Mad_About_Money_final Mad About Money_Dec 2016 | Page 8

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MadAbout

Money
In nutshell, your EMIs do
not count towards equity
until a long time in mortgage period.
Before taking any decision on buying or renting,
consider once again,
could you be invested in
saving up resources in
other investment sources
with better returns?

Takeaway:
Don’t oversimplify the
big decision of your life
of buying a house by
claiming that it will build
equity and thus buying a
home is superior to renting or any other source
of investment.

Myth #2
Rent is forever while mortgage stops
one day
It is a hook statement.
The statement is not a
myth but the ultimate aim
which it aims to attain. It
argues that a tenant will
continue to pay monthly
rent forever while monthly
installments which go
towards home equity
will end one day. It is
based on the arguments
widely used by real estate
advertising agencies.
They say- ‘It’s high time
to take risk and a little
pain so he/she can rest
later’. I ask two questions
to them:
1. Doesn’t a home require investments once
mortgage period ends?
What about maintenan-

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Money
ce costs, property taxes,
utility bills, etc.?
2. What if you are too
old or boring to have fun
after 20 years from now?
Certainly, the EMIs will
stop, but there are lots
of additional overheads
which go in maintaining a
property. I am not suggesting that be locked up in
a rental loop for the rest
of your life. I just want to
burst this false argument
and reiterate that don’t
make a falsified premise
the basis of your buying
versus renting decision.

Takeaway:
Weigh your priorities
well and explore other
investment avenues before jumping into anything based on hyped
social sentiments.

Myth #3
Tenants do not
benefit from rising
real estate market
prices while homeowners do
This myth is often argued
in social settings. Statistics suggest that long term
real-estate returns are
extremely overhyped.
A property can appreciate
in two ways- via forced
appreciation and market
gains. Forced appreciation is upgrading your
house condition and
renovating significant
portions of your house so
as to enhance its market
value. But remember it is

not about your personal
whims and fancies. It is
not limited to ‘having a
beautiful marble floor’ or
‘expensive wooden doors’.
It’s more than that. It takes
a lot of skills and strategy
to appreciate property
value via forced appreci ation.

They do not tie their
cash to EMIs,

MARKET GAINS
ARE OUTSIDE
HUMAN
CONTROL

So, with right financial
knowledge, a tenant may
invest the extra cash
towards better investment opportunities. Not
to mention that your lifetime cash tied up in home
equity may just merely be
keeping-up with inflation
rather than giving you an
upper hand over renting
option.

Market gains are comparatively slow and outside
human control. According
to housing statistics,
property prices do not increase substantially in value, they only keep pace
with inflation. Real-estate market significantly
underperforms the stock
market most times. So,
a house that you bought
in 50 Lac in 2009 may
appreciate to 1 cr. till 2016.
Yes, the initial amount has
got doubled but due to
appreciation in property
prices, naturally the new
property you wanted to
buy would have increased in prices as well. Rise
in your property prices
may not even be adequate enough to be called
a ‘benefit’ or ‘profit’. One
may argue that however
less, at least buyers get
some home equity at the
end. Comparatively, renters have nothing. Renters
may not get any equity
gains from appreciating
property values, but remember they are neither
paying for the ‘opportunity costs’ that comes with
buying a house, i.e.

They do not have to pay
for maintenance charges,
and
It is highly likely that
they are paying less monthly rent than your EMIs.

Takeaway:
Do your math before taking the rise in real-estate market for granted, especially if you are looking
to sell your property after
some years.

Myth #4:
A house is the
biggest investment.
For people in India and
elsewhere, real estate
investment is more of an
emotionally driven decision than financially, especially if one buys with an
aim to reside in it. Unsurprisingly, it leads to a
great emphasis on buying
a house and creates an
impression that it’s the
biggest investment. I hate
to break it to you, but it is
mere illusion, the ground
reality is very different.

Experts say that your
home should only be
about 20-40% of your net
investment worth. It’s not
a good picture to end up
with your house as your
only biggest investment.
People counter-argue
that it is better to own
something than to own
nothing. Well, it mostly
depends upon:
Rent cost: if the rental
costs are cheaper than
EMIs, then you may consider investing your extra
money towards better
opportunities which can
generate higher longterm returns;
House Down payment
and Interest rate: Similarly to rental cost, you
should weigh all proscons and opportunity
costs (the loss of other
alternatives) of investing
this money in real estate
market. Consider if
property investment will
generate better returns
or something else?

Takeaway:

Location: The place
where you buy a property
makes a big difference
to highs and lows in housing prices. Some places
are more sensitive to
real estate changes and
some are not.
Ultimately, do not forget
even a small increase
in disposable income
significantly enhances the
quality of life. It’s not an
intelligent idea at all to
live in a ‘hand to mouth’
situation and be left with
nothing to enjoy life or
exigency funds, just in order to acquire the so-called ‘biggest investment’.

These assumptions are
not based on mathematical calculations or
sound financial knowledge rather the underlying
sentiment of these myths
is simply that it is beautiful to own a house
because it’s an indicator
of peace and a settled
life. The tradeoff between
buying a home and living

Take a sound minded
decision rather than
emotionally drive decision while buying a house.
Otherwise, it may lead
to grave consequences
and huge losses of your
standard of life.

on rent is not an easy
one. And to be blunt, it
shouldn’t be. For a salaried person living in India,
owning a home seems
wonderful but wait until
honeymoon period ends
and the reality of EMIs,
maintenance charges
and home insurance hits
you. Similarly there are
qualms about staying on
rent; mainly, managing
landlord’s expectations,
living with the skepticism
that the landlord may ask
you to vacate anytime; or
the fact that you cannot
entirely consume the
utility of the space as per
your ideas.

There are compromises in both, but it is
important to make a
fianncially literate decision absent of these
stereotypes and with
least risks involved.
The question is which
option will be optimum and allow you
to live on your terms
with happiness. The
dilemma of renting
or buying a home
is worth pondering
upon. Let’s see how
we can make an
informed choice
backed with strong
financial reasons.

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