. Khan Academy Videos
3. Image courtesy: Kolte Patil 24K project & Johnathon Kingston
EDIT: I wrote about water scarcity in coming few years & see it’s start happening already