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
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.