When you start your career, one of the things in the list to achieve is having a dream house. Before buying a property, a little calculation can help you save a lot, and take an informed decision.
Case-I : Buying property near work place
We often meet people who buy property near their work places. As they change their job, they have to move to other cities. Now managing that property becomes a big task. Eventually they end up deciding to sell it. When there is no demand, selling a property means a reduced property value to the tune of 20-30%.
In nutshell, you should buy property in the city, where you finally want to settle down after retirement.
Case-II : People buying property thinking it’s better to pay EMI than rent. As in the end, they will atleast own it.
You may want to save on rent by buying the property on EMI. But sometimes people end up paying both because they move to other city due to job and you are paying EMI for the house you are not living and paying rent for the other house. The renting of the house is not easy.
When you are taking a house loan, being a financial planner my advice is
- Give atleast 5 years to accumulate the money before buying the house. Must do the calculation for the value of the house in future.
- Accumulate atleast 30% of your property value before buying.
- The EMI amount should not exceed 30% of your salary; otherwise, your EMI will eat major part of your income. This is the ideal situation and if the EMI amount exceed 30 % of your salary, you should lower the value of your dream house to have a comfortable life with loan.
- Buy a term insurance with the same sum-assured as your loan amount, to manage risk.
Let us look two scenarios of house loan-
Scenario 2- after accumulating 30% of house cost
A little planning can really reduce the cost of house to you. You can invest monthly in mutual funds to accumulate the amount for the down payment. An SIP for 5-7 years should be able generate your down payment. You must keep in mind the future cost of the house as per the inflation rate.
Things you must know before investing in property-
- Check if that property has a demand to be able to generate rental income.
- The typical rental income in India is 2-3% of the property value i:e for a property of RS. 1 Cr the rent is about Rs. 17,000/- per month. (yes….even an FD can give a better return than that)
- 20% of the house value is deposited as the down payment.
- People who say their property has value appreciated by 30 times or more in 50 years, it looks good in “times” but if you calculate the annualized return, it is not more than 7% per annum. (again FD may give a better return, let alone equity market)
- The home loan rate is around 10% per annum including all associated charges.
- It’s difficult to sell and to liquefy in case of emergency.
- It needs large capital to invest and high transaction cost in stamp duty and registration.
- High house repair and maintenance cost.
- Long term capital gain tax is higher than in equity market.