Why you SHOULD buy a house

What a contradiction….

Last time I gave you all the reasons of why buying a house (in India especially) did not make sense.

I have a friend Sanjay, who almost 27 years back had given me a very nice philosophy, which I did not heed. But the older I have grown the more I have realised, his was a better thought process.

He used to say ‘ pehle dukaan phir makaan’. For those of you who don’t understand Hindi, it means….if you have some money, first buy a shop (invest in a business), because once the business succeeds it will generate so much money that you can buy many more houses or larger houses. The fundamental issue over here being that if you have money and can invest in a productive asset which can supplement your cashflow then building assets and creating wealth become even more easy.

A real life example of this was the landlord of our office in Gurgaon. He had 7-8 properties which he had rented out to offices. Each of those properties was getting him a passive income which he was utilising to buy even more properties and he did not need to work.

I would strongly recommend reading Robert Kiyosaki’s book “Rich Dad Poor Dad”. It talks of a similar philosophy where cash flow (passive income) is important if you want to create wealth.

So coming to the topic of this blog….you Should buy a house if you can give it on rent and get passive income. You Should buy a house in a locality where businesses and a young migrant population are growing. From that income you could buy more houses.

Most young people in the technology and services industry today carry home huge bonuses if their company succeeds. Utilise a portion of that money to put in an asset which can give you passive income. Once the passive income starts you get the opportunity to start thinking in ways of growing your wealth.

Till next time then…think your way to financial freedom through Passive Income!!!

Why you should not buy a house to live

Financial Independence, Uncategorized

For most Indians having a house is the first investment that they ever make. Even the government gives subsidies for taking your first house. The first house is an emotional issue for most middle class Indians.

After getting a job an Indian male is expected to work for the next 2 to 3 years and then get married. After marriage husband and wife want that they have a house of their own as their first investment where they can live on their own.

So after the person has started working and for 3 years has saved something he gets married spends his savings immediately for expenditures after marriage. Then he starts saving for a house and takes a loan to buy his first house.

Now the company giving the loan is more than happy to give him a longer duration loan because they also realise that compounding helps them make more money.

While paying for the instalments the husband and wife end up completely blocking their liquidity for the next few years.

As time passes you have the family growing and the investments never happen.
Suddenly at the age of 45-50 the couple realise that they will retire in the next 10-15 years. Life has just passed them by.

I did the same thing incidentally, so I know what this couple goes through.

The house I bought by investing Rs 200000 and taking a loan for the remaining 1900000, costed me over the next 15 years a total of rupees 3700000/- and the hardships that we had to undergo because of not having spare cash.

If I take out the benefit of tax that the government of India gives, I ended up paying a total of rupees 3300000/-. Today the value of the house is about Rs6000000/- so net gain of Rs2700000/-.

If I had invested the same monthly instalments in equity over the next 15 years (less the rent I was paying and less the tax benefit I got) I would still have invested every year about Rs150000/-.

The 200000 plus the 150000/- every year for the next 15 years in the conservative NIFTY index would have resulted in me getting approximately Rs100,00,000/-. At this point I could have bought the same house on cash and still have 4000000/- to spare or I could have bought a much bigger flat.

Now there is always this issue about staying in a rented house versus buying your own house… If you can manage to stay up in a rented house for a longer time and if the rent is controlled then you can hold back the fixed cash flow that you will have to shell out when you take a loan for your house. The rent also gets the income tax benefit.

Some of you may come back to me saying – the house also appreciates…. That’s true but the appreciation of any property even in a place like Bombay has not been more than 10 to 12% compounded over the last 35-40 years…. An investment at 15% will beat the appreciation of the property anyway… The second and more important point is, if the house is where you are going to stay then its appreciation has no significance because you will not sell the house in which you are staying and live somewhere else.

Now my intention of the headline is not to stop people from buying a house in which they should live… but the appreciation of the house and the interest rate that the loan company charges actually kill the capability of the couple to ever create wealth.
You should buy the house where you take a loan such that the interest payments get both the husband and wife a tax benefit and therefore the cash outflow is low. You should first invest and create a corpus which appreciates more than the value of property and from that corpus take out enough money and do a down payment so that the interest outflow is just enough for qualifying for a tax rebate.

Till next time….

Savings versus investments

Financial Independence

In my previous post I had mentioned that there’s a difference between savings and investments.

I had a typical middle class up-bringing which laid emphasis on studying hard, becoming an engineer and then getting a good job and working hard. Each year year I used to get an increment. After the first month’s euphoria of the increased salary, the salary always felt less at the end of the month.

Based on my salary I used to try and put away some money into the bank fixed deposit or recurring deposit. But inspite of all the effort at SAVING money I was at the same place financially. I was walking on a treadmill!!!

A few years back rummaging through some old papers I got a receipt of an INVESTMENT of Rs2000 I had made in 1994. That had over the years become close to Rs 100000/-.

That’s when I started analysing, reading books etc. to understand what was it that I was doing wrong. This is what I realised

1. Savings are what you take out from your earnings after you have consumed. You put them in a bank because they are safe but they earn a low level of interest and you PAY TAX on the interest you earn, at the level of income tax.

2. Investment is what you take out of your Savings to help build your CAPITAL. Wealth is only built by making investments. TAX RATES for investments are generally lower, which means you earn more and pay less tax.

This does not mean you should not have FDs….they have a basic advantage of being quick, safe & ready to use when you want it. However you need to decide how much is that emergency cash which you absolutely need and then cart away a certain amount to ensure you build Wealth by making Investments.

Till next time…