Is Love of Real Estate delaying your Financial Independence ?

This article will help people on Financial Independence Journey, to ask right questions to themselves and make a clear choice if they should own Real Estate (RE) or not.

I say people on Financial Independence (FI) Journey as they have already prioritized what they want, it will help others as well but they may have different priorities maybe owning a home is their priority.

It caters to all who want to decide below :-

1. Decide to buy RE for self consumption
2. Decide to buy RE to Invest
3. Decide to sell self consumed RE and move on Rent while investing the proceeds
4. Decide to sell investment RE to invest in other asset class

To give you background on why I am writing this:-

As I had shared with you in my previous blog that I am planning to sell my apartment and invest the proceeds in other asset class so that I get better RoI and also to reach my FI early.

I was evaluating all possible scenarios, while discussing with friends and  colleagues I found two of my colleagues who are in same situation and have lot of concerns/fear before taking the decision. This lead to all of us discussing this in detail and below blog addresses the same. At this point I would like you to think about your concerns or fears and write them down.

I am going to explain this in form of actual cashflow analysis of a Person when Owns the home which is on loan, and same person when lives on Rent.
Its simple comparison not considering tax benefits or rental increment over a period.
Its just easy to understand minimum sort of calculations to visualize how the cashflow situations will look like in both scenarios

Own_rented_comparision

So as per above analysis the person living on Rent and investing the surplus cash generating a returns of 8.5% CAGR for 20 years has 38,260,244 of his own money and the person owning the home has completed his loan and owns a 20 year old apartment which may or may not have value above the sum saved by person living on rent.

Some of the terms which will help understanding above calculations:-

Rental Yield – Rental Yield is the amount of rent a apartment can generate on annual basis to its capital value.
In our case we have considered 3% as Rental Yield. So a apartment of value 10,600,000 can generate rental income of 10,600,000*3% = 318,000

Rental Yield can vary from location to location, In Mumbai it varies from 2% to 4%. I have used 3% in my calculation, you can use based on your locality.
You can find rental yields in your locality through Property Portals.

Home Loan Rate – Current home loan rates for salaried people ranges in between 8.5 to 9.5% per annum

Down Payment – Down Payment is your equity in the loan which bank will not finance. Have considered 20% down payment.

Stamp Duty, Registration is 1 time expense and taken as per Mumbai Rules. You can take yours.
Maintenance & Property Tax -> I have taken as 3000 per month as per my knowledge.

Please use the attached sheet to change the calculation as per your actual. Own_rented_comparison.xlsx

The difference between the Home Loan and Rental Yield tells you about the state of Property Market

A Rental Yield Close to or greater then home loan rate means that it is better to buy a home then rent.
Lets say if rental yield is 4% and home loan is 5%, difference is only 1%. With all the other variables(tax, rent increment, investment risk) it would be beneficial to buy rather than rent.

If rental yield is way below the home loan rate it means that living on rent can be beneficial. It gives indication that either the capital value is too high or/and rents are subdued.

For e.g. in our case the difference is 8.5 – 3 = 5.5% (That is the potential saving on the value on flat when we live on rent)

Concerns or fears we face while taking a decision to live on rent or sell an investment property

1. What if the property prices run up after I sell or in future OR
2. What if I am not able to afford to buy again after achieving FI
3. What if the rent increases dramatically in future
4. Where to invest and how to invest
5. What if the investments don’t do well
6. Insecurity and lack of emotional connect in rental place

Will cover all the above concern/fear in next weeks article.

Please share your concerns if not in above list which I asked you to write down earlier in the article.

Thanks for reading and sharing your thoughts.

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18 thoughts on “Is Love of Real Estate delaying your Financial Independence ?

  1. Many thousands of work hours have been spent on this dream of own home to be achieved right after first job. Why? Because friend has already bought a home or parents have a home . What they don’t realize real estate always don’t go up and you will not be living in 20 years old flat all your life. Housing has been a status symbol that has killed many a dreams or pushed people to work for longer than they can afford.
    The maths is so so so real yet it fails to make a dent . You should do one more math. Some one buying at 30 and then how manny years he has to work extra to achieve FI.
    Secondly for people who have home loan, while booking they want to take 20 years but then tendency to pay as soon as possible. Once again not building any corpus for equity.
    Really wish real estate love dies in India.. world over this expense also has pushed people in misery..

    Liked by 1 person

    1. Thanks for your thoughts and idea, will try to cover. You are right the calculation speaks out loud, but your family can’t boost about your portfolio of stocks but they can boost about your upscale residence. You can showoff. No one is seeing that you may be bleeding financially. Inner scorecard is more important rather than outer.

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  2. I have always believed in the math. You just confirmed my thoughts in better structured way but I also have contradictory thoughts

    1. It sounds easy on paper to generate 8.5% returns . Lot of complexity comes with it, a normal individual without stock market knowledge can’t handle the volatility and emotions. He will be in and out and probability of getting killed is more.

    2. A scenario of 5-7 year recession where we have job losses and low income should be considered. I have always accounted it will happen once in my life time. This will be time where your equity is corrected by 50-60 % and you may not have any job. Rent will sound pretty costly then. House will give me my peace of mind.

    3. Rent increases, in Bangalore rent is increasing at 10% per year. Atleast my landlord is doing so. And movement is a pain when you don’t want to pay higher rent.

    4. Putting all your money in most volatile basket sounds little bit risky to me. Even if you Want to go this path, you need allocation strategy like you need 30 percent in Debt instruments and 60 per in equity and 10 percent cash. Doing these calculations makes you professional which normal people without sound equity principles can’t do.

    5. If you don’t have equity market knowledge my sense is you won’t do it, you can’t do it and you shouldn’t do it. If you are a professional then I assume you will apply all risk management principles & you will sooner or later but a house on cash removing all interest cost.

    All of us want no boss that is one of the reason of financial independence, who is land lord if not a person who you have to answer and agree to.

    My views are biased based on my experiences in life . A good article indeed as it gives you ideas to think.

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  3. 1. Liquid fund gives 7%, slightly agreesive profile with a 40% equity also yield overall 8.5% in long term.
    2. Imagine you have an emi and there is a job loss.
    3. Buy a home which is not 3_4 times of rent ( for emi). Maths starts failing when emi is more than 2 times of rent .slavery confirmed
    4. Your pf is a best allocator ( perhaps conveniently ignored by all of us as part of asset allocation ). Yes all money should never go to equity. I would rather first have corpus of at least 2_3 years in liquid fund not 6 month if you are a working professional.

    5. Not having knowledge is same thing as ” Mera bachpan me school Hindi medium that, isliye Maine engineering me English nahi sikhi”. This knoweldge is must … The home loan takers don’t even know how to calculate emi on excel ( most of loan takers ).

    I really appreciate your views because they reflect exactly the kind of story which we all go thru. The whole thing is we believe that multiple bad things will happen in sequence..while research says 87% of envisaged risk any one thinks they have in life never appears. It’s really great to hear multiple thoughts ..

    Agree on last point …buy with cash.. wait for it ..just because prices have shot up doesn’t mean u have to buy it..it’s not a race..

    Liked by 1 person

    1. Thanks Naval for explaining this very well, all the best to both you and Puneet on your journey.
      Do you guys know when will you hit 25X of expense if you save 70%, at different returns ?
      You will be amazed to know, try to find out or watch this space out 🙂

      Liked by 1 person

      1. I am there. but I would like to have a house and 25x my expenses in my account . So for buying a house on cash down will take 5 more years.

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      2. 1. Child goal saved, all my assumption is at 10% and last 3 years in liquid of any goal. Goal saved for graduation 2031: 65 lakh, post graduate 2035 : 1.25 lakhs

        2. Saved for year 60 onwards retirement at 10%, 25x of age 60 expense. Age 50-60 is going to be a mix of PF and another sip that’s on going .

        3. Home : sip in place, plan to buy once I reach 50% down payment .

        If all goes well.. all savings for all goals should be over in another 5 -7 years.. after that last 5, there won’t be need to save but will figure once reach there

        It’s an exciting journey..

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  4. Thank you so much for good article .I just started investing in equity from last one year I know there are so many ups and downs in equity .there is risk associated with it but I know from history data of equity that it will b far better than other asset classes.home loan is a liability not asset .I don’t want showoff to any one that I bought a house everyone is buying home .I prefer to choose the road which is less traveled .😉🤘

    Liked by 2 people

  5. Everyone here seems to be experts. I was wondering if someone could give me advice on raising capitol. The goal is to help single mother’s attain nice housing, Recently divorced, credit is not to good, but was wondering are there any other alternatives. God Bless

    Like

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