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Are you planning to buy a house? Read this! - Outside View by PersonalFN

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Are you planning to buy a house? Read this!
Apr 26, 2014

The moment we start working, we dream about some or the other financial goals which we want to achieve in life. One of those is buying a real estate property. You see, buying a real estate property - especially a house - is the foremost requirement of most individuals. Some want to buy a house to live in, while some want to buy it as a good investment. So there are different needs.

Owning a real estate property has its merits and demerits. You see, buying a real estate property can have big impact on your other long term financial goals, so you must consider all advantages and disadvantages of real estate property before buying it.

Advantages of Real Estate Property

  • Real Asset

    Our experiences with clients reveal that they often tend to value physical asset more than a financial asset. Buying a real estate property leads to creation of a physical asset since it is tangible and it gives a feeling of security. Additionally you might have an emotional value attached to it which other asset classes may not invoke.

  • Price Appreciation

    A real Estate property provides return in the form of price appreciation and it might vary from one place to another. It has no defined rate of price appreciation and varies depending upon the accessibility to necessities of life such as school, hospital, convenience to travel, etc. The price appreciation will also depend upon the future development of the area where you might be buying it.

  • Rental Income

    If you buy a house which is ready to move in, then you have an option to give it on rent. Rent can be a second source of income which you can earn from a real estate property which no other asset class can provide. The rental income may vary depending upon accessibility to necessities of life as cited above, but it is generally 2-3% p.a. of the property value. You see, rental Income can be very handy; especially after retirement as it can give you a permanent source of regular income.

  • Hedge against Inflation

    Usually real estate property prices increase in line with inflation rate and over the long term, it can be considered as a good hedge against inflation. If you want to protect the real value of your hard earned money, then you can consider investing in real estate.

  • Diversification

    PersonalFN believes that you should never invest all your hard money in one asset class as it is considered risky. Therefore, investing in real estate can provide you diversification benefits, but you need to diversify wisely.

Disadvantages of Real Estate Property
  • Affordability

    While the aforementioned advantages are quite enthralling for one to buy a house, skyrocketing prices is impeding the affordability and is the biggest issue. Today buying a house especially in a metropolitan city like Mumbai requires huge capital investment. While home loan schemes are available in plenty, affordability yet remains an issue. You see, as with other asset classes you can't invest small amount every month to buy a real estate property. You need to have a big amount by your side for down payment even if you consider financing it through loan.

  • Risk

    Normally people who buy real estate for investment purpose prefer buying a under construction property, as it generally has higher return potential than a ready to move in property. But extra return comes with extra amount of risk as well, which you have to take in an under construction property. Risk includes delay or default by builder to complete the project, Government / Court interference if all the construction rules are not followed while property is under construction.

  • Liability

    Most of the house purchases are financed with loan as the amount required to buy it is very high. These loans create an obligation on the buyer to pay regular EMIs. EMI affects an individual's cash flow in a big way as very less amount is left after regular EMI and expenses for investment purpose for other short and long term financial goals.

  • Valuation

    Valuation of a real estate property is not easy determined as in case of other asset classes, because lack of thorough real estate regulation in India. Each and every society and area will have different valuations and it will also depend upon the selling and buying power of both the parties involved.

  • Liquidity

    Liquidity means how quickly an asset can be sold. In case of real estate liquidity is very low as it takes long period of time to find a buyer, finalize it and close the deal. So you need to be very careful before investing in real estate, as you might not be able to sell it whenever you want. It might get delayed by some months or even years.

So while you may want to own a real estate property, know the merits and demerits of owning it. PersonalFN believes that if you are buying a house for dwelling, anytime might be a good time to invest (assuming you have assessed the affordability). But if you want to buy a house for the purpose of investment then you should take a holistic view of your portfolio. PersonalFN is of the view that investments should be made keeping your goals in mind.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Are you planning to buy a house? Read this!"

Prashant Thakur

Apr 29, 2014

The writer has missed the about very bothersome taxation issue related to buying house.

You as a buyer will have to deduct the tax and other compliance.

Any difference between buy price and stamp duty will be added to your hand as income.

I would suggest readers to watch this excellent video http://youtu.be/Hj_LLUoYN6Y

Equitymaster requests your view! Post a comment on "Are you planning to buy a house? Read this!". Click here!

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