Sometimes your parents push you into buying a house at a very early age, which could tie you down as your parents may have no clue about your present needs.
One housing finance company ad says ‘Kishton se rishta Jodo, Kiraya to paraya hota hai’ (Get engaged to an EMI, Rent is an outsider). At the outset a large part of Kisht is byaj, which is as much paraya, if not more than Kiraya. (A large part of EMI is interest, which is as much an outsider, if not more than rent.)
This thinking is so much old fashioned and so uncool to use the present generation lingo. Even uncool is listening to your parents, who push you into buying a house at a very early age, which could tie you down as most have no clue about your present needs. Sometimes experience is a bad teacher; in case of investment, it surely is. Also, if your future father in law is going to decide whether to marry his daughter based on whether you own a house or not, then dump her. It is as bad as marrying a man, asking a dowry.
On a serious note, I was asked by a class of students, what should be the ideal ratio of EMI to rent. Of course, these is no science and there may not be any one answer. Life rarely has fixed answers. But just to arrive at some ball park figure, let us see what are the ratios prevailing today in India. At 2% rental yields, a Rs 1.5-crore apartment fetches a rent of Rs 25000 per month. Now let us see if the same apartment was to be bought, one will have to put a down payment of Rs 30 lakh and take a loan of Rs 1.25 cr (including stamp duty), which will result in an EMI of Rs 1.25 lakh a month at 10% for 20 years, which translates into a ratio of 5:1.
Also, the down payment of Rs 30 lakh at 6.4% tax-free bonds of NHAI, REC would fetch you Rs 16,000 per month. So, actually the ratio is almost 5.75:1, that is obnoxious. My take is these ratio should not exceed 2-2.5:1, net of down payment, anything more than that is a bubble. A 2:1 ratio translates into a 4.5% rental yield and 2.5:1 into 3.96%, much lower than the 6.4% tax-free bonds. At these ratio of 5.75:1, the person staying on rent can own the same house within 5-6 years cash down, by putting the difference between the EMI and rent in a good equity mutual fund through the SIP route, for which the original owner will have to pay EMIs for 20 years.
A friend visiting from the UK told me that back home the rent is almost equal to EMIs. Well, if that is the case it is equally irrational, it is no brainer to go and own the property. But such is the human mind, having gone through the real estate slump, people prefer to stay on rent, didn’t I tell you, sometimes experience is a bad teacher.
In the meanwhile nothing is permanent. Kabhi apne bhi paraye ho jate hain, aur kabhi paraya bhi apnapan jata jata hai. (Sometimes our own betray us and the outsiders also give us the warmth of our own.)
(By Ashish Deshpande, Founder & Director, Paradigm Wealth Managers)