Why investing in apartment in Metros a bad decision for middle class Indians

5
1982

Check out these calculations if you are planning to buy a home

If I am not wrong, the “craze”  started just over a decade ago. It was the same time when Atal Bihari Vajpayee led BJP had the India Shining campaign. We had the IT boom and this boom gave momentum to our confidence and faith. From a society that was predominantly focussed on saving all of a sudden started opening wallets for investments. Earning in vilayat was not just limited for some Tata or Birla or even a Gandhi for that matter, the world was an oyster for any desi.

The Great Indian Middle Class was the new global buzzword and this “jaati” was the talk of the time. The world was looking on this class to improve their “note bank”.The Indian stock markets traveled from 3000 to 30000 in these years. And the society which mainly focused on saving seemed to open up the strings of its wallets for investments. Real estate investment which was supposed to be done by the dhanna seths was no more exclusive to anyone. More and more people from the middle class started to invest in real state. And it was not just more people but more youngsters getting into the show. Buying a house which was once a “life time achievement award” for a middle class person all of a sudden transformed to a basic certification that must be possessed while in 30s or 40s.

Real Estate businesses have used this emotion to exploit people. Just remember how many times we hear “Apna Ghhar” or “Sapno ka Ghhar” for that matter. Experts across the media world (TV, Radio, Internet) to the ones sitting in the nearby paan shop to the pados wali auntyji everybody talks about the importance of having own house. Though this gyaan is correct in general but it may not suit everybody.

One of the main reasons is that most of the people in metros do not buy Ghhar(house), they buy apartments. Though apartments come with a host of advantages like security, safety, clubs, sports arena etc, a resident looses a lot of freedom. Add to that, in todays dynamic world, a working class professional may have to change his job (and city) unexpectedly. In addition, a big misconception which is told time and again is that real estate investment is the best investment and there is no chance to loose money in it. With prices crossing rooftop and many projects available, this theory is not at all valid.

Lets do some Maths:-

We have to make few assumptions. You might like to change the same according to your need/budget.

Apartment cost:- 50 Lac (35-40 lac is the minimum quoted apartment cost when possession is given 2-4 years later)

Cash in hand(Down payment):- 15 Lac (15-20 lac should be the minimum cash needed. Though a less amount may work.)

Home Loan Interest :- 10% for 25 years.

Just looking at the above, we can see that loan amount is 35 Lac. I am using the BankBazaar calculator for calculation purpose.

home-loan-best-advice

So going by the above calculation, the total amount payable is a whooping 96 lacs!  Since the down payment was 15 lac, the cost of house becomes 1 crore 11 lacs. In the best of the market conditions, a person can sell his apartment worth 50 lac at 1.11 crore. Though the fact is apartment price may appreciate for a few years but they start stagnating and/or reducing thereafter.

Now let us calculate what would happen if a person keeps 15 Lac and invest it in a FD/bond with 10% compounded interest. It is also interesting to note that the person can rent the same apartment at 20000 monthly rental. Since he was paying approximate 32000 as EMI from the figure above, this person can save 12000 a month extra (Here an assumption is made that the rent will not increase too much which can be a possibility because of abundance of apartments already built). Since rent may also increase eventually, let us consider 8000 a month extra and not 12000 a month.

Calculating the compound interest on 15 lac and Recurring deposit returns on 8000/month.

compound interest calc

1.8 crores!

Moreover the Recurring Deposit of 8000 a month will give approximate 15 lac after 10 years which can again put into FD.

rd-calculator
Courtesy HDFCBANK.com calculator

This 15 lac when put in FD for 15 years(remaining) will fetch 65 lac!

The RD over next 10 years & 5 years will again yield 15 lac and 6 lac. This 15 lac RD return from year 10 to year 20 will become approx 25 lac by the end of 25th year.

Hence, from the monthly savings of 8000 becomes 90 lac after 25 years. So total money saved from Compound interest and (RD + compound interest after RD) is 1.8 crore plus 90 lac which is 2.7 crore! Even if 30% interest tax goes that 15 lac with monthly saving becomes over 2 crore in 25 years.

I personally believe in investing a part of money in stock markets too which can give better returns than FDs. Taking into that angle, the returns can scale further. Hence, it would be wise not to buy an apartment house until there is a good deal. Having own house is very important but buying it for the sake of buying or in a desperation may not be a good idea. Hope this calculation of mine can help you when you are planning to buy your house.

Happy investing 🙂

An ardent observer of life’s visual rhythms & curious on the SOEs that take place in the cosmos, I jot down my mind occasionally on yet another universe of the Internet.

An Engineer by profession and nationalist by heart, I write my heart and mind on anything and everything that comes to my way. I put my ideas on politics, religion, technical, green energy, stock markets, spirituality, open source, business and anything under the God’s green earth and above that too 😉

Being a Jack of all trades, I have my say on varied subjects 🙂

Some of my articles are also published in http://articles2read.com/author/ankur-mehta/

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An ardent observer of life’s visual rhythms & curious on the SOEs that take place in the cosmos, I jot down my mind occasionally on yet another universe of the Internet. An Engineer by profession and nationalist by heart, I write my heart and mind on anything and everything that comes to my way. I put my ideas on politics, religion, technical, green energy, stock markets, spirituality, open source, business and anything under the God's green earth and above that too ;) Being a Jack of all trades, I have my say on varied subjects :) Some of my articles are also published in http://articles2read.com/author/ankur-mehta/

5 COMMENTS

  1. Epic! Most of the finance articles aren’t like this. This is the best one I’ve ever read. I myself use bankbazaar.com to estimate the loans, and was blindly planning to buy a house when I turn 26. An eyeopener! 😀

      • You are ignoring inflation in rent !! 10 years down the line rent won’t b 20k but 35-40k …in that case the saving of 8k for RD which u r considering doesn’t exists !! Also during peak market condition you wil be able to sell ur house at 1.1 CR is a flawed statement !! Property going forward will appreciate at minimum 7-8%/ for next 2 decades , which makes your houses best valuation during next 2 decades much more than 1.1 CR !!
        Although your point of view of not buying property too early is correct , but I believe investing more than 30% in FD/RD won’t help! Rather invest 70% in lumpsum diversified Mutual funds ( like FD ) and sips ( like RD) ! Historically in longer run 10-15 yrs horizon market has given more than 15% cagr and gains r tax free after 1 year !! If you make above mentioned calculations at an interest of 15% and not 10% , u will realise that u will be in a position to buy same property with its appreciated value on cash 15-18 years down the line .

        • Agree on the rent thing you said as it may go up.

          But I have already mentioned this that I am assuming that the rent won’t increase from 18k.
          A house of 50 Lac is considered as an “economy” one and the rent is anywhere between 10k to 20k for the same. I considered the higher range. Although the rent inflation can make someone think about buying, the amount of unsold residential inventory has hits a record high.
          You may like to refer this article- Unsold homes hit 6.8 lakh units in 6 cities; inventory up 2.48% in Q4

          In addition, there is risk if a person having a house plans to relocate because of job or business.

          I also mentioned that investing in markets (Stocks and MFs/SIPs) may fetch a better yield. Those who want to go safe can also opt for bonds for better returns that FDs and lesser tax liabilities.