Should you no longer own the house you live in? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you no longer own the house you live in? 

A  A  A
In this issue:
» Slow global growth spooks commodity investors
» John Bogle: US stocks aren't expensive
» Rogers: Makes sense to sell and run
» IATA: India amongst the fastest growing global markets
» and more....

For first time home owners, an option they quite often consider is that of prepaying their home loan debts. Given that EMIs are calculated at the start period and as and when the individuals' salaries rise, it becomes easier for them to service loans. And thus, prepaying off the debt is an option that many would strongly consider.

While we are not experts at financial planning, in our view, a good alternative to this option would be to invest the surplus into SIPs as well. Given that the long terms returns of equities are a couple of hundred basis points higher than the average home loan rates, the positive compounding effect of this would turn out to be an alternative that investors could consider.

We write this today as we came across an interesting article which compared the financial returns that arise when we compare buying versus renting a home. While the feel good factor does come into play as having a physical asset such as a home provides security to one and his family, and as such most would believe that paying rent would not make sense; and instead using such funds to buy a home by paying EMIs would be the better way to go.

In an article in the Financial Express, the author discussed why renting a property would make more sense when gauged purely from a financial returns perspective. As such, one should not blindly assume renting to be the worse option. It may however be noted that the calculation carried out by the author is done only for a period of ten years.

Let's discuss the example. Assuming a home is valued at Rs 2 cr and the bank would be willing to fund 80% of the value - Rs 1.6 cr. The monthly EMI would turn out to be about Rs 1.6 lakhs per month. Assuming that the home prices would rise by 10% each year (a debatable topic in itself), the value of the home would be Rs 5.2 crores ten years down the line. As such, after deducting the cash flows the total EMIs (1.92 cr including Rs 1.5 cr of only interest payment), the down payment (Rs 40 lakhs), the capital gains tax, and prepayment of the balance outstanding debt, the amount left with him would stand at Rs 1.4 cr, which would also be the home owners' net financial gain.

Now comparing this to renting out the similar property - assuming 3% yield and annual rent of Rs 6 lakhs, plus the interest earned on the down payment of Rs 40 lakhs over this decade (Rs 39 lakhs), and also investing the saved amount; (earning a low single digit return of 4% on this amount would build a corpus of Rs 1.6 cr after a decade; however when using 12% returns which is the long term return of the Sensex, it amounts to about Rs 2.5 crores), the net financial gains would have been almost Rs 2 cr, a figure higher by 43% as compared to the financial gain made when buying the apartment.

As per the author, the assumptions taken include 7% is the annual rent appreciation and 7% per annum indexation benefit assumed over 10 years for capital gain tax calculation.

While taking such an aggressive approach is not something most would agree with, we believed this was an interesting approach that we came across and thus wanted to share this with our readers.

We would like to get your views on whether it makes sense to buy or rent a property. Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
What this special table of stocks tells you... (Rs 495 only)

We now want to show you a table consisting of some special stocks...

Stocks that grew 107 times, 116 times, 192 times and even more between 1991 and 2014.

Such big returns do not happen everyday. And when they do, they are usually driven by an extremely rare event.

Today, we are going to discuss all about this rare event. And more importantly, how you too could start benefitting from it for as little as Rs 495!

However, this opportunity will be available for a short time only. So hurry...

Click here for full details right away!

01:50  Chart of the day
Over the last few days we have been trying to highlight the sharp slump in commodity prices, including crude oil and precious metals. Now the fall in commodity prices has been a result of growth concerns in developed markets as well as high growth economies like China. Plus the prices of crude oil is being dragged lower by the OPEC thanks to its tussle with US shale gas producers. If commodity guru Jim Rogers is to be believed, the fall in price of commodity like crude oil is going to be short-lived. However, the prices of other commodities may take time of revive, unless global growth rate picks up.

Growth concerns lead to slump* in metal prices
*Daily price change as on 16 October 2014

For India, the fall in commodity and crude prices could not have been better timed. After all the economy is looking to stimulate industrial growth with big ticket capacity expansions. However, one cannot assume that commodity prices will keep falling. Else companies may well be caught on the wrong foot.

When it comes to sane voices in the stock markets, John Bogle's would certainly be one of them. So much so that even Warren Buffett is seen recommending his books on several occasions. Consequently, when he speaks, it pays to listen according to us. Right now, he has an advice for US stock market investors. And this is in context of the near 8% fall that the US indices have seen since the highs of mid-September. He is of the view that there's no reason why one should sell stocks in view of the recent gyrations. As per him, a close to 10% decline is hardly anything given how speculative the markets can be. Therefore, investors should even take a 25% decline in their stride if they want to gain over the long term. And while he agrees that the US stock markets aren't cheap, he does not see them in bubble territory either.

Now this we are not very sure about. There's enormous amount of money printing that's happened which is trying to keep the economy in good spirits. And therefore once this support is taken away, there's a good possibility, the economy should again start struggling. Consequently, it may not be a bad idea for even US investors to contemplate keeping part of the money in cash or safe havens like gold.

In contrast to what John Bogle said, globetrotting investor and commodities guru Jim Rogers has pretty depressing views on the US. In his typical cowboy style, he puts forth that this is the time to 'sell everything and run for your lives'.

What are the reasons that are compelling him to give such bearish views? As per Rogers, the consequences of the Fed's reckless monetary policies are being felt by the world markets now. All the money printing and excessive debt is going to wreck havoc. He believes that the US stock markets have topped and are in a bear market already.

As mentioned above, we agree with Rogers that the Fed has indeed caused gigantic distortions in the financial markets and the consequences of its excesses will be felt with increasing intensity. While this may cause investors to panic worldwide, including India, such opportunities could throw up lucrative long term investing opportunities for Indian investors. So whenever there is bloodbath on the street, be on the lookout for attractive bargains.

Indian economy seems to be just waking up from a long slumber. And with a pro reform and pro growth Government, is expected to tread the recovery path. If IATA report is anything to go by, aviation sector is likely to contribute a lot in improving the ground scenario for the economy. From being the ninth largest currently, Indian aviation market is likely to more than double the passengers in two decades and grow at 6.9%. This will indeed be positive for employment scenario and economic activity in the country. It could further lead to better bonds with other economies in the era of globalization.

However, there are challenges galore in the way of this ambition. One must note that despite huge growth in the traffic over years, airlines have hardly any reasons to celebrate. Most of them are under financial crisis and facing huge debts. Indian aviation market is highly price sensitive. On the other hand, the costs for players have been rising. High taxes, limited fleet size, competition from relatively cheap railways, high fuel prices and weakness in the rupee are some of the challenges. On the top of it, because of the poor policies and delays, infrastructure development is unlikely to keep pace with the potential growth in the traffic. In short, a lot of groundwork needs to be done before the big aviation dream comes true.

In the meanwhile, the Indian stock markets firmed up further in the post noon trading session. At the time of writing, BSE-Sensex has closed higher by 109 points (0.41%). Barring IT stocks, all the sectoral indices were in demand. Stocks from banking and power sectors were among the leading gainers. Most of the Asian stock markets traded in the red led by Japan and Taiwan. However the Singapore index closed firm. European markets have also opened the day on a strong note.

04:55  Today's investing mantra
"In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch
Today's Premium Edition
What really matters is earnings, earnings and earnings!
Why have investors been unmindful of the stake sale by this promoter?
Read On...Get Access
Recent Articles:
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?
The '26% Secret' to Buffett's First Billion
August 11, 2017
This is what led value investors Mohnish Pabrai and Warren Buffett to their first million and billion.

Equitymaster requests your view! Post a comment on "Should you no longer own the house you live in?". Click here!

9 Responses to "Should you no longer own the house you live in?"


Oct 21, 2014

Old saying in my village मया से छया भली ,(Home is better then money)


D D Kochar

Oct 19, 2014

Thumb rule for property dealing is approximately 2% per annum (1% rent + 1% appreciation). Figures quoted by the author of article is beyond imagination. once in every 1o to 12 yrs, there is beyond reasons known, an unexplained appreciation/depreciation. Both scenarios have been experienced by me personally. Still real estate returns are far more than expected over a period of about 10 yrs.

D D Kochar


Harihar Dhere

Oct 18, 2014

Those who are earning between Rs.40,000/-and Rs.50,000/- and whose wives are housewives and whose parents are dependent on them cannot think of buying a flat worth Rs.10,00,000/-.They stay at 50 to 100 Kms. away from their work place. Moreover the jobs are not permanent.The jobs are transferable too!In such difficult economic conditions it is better to have an affordable rented property with minimum aminities!



Oct 18, 2014

I have read the article .No doubt it is interesting ,but the problem of renting a house is ,as of now , no one allows you to stay in the same house for more than 36 months . Most of the time they ask you to leave the house even before that.This is a difficult situation to a family ,as one has to think of the distance from the home to school/ college of the kids,their friend circle ,his/ her own destination of the job/ business .etc.So every after some months if one has to shift ,it is again a torturous to the whole family .Every time one should not think of only about monitory gain only but satisfaction from the family members is also equally important ....


Prof. N K Jain

Oct 18, 2014

I agree in the old age saying that fools build the houses for wise men to live in. It makes ample economic sense to rent a house provided you are willing to shift every three to five years when the lease agreement expires. Do not forget the liquidity aspect. More liquidity means more to splurge on your unrealised dreams. We can always earn tax free income by proper planning and investments in equity or equity funds.
The only downside is that people may think that poor chap does not have a permanent roof over his head.
However, we do not live for ever.


Kamal Garg

Oct 18, 2014

This is a flawed case study. Earlier also this type of case studies have been made by different financial experts/sites. The basic flaw in this theory is that only the loan repayment tenure is considered for comparison. Whereas you must take double the repayment tenure to make a detailed comparison. In addition to the financial gains over an extended period, additional great advantages in owning a real estate property is security of your accommodation / shelter which is unparallel and further that you are not easily 'tempted' to sell your real estate property easily and therefore it keeps on appreciating over a very long period.


Sudhir Y R

Oct 17, 2014

This holds true if you invest in an apartment. But if you invest in a piece of land (where you are the absolute owner of that land), the gains on the land would beat the returns from the Sensex and with lower risk. Plus you also save on the costs of maintenance charges (which will be upwards of INR 10,000/ per month) for an apartment costing INR 2 Cr. At INR 40 Lakhs investment 1200 sft of land can be owned in developing areas of Bangalore, without a loan (only the downpayment for an apt). After 10 yrs the land can easily fetch INR 2 Cr. So buying land is a wiser investment.



Oct 17, 2014

The article assumes a flat Rs. 6 Lakh rent per annum. In fact in every rent agreement, there is rent escalation clause on annual basis which will increase the rent and change the calculation.



Oct 17, 2014

This does not take into account Vacancies, Brokerage for letting out, Upkeep and essential upgradation costs to make it rentable, Wear and tear, Local body taxes etc.

Equitymaster requests your view! Post a comment on "Should you no longer own the house you live in?". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407