I am no fan of real estate, and certainly won't
advise investing in property to earn rent. However, I strongly believe
that one should own a debt-free house in which one will live in. Most of
us have read about how Rakesh Jhunjhunwala sold his Crisil shares in
2005 for Rs 27 crore to buy a flat at Malabar Hill in Mumbai. Had he
remained invested, his shares would be worth Rs 600 crore in 2015. The
flat, on the other hand, was only worth Rs 65 crore. This story has
hindsight wisdom written all over it. If instead of Crisil, Jhunjhunwala
was holding Hindalco shares, his Rs 27 crore would now be worth Rs 18
crore. This story has too much of survivorship bias.
Putting all your eggs in the equity basket is
not a good idea. Another ludicrous suggestion is to invest in equities
in the formative years and then buy a property in the late forties,
assuming that you would have built wealth by then. The assumption that
you will continue with your job and draw a high salary to pay EMIs in
your late forties or early fifties is quite cute, especially when I see
voluntary and forced retirements all around. By the late forties, you
may have gotten used to a certain lifestyle which could be difficult to
cut down with the huge home loan EMI. If the house is bought early, you
learn to live within your means.
Leverage is a beautiful financial concept. When
used to buy a property, leverage fetches us tax exemption. But the same
leverage used to buy stocks (popularly known as derivatives) is a
dangerous game. Can you imagine leveraging heavily year after year to
buy the most convincing stock ideas? It is an extremely specialised
field and requires phenomenal skill to make money out of leverage trades
in the market. But owning a house does not need any special skill.
After paying a certain number of EMIs, there is surety that you have a
roof of your own.
What is important is to keep the leverage
multiple in check when you buy that mortgage. Stretch it too far and
suffer sleepless nights. Keep it too low and you will probably look
foolish a few years later for having bought a property much below your
aspirations. On the other hand, rent is nothing but a sunk cost. Even if
you are claiming tax benefit, it remains money spent which did not
build you an asset. Staying on rent forever with a great equity
portfolio sounds quite exciting when you are young. But when you get
old, the idea may sound criminal. One does not have the energy,
patience, willingness or strength to endure the burden of a rental home.
All said and done, you are at the mercy of your landlord who may send
you packing.
Another argument against owning a house is that
a young person may relocate in future. It's a valid argument, but once
you decide to settle down in a city, buy a house quickly. Of course,
this will also depend on the buyer's occupation and income. If he is a
salaried employee with a regular income, buying a house makes more
sense. But if you are living by the adventures of self-employment or
upcoming business, it is more logical to live on rent. The return on
capital employed in your business will be far higher than blocking money
in a house.
Reverse mortgage is another fantastic financial
innovation. A couple gets a stipulated amount every month depending on
the value of their property and when they both die, their heirs repay
the lender the accrued interest and principle of the annuities given to
the owners. This may not be the most efficient or cost effective tool,
but it is very useful. It allows a couple to live a better life even
when they get old without burdening their children.
Contact
501, 5th Floor, Plot No – A-123/4,
Odyssey IT Park, Road No. 9,Wagle Estate
Thane (W) – 400 604, Maharashtra, India
Mobile : (+91) 9833 4583 23 E-mail: mchithane@gmail.com
501, 5th Floor, Plot No – A-123/4,
Odyssey IT Park, Road No. 9,Wagle Estate
Thane (W) – 400 604, Maharashtra, India
Mobile : (+91) 9833 4583 23 E-mail: mchithane@gmail.com
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