If you ask this question to Indians, the answer is an emphatic yes. It is a prevalent notion that buying a house is akin to building an asset. The desire and need to own a home is hard-wired into the Indian psyche. It might be a good idea to pause and think over this question again, Is your house an asset? To answer this question, you need to define what is the meaning of an asset!! But defining asset is not easy since there are numerous definitions - two interesting ones are :
1) An asset is something that you own, where as a liability is something you owe.
2) An asset is something that generates money for you, where as a liability is something that takes away money from you.
The second definition sounds very logical and if you go by this definition, almost anything you own is NOT an asset. This controversial definition was given by Robert Kiyosaki of Rich Dad Poor Dad fame. This definition leads him to conclude that a self-occupied house is not an asset. Watch this interesting video on Youtube :
I don’t exactly agree with Mr. Kiyosaki even though I am inclined towards not buying a house. I believe that calling house a liability does not change anything apart from turning the traditional thought process on its head. The ultimate goal for buying an house is a) Personal satisfaction of owning a house b) Increase social status.
Indians think of the house purchase as a form of investment, which is incorrect. Let us step back and think about why anyone wants to invest their money? The whole purpose of investment ( be it in stocks, mutual funds, FDs, house or gold etc. ) is to beat the inflation and grow the money. The intention is to increase the financial net-worth so that a person can enjoy life and be mentally peaceful during any emergencies.
So is buying a house an investment? Yes and No. Let me explain this.
You may know of your friends & family who bought a house very cheaply few years back and the current price of the house is quoting much higher. But are they enjoying their current life or are they financially stretched owing to a huge chunk of earning going as EMIs? Is this sacrifice of constraint in present living state worth the investment for future self-owned house? If you are stretched too much today, then your house is definitely a liability.
Another question to ask is, when someone sells a house what happens to the money earned? Assume one of your friend bought a house for 30 Lakhs say five years ago and now it is quoting at 70 Lakhs. If he sells the house today earning a cool profit of 35 Lakhs (minus bank and other miscellaneous expenses). What happens to this 35 Lakhs? The most probable answer is that it is spent on buying another house. Did you know of anyone who sold his house pocketing a huge profit and then spent that money on a foreign trip or paid for medical emergency? In majority of cases once you buy a house, the money invested just remains as a house, you sell this to buy a bigger/better house.
If you think about any other investment, the same does not hold true. Any money earned through stocks or mutual fund immediately goes into some expenses be it for children’s education or buying that big car. But a house remains a house even across generations and the money is locked in that house. So any house bought on a huge loan only turns out to be an asset for the next generation (since they got it for free) and not for the person who bought it. I strongly believe that with nuclear family being the trend and with more globalized world, children will not care about the ancestral house and may not be living in it.
As a fact, most people who buy houses/apartments on huge loans are taking significant risk compared to the returns given by that house during their lifetime. Thus to me it implies that house is a liability.
A rough indication below will indicate that a house bought on loan cost much more than it seems :
- Down payment in cash [the cash gets locked up even before you are living in that house]
- Monthly EMI [Major portion of EMI is interest in initial years]
- Intermediary Fees [if bought through a broker]
- Miscellaneous Fees [e.g. lawyer fees, society fees, loan processing fees for banks]
- Government dues [registration fees, electricity charges, house taxes, VAT/service tax]
- Premium paid for Insurance of house
- Maintenance/upkeep for the house
An important point to note here is that typically the amount of money (interest) you pay during loan tenure to the bank, for taking home loan is approximately same as the principal (~purchase price of house). The worst part is that EMI usually follow the upward trend, as the cost of fund increases for the bank, making the house much more costly to the end-customer.
Hence buying a house may become a liability rather than an asset due to the inability of buyer to identify and understand the risks involved. This is actually true for any investments but for house purchase the stakes are much higher and risks runs much deeper.
Here are some tips to make your house an asset rather than a liability:
- Try to purchase a house which is priced a little less than what you can afford. Keep some buffer rather than stretch your finances.
- Keep a target of 100% ownership in next five years
- Buy a house which is 2-3 years old or new but fully completed. An under-constructed property is certainly more risky & hence inherently costly but it may seem cheaper upfront
- Buy a house when you can afford to pay 30% or more down-payment and plan to pre-pay the loan within 5 years
- Better to buy a house in tier-II city and rent-out the house rather than make it self-occupied in tier-I city. You can save on tax that way and also avail HRA.
- Stay on rent in good locality to enjoy your present life. The rent from your house in Tier-II city should compensate for the expenses incurred on that house.
Some related resources:
Real Estate Bubbles and California's Economic Growth Part-1, Part-2, Part-3
Buy Vs. Rent calculator Link here
Some old posts from this blog
Link1 : How to buy apartment in Bangalore?
Link2 : Get rich by staying in rented house?
Link3 : Reverse Mortgage doesn’t work in India?
Link4 : Real estate real returns?
Link5 ; Buy Vs. Rent
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