Is a house a good Investment?

Its a dream to own a house. Your own roof and floor is absolutely essential in life. One of India's most prolific writer and thinker, Khushwant Singh, has written that in order to be happy one must have: "your own home. Rented places can never give you the comfort or security of a home that is yours for keeps. If it has garden space, all the better. Plant your own trees and flowers, see them grow and blossom, and cultivate a sense of kinship with them." (you can read the essay here)

We agree. One must buy a home to live.

But is a house a good investment?

Should one buy a house so that one makes good money?

That is an entirely different question, and we believe that on balance, a house isn't a good investment.

Here are a few reasons for you to think about:

1. The ticket size and risks are incredibly huge. Houses in most large cities in India cost around a crore or more these days. That translates into roughly a Rs. 1 lakh per month EMI over 20 years. It is a huge burden to pick up. If you buy a house for Rs. 1 Crore when you are thirty five, then you are effectively committed to paying Rs. 1 lakh per month till you are fifty five years of age. If the price of your house falls, or if you are unable to sell it, or if there is some problem with the builder or with the building, you will end up with a financial liability that will completely take over your life. It is the stuff nightmares are made of.

2. House prices fall. It is often missed, but it is true and can be seen these days: house prices fall, sometimes they fall off a cliff. What is worse, when house prices fall, a phenomenon called deflation takes over and buyers dry up. There is no reason for a person to buy a house you are selling if he believes that prices will fall in the next six months. Not only will prices fall, you will be unable to sell until prices bottom out and start rising again. This is a nerve wracking and very dangerous situation.

3. There are very few credible house buyers in general. As a rule of thumb, a person can buy a house that is about three to four times the annual salary. Which means only a person with an annual income of about Rs. 25 Lakhs and above can buy a house worth Rs. 1 Crore. There are very few such persons in India.

4. Transaction costs are huge, sometimes as high a 10% one way in broker fess and registration charges and legal fees, etc. This 10% does not include taxes due from you for capital gains. It is very expensive to both buy and sell a house.

The one advantage in investing in a house is that it allows you to borrow money cheaply. Cheap borrowing allows you to feel rich and also allows you to take advantage of rising prices because as prices rise, loans become less onerous. Cheap borrowing also boosts the returns you make. But you must be careful. Borrowing works both ways: it can boost the profits you make, and it can also magnify the losses you could end up with.

The clinching reason to not use a house (or a flat or a plot for that matter) as an investment is that even after all these troubles, houses are just no good as investments. Equity is far better. I live in Gurgaon and a lot of times people point houses to me and say: "that house was worth Rs. 35 Lakhs in 2005. Now it is 2 Crores." And they look at me waiting for me to be impressed.

Well, I am not impressed. Far from it, I am shocked. Rs. 35 Lakhs to Rs. 2 Crores in 12 years is a 15.6% return on investment. And this is the best return you get in the biggest boom in the biggest boom town in India, and this return is before taxes and broker costs and other charges.

Now compare.

Rs. 35 Lakhs invested in DSPBR Opportunities Fund on 1 Jul 2005 would be worth Rs. Rs. 2.5 Crores on 1 Jul 2017. DSPBR Opportunities is nothing extremely extraordinary that I have especially chosen. It is a good solid above average fund from a good solid fund house rated about 3.5/5 stars for performance. The best performing funds would have turned Rs. 35 Lakhs to more than Rs. 5 Crores. 

Remember, your gains from DSPBR Opportunities would be tax free, and you would be able to take out your money at the click of a mouse without the need to visit any broker. The DSPBR fund would cost nothing to buy or sell. On the other hand the flat would have cost you maintenance, interest, taxes and a whole lot of hassles.

There is simply no contest between the two investments. So yes, buy a house to live, but don't buy one as an investment. 

A Career Plan without a Financial Plan is Meaningless

When people think about their careers, they think about skills, role, designation, the brand value of the company they work for, or wish to work for, the number of people who report to them, and in addition they think about salary, perks and benefits.

These are all important things.

But they are not THE most important thing. THE most important part of a career plan is a financial plan.

There are three reasons why a financial plan is the core of a career plan. Let me go over them.

First, any career, howsoever successful, will ultimately end in failure if it does not lead to financial security. We all work hard, long hours, we take unbelievable stress, we commute for hours through a toxic pollution haze. It is worthwhile to take the time to think about what we do with the money we are making. It is not enough to make large salaries. Examples abound of famous stars and sportspersons who made millions in their heydays, but were ultimately left bankrupt, unable to finance even a roof over their head. It is not enough to have a large income. It is necessary to plan how that money will accumulate into enduring wealth and financial security.

Second, your career choices depend largely on your finances. The choices you can make, or let go, depend on the money you have.. Want to start up? You will need the staying power of personal wealth. Want to negotiate hard for a raise? You will need the safety of a large balance to be able to bargain hard. Want to wait for the right role to come along before you start working again after a hiatus? You need money to have staying power without a salary. Personal wealth provides you flexibility. It multiplies your options as you grow in your career. It provides you the cushion to take risks, because you know that even if you fall, you have enough to get back up again.

Third, a financial plan helps you set the priority of your career in the larger scheme of your life. For a few of us the working life is all there is to life. This set of persons gets up every day raring to go to office and does not wish for anything more than to be able to work at the office lifelong. For many of us, however, a career is a means to other ends. We spend our time at office working with great dedication and effort, but desire more from life than just an office and a designation. Do you know what is truly important to you? A world tour? A holiday home? Kids’ education? Your own house? A year biking in the mountains? And do you know what is perhaps not so important? All careers involve a tradeoff between time spent earning and time spent spending. The financial plan helps you make your choices. It can help you determine what you must have, what you can let go, and how long and in what way you need to work to have enough money to get what you truly want.

If you do not have a financial plan, then you really don’t have a career plan. Write to us at SphereGreen.Investments@gmail.com and we can help you understand how to develop a basic but effective financial plan for free, and then help you set it into action.

Click here to view or download our presentation on basic DIY financial planning