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 specialized
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.
Your wealth can
dwindle, plans can go haywire, money can be philandered or lost, businesses can
get wiped out, medical ailments or court cases can leave you broke, but a house
remains. When I was a child, my dad suffered a huge business loss which
stripped us of our savings. But the house which he had bought earlier stayed.
He was desperate to sell it to repay debts, but my mom did not allow it. She
would send prospective buyers away, saying the house was not for sale. The house
gave us a reason to fight it out, giving us comfort. The house was our
strength. It can be yours too.
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