“A dog held a juicy bone in his jaws, as he crossed a bridge over a brook. When he looked down into the water he saw a another dog below with what appeared to be a bigger juicier bone. He jumped into the brook to snatch the bigger bone, letting go, of his own bone. He quickly learned, of course, that the bigger bone was just a reflection, and so he ended up with nothing!”
What do we learn from this short story?
Some thing, really similar to this story is happening in our lives – where the bridge which we are cross is our lives, the bone is our home,(or car or any thing we own) and the “other dog” is none other, than the people around us, our friends at work, neighbours, relatives etc., who might have a bigger home than us, a better car or a more expensive LCD.
Does that mean that we also need to run towards that bigger bone? Yes? No? There is no harm in fulfilling our needs. As our families grow, and our need for comfort increases, we are bound to buy bigger homes, better cars (read more expensive) et al… And while we are at it, why not buy that much bigger LCD or enjoy that international holiday with the family? The EMI system changes our “wants” into “needs” .
Is Installment system of payment bad ?
Definitely NOT! It’s a very convenient way of buying things, but the problem, is that the EMI way of buying, gives a lot of people the feeling that they can afford anything which comes their way. And there lies the problem! A sizable chunk of people believe, that they need a bigger bone (when they actually don’t) and the easy availability of everything, in EMIs plays a large role in said belief. The EMI is such a beautiful concept, that even a person with salary of 30k can buy a helicopter! Why not? Just 9999 per month, for next 200 years! Does he need it? Who cares? He can afford it! The problem is not the EMI concept in itself. The problem is us – losing our control on our spending and extending our affordability horizon to such great lengths, that we have everything in our life; but most of it is under debt.
Our home and our car are the two classic examples of this. Let’s talk about the home. I don’t have much data, but my instinct says that most of the people who have taken a home loan, are living in a much bigger home than they need. As per an in-house study, (through a poll,) I found out that as much as 67% of the readers on this blog or urban net savvy people are paying at least 1 EMI, which would mostly be a house or car loan EMI. It was astonishing to see that 11% of readers here pay more than 3 EMIs! That’s too much!. Make sure that your EMIs are not more than 50% of your total, in hand (net), salary.
Affordability of EMI vs affordability of Loan
If you tell a person, the EMI of a product, chances are that they will believe that he/she can afford it, as compared to when you tell them the actual price of the product. The problem lies in the numbers. The lower the number, the more affordable it becomes! However this is not true! Actually, the more you reduce the EMI figure, the longer the tenure, and hence the total cost for you over a long period of time increases drastically!
Lets take some products .
Home Loan
A classic example is the Home Loan. When a person plans for a loan, he makes sure that the EMI figure is affordable to him and does not concentrate much on the final value. For example, consider a person earning 50k per month. The EMI for a home worth 30 lacs @10% will be Rs 39,645. This may look unaffordable to him, so he increases the tenure to 20 yrs instead of 10, and brings down the EMI to 28,951/- Magically, this same home starts looking affordable to him! What they concentrate upon, is the initial years, and not the big picture. They might not be considering some important points… like what if interest rates increase to 14%? In which case, the EMI will go up to 37000/- ! These are young, recently married individuals, who have no idea of where they will be working in next 5 yrs. Will they be in same job or same Industry? What will be their liabilities then? A close look at Real Estate Returns in India
I am not sure, if a 3 BHK is the right choice for a recently married couple who has no one else with them, to live with. The justification can be that in future they may require it, however if that’s going to happen in next 15-20 years, a 1 BHK or 2 BHK is a better choice. Its better to live in a 1 BHK and breathe easy, rather than a 3 BHK and suffocate every day from the burden of the heavy EMI. Here’s a good article on Home Loan EMI calculation .
Calculate your EMI
Car Loan
A lot of people buy a car before a home, as the EMI is affordable and the car adds to their comfort. I know a lot of people who can easily manage their life with a bike or without a vehicle, but have bought a car for reasons only known to them. There are just 2 people in the family, both have company transport, aren’t really outgoing, but they have a car. Not sure why!
A car is a depreciating asset. This means, that when you buy a car on loan, you are paying more money for something, whose value is coming down day by day, unlike your home. So buy a car, only when it’s really important or your comfort gets more bigger than your simplicity, when commuting is a problem.
The main problem again, is people buy cars that are much bigger and costlier than what they can afford and need. If you are in the starting phase of your career and have no more than 4 people in the family, why take anything beyond a Santro or Zen? You can always buy that dream car when you are more stable in your career and the other important things in life are taken care of. My views may be biased because I am not a car or vehicle lover, so all car experts might disagree with me here 
Holiday/LCD/Camera/Air Tickets
IRCTC has started giving air tickets on 6 equal EMIs! There is no catch! You can buy a ticket worth 3k today and pay 500 a month over 6 months. The only catch, is that this makes many people feel that they can afford it now. A student who was earlier travelling second class in train or at most, 3rd AC will not just be tempted, but will believe that he can afford air travel now, which he couldn’t, if he had to shell out 3k in one go.
Just because it’s a smaller chunk, we tend to buy things which we don’t need and can’t afford. Holidays are a perfect example! We Indians, are earning very well in this new decade, thanks to the opening up of our economy and IT sector especially. Our future earnings are more predictable now, compared to the past and this is the reason why most of the products are available on EMI; which makes us buy today and then pay for it for next couple of years.
Conclusion
There is nothing wrong in buying things on EMI, as long as you know what you are doing, and then only if you really need it. Don’t run after everything you can get on EMI, and don’t drown yourself in so much debt, that it gets tough to come out. Save a good amount for down payment and take debt only when buying something becomes inevitable. An early Start in Saving today will make you wealth overtime .
{ 107 comments… read them below or add one }
Dont quite agree, Manish this time.
Lets take the example of the couple with the 3-BHK flat. Recently married, they will need a 2-BHK (AT LEAST) in the next 3-4 years, as they will start a family. If they have frequent guests, like parents, (of both husband and the wife
), relatives, friends etc., they will need at least 1 bedroom extra, making it a 3-BHK, which is the minimum requirement nowadays.
There can be several other cases requiring such a flat. If either parents’ stay with them, or they plan to have 2 children or they have relatives/guests/friends staying over, a 3-BHK becomes a minimum requirement.
Also. once they buy a bigger flat, they will pay it off in say 15 or maximum 20 years, if not earlier. It takes off a big headache, once you have your roof over your head. No tension till you retire ! With property prices rising, it is a good investment too.
On the other hand, if they buy a small flat, in addition to daily problems of staying in a small place, they will have the constant headache of looking for a better,bigger property. And with increasing proces, it may not be in their reach too. So , better buy it now and finish it off.
What do you think? Do you have better ideas?
> With property prices rising, it is a good investment too.
In TierI, II cities, current property rates are almost the same or more than they were before mid-2008 recession.
With long loan tenures and rising interest rates, banks will eat up major part of the property value appreciation (if any, on and above the sum which you end up paying over the entire tenure).
Manish, can you give link to your CAGR post it is applicable here?
Earning a net 4-7% CAGR on property is not that “superb value appreciation”.
The link is given in the article
People please add house rentals to your returns. If you hadn’t gone for house via home loan, you would have anyways lived in a rented house. So, instead of paying 28000 EMI you would have paid 10,000 rent. If interest rates go up, so are house rents (they rise exponentially). So, effectively, you will be paying only 18000 more. Also think of the sentimental aspects of own home.
Finally,I know many people who earn more than 40
Sunny
I am confused at that point, if we include that rental part in the returns , we are assuming we are getting it , however we are not getting it in our hand , if we need it in our hand then we need to give the house on rent and stay ourself on rent somewhere else which would mean we also pay rent and it would cancel that income which we get from our own house , then why do you suggest we include it ?
Am i missing anything ?
Manish
Rahul
You have not take the article in right sense . I am talking about people who buy beyond their capacity just because EMI is available . I have clearly stated in the article that people who have requirement and cant do without buying something have to buy it .
What about the family (only 2 people , married) who can not afford a 3 BHK and can only afford 1 BHK . Dont they get guest or dont start a Family ? They do . They make adjustments and how many times do guests come , it also depends on that . I am little crude on this , but I personally would not like to buy a 3 BHK because my guests come for 4-5 days in a year . I rather sleep on the floor and offer them the room . Thats a better choice , atleast for the initial years till I am capable of affording a bigger house .
Another point you made was that if the couple is starting a Family soon ? Why is it neccessary to assign a seperate room to kids till they are 7-8 . You can manage thigns somehow .
We are talking about the cases where a person can not afford a bigger house .
Dont you think so ?
Manish
Amen!
Manish,
I think if you buy a smaller house and then go for a bigger one after 6-7 years, it may get out of your budget by then, especially the way India is progressing and infrastructure is developing. Practically all Indian cities are bound to expand as more and more people move to the cities and our country becomes an urban country from a rural one.
I have also seen that having 4-5 residences gives one a feeling of financial security and achievement too ! Keeping all this in mind, im all in the favor of paying steep EMIs, just within your reach (leaving just enough for daily expenditure and a 5% room for emergency exp.) to accummulate as much land/flat as possible.
In such a scenario, it makes sense to accummulate as much land(flats etc.) as possible. It is almost certain that land,flats’ prices will keep rising for the next 20-25 years. Besides, practically speaking, paying off steep EMIs just beyond your reach inculcates a habit of savings too. One has to pay the high EMIs come what may, so expenditure is automatically checked. I have seen this in numerous real life examples
What do you think?
Rahul
I get what you are saying and it makes sense for people who dont have control on their spending , then having High EMI acts like a mandatory check on them , agreed . However my point was that many people who can control themselves are also getting into the debt trap because of EMI way of selling
.
Manish
Rahul Kashyap: Please note if the property rates are rising, then even the current 1 BHK that you own has appreciated. you can sell the 1 BHK and go in for a bigger accommodation.
My economist friend in US told me to stretch the loan as far as possible in terms of years because, say 20 years from now, the value of $ or Rs for that matter, will be much less. I would rather pay 10,000 after 20 years than pay it now. As for as property is concerned, buy a bit more than what you can afford (and only) if the loan is stretched out over a long period.
Karamjit
I didnt understand how $ and Rs is related here . You always have to pay in Rupees , how is $ coming into picture into this ?
Manish
Since I live in US the payment over there is in $ but in India it is Rs. Also, in US the interest on loan is tax deductible and that is one major reason the Indians invest in property. I don’t know about Indian tax laws. The point I tried to make is whatever the currency stretch the payment.
Karamjit
I am not qualified enough to comment on your economist US friend judgement , but I see a bigger issue in your case . Over the years I see US doller weakening aginst Rupee and hence today if you have to pay 40k as premium , you pay $1000 , when over the years Dollar will weaken and will become $1 = Rs 20 , you will have to pay $2000 for the same EMI .
Thats my understanding, better confirm it with your economist friend and ask him to also tell us his thoughts/Analysis in detail , so that all can learn .
Manish
“With property prices rising, it is a good investment too.”
The same thing applies to stocks in that case . Real estate is not that clean and simple as it looks , just because property rates are increasing does not make it a good investments . There are a lot of things there .
In India people have just seen the last 10 yrs in real estate and madly going on buying real estate , while I cant deny the handsome profit one makes in some years , over a long term like 20-30 yrs, you will be amazed to see the returns in single digits , this is where the ignorance is killling indians who are going on buying real estate without understand the long term implications .
Having saying that , it does not mean real estate is bad investments, Its a great investment , but for people who understand how to play it , its not a long term game , its a short term game, and if you know when to buy and when to sell , then nothing matches real estate .
Manish
The bigger the house the more guests. If you are a nuclear family with parents in their natives, then they can be easily accommodated, as they might come just for a week and then go back. Even if they are staying with you, it’s wiser to go in for a 2 BHK than a 3 BHK. All that I have noticed during these years is young couple’s go in for a bigger accommodation and then hire maids (also have maid room) and pay around 3-4k per month to that maid to maintain their houses. This makes the lady of the house more lazy and creates more problems in the house.
It’s just a personal opinion, with due respect to people who own and also can afford to maintain such houses.
Anita
Nice , Its a different perspective
Manish
Manish, have you intentionally mentioned Disease as desease? If not, please change the spelling
Done
Manish,
Would like your view on Renting v/s Buying a property. Below are my personal views but would like your views. I am yet to buy any property in India, parents are hell bent on me buying property. I dont see value for money in today construction. When I was on vacation last december I did look at some Lodha and Oberoi construction in Mumbai and they were priced at 9000psft but the rooms were match boxed size where you put one double bed and you have to walk around carefully without hitting yourself. Nowadays more emphazies is given on elevation outside your living area.
What would you prefer to do, Rent or Buy ?
Thanks
Nipi
The first question you should ask is , are you convinced about the value you get out of it ?’ Do you plan to live there for next X yrs ? Can you live confortably after you buy the property ? If answers are YES , then you can go ahead , but if the reason for buying the property is “I will make a lot of return over long term” , then its totally wrong . Real Estate is gives no more than single digit returns over very long term .
Timing in real estate coupled with short term view , is the best way to make money .. If you feel the prices are down at the moment and you plan to sell it in couple of years then you can go ahead .
I think the real estate is over priced and will be over priced and still it will continue to rise and fall for many years , The volatility is very high .
So for a common man , the better thing would be to rent out atleast for 8-10 yrs of his career , if he can do without the emotional gratification one gets out of “owning” own home .
Rent out .
Manish
Manish – People should remember
No matter how much or how little they earn, they will never get ahead if they spend more than they earn.
Often It’s easier to spend less than it is to earn more.
“ज्यादा कमाने से कम खर्च करना आसान होता है”
Hemant
Ya , in general its true
. However in India there are many people who are so used to comfort now , who can work hard to earn more , but not lower down on consuming less 
Manish
Manish, I an agree with you that EMI is good as well as bad. If you restricting yourself upto 50% of your take home salary then it is good and if you go beyond that then it will be a problem for you.
So you have to check yourself and do not indulge in rat race with your neighbor and relatives as the financial condition of all are different.
Khalid
Instead of saying 50% of take home , I now think that a better estimate would be 75% of your total savings done in a month after expenses .
what do you say ?
Manish
I’d actually say, it should only be a third (30% – 33%)!
I meant the % the EMI should take up
30% of the total savings ? That will be too less , how one will buy anything then ? Are you sure 30% of savings ?
If a person earns 50k and his expenses are 25k , he saves 25k per month , so 30% of that is just 8k .
Manish
Nope.. I got confused. Your statement is clearer!
“75% of your total savings done in a month after expenses”
very well written, Manish could you please suggest about the Personal loan for salaried person.
Dhiraj
There is no extra caution to be taken with personal loan , personal loan by their definition is to be taken when there is no other option in life . So be prudent and take it for valid reasons . Taking personal loan to buy something on which you can wait for more time is totally idiotic .
Manish
If one were to follow some sane Wall Street experts (Peter Lynch for eg), the first investment an investor should get in is a home. Having said that, wanting to buy a 1 or 3 BHK in my view should be driven by affordability. If a young couple can invest into a 3 BHK, well fine. But maybe a cost benefit analysis should be done as to how much they could make with investing that extra that they would have saved if they invested in a 1 BHK now and using that saved money to buy a bigger flat in the future – that way, as the author mentions, they would not get suffocated today while paying. Homes, in India, are very emotinal investment assets and so one could go on arguing but as long as EMIs can be limited to 50%, investors should be good to go.
I think the point Manish is making here is that youngsters in India tend to buy into things which are not required or suitable for them at the present point of time with an amount that they stretch to afford to pay through their nose.
As Manish mentions above – as long as total EMI’s are limited to a max of 50% of net salary and the investors are saving enough for their future in a disciplined manner, flamboyance might be acceptable on a few occasions but if it persists, the investor could be in potential trouble.
Radhey
Yup , thats the correct thing . I want to make the same point that in todays urban india , youngsters are living in over debt compared to their parents . They are living riding a much expensive and bigger car than they want , they are living in a much bigger home than they require , they are replacing all the things in home with more expensive and much branded stuff which can be avoided.
The article is just about over spending and living beyond the means and how EMI way of buying things contribute to this phenomena .
Manish
HI Manish,
I totally agree with your view. I advice my friends when they buy a home, it is good if you can put 40-50% as the down payment instead of getting 90% loan amount.
I feel one should buy a car with own money, when he can really afford it. It is not at all need when you don’t have the capacity to own the car.
It is good article proper analysis!!!
Thanks,
Krishna
Krishna
Thanks , however its a great thing to buy a car once one has full cash , I am not against buying car on loan , just that a person should pay a good part in downpayment and make sure that he takes loan only for the part which is comfortable for him to pay and apart from this , he is in real need of car .
Manish
+ there is even more emotional satisfaction/gratification if you buy it all on your own…………i might be sounding out-dated…….but thts what i believe!
besides, that’s something you can even flaunt off!
Nikhil
Haha .. guess what “Buying car all on your own money and not loan is Outdated” funny
Manish
HI Manish,
I am 100% agree with your opinion. I have told many of my friends the same, but people not aware of the real value on buying properties with loan. They don’t know how much they pay as the interest part of the loan.
Thanks,
Krishna
Krishna
Yup, a lot of people dont know how much money they pay in home loans . they dont calculate
Manish
Manish,
What will rub people who are indulging in satisfying their senses in current times is your tone in the article. You are calling a spade a spade. Your article teaches the virtues which were (or are depending upon which school of thought you are in India) present in 1980′s of India. Things like “if guests do visit one could easily shift on the floor and provide them the room”. The current generation (unfortunately) will go beserk with the idea when you say this. I mean I have seen indulgence in cities like Bangalore taking peak in 2007. Eating out every single weekend when you can settle on rice and sambar occasionally was and probably is blasphemous for the current breed. Again, no offense to the people who get the idea where you are coming from. Personally, for me, you started the surgery on the most painful of nerves. I like it!!
Vinayak
Thanks for your thoughts . Regarding your comment “The current generation (unfortunately) will go beserk with the idea when you say this” . I think does not applies to a larger section . Though the section you are pointing may be a class which earns 40-50k per month kind of money which comes mainly from software section . I can say that most of the people who are in the industry come from a simple and small background where they have seen hardships and sleeping on matress etc is a common thing .
There might be some people who can go berserk by the idea of “sleeping on the floor and giving the room to guest for some days” in whole year .. but there number is less .
The issue of “living within one’s means” is becoming hard to deal with these days given the aggresive lending by Banks for each and everything + the tax breaks on Home loans is another fuel which is leading to excessive debt acquiring . We are slowing going the way US citizens are moving where their annual saving is in range of 10% to -5% , where as In India its still near 40-60% .
What do you say about this ? As a financial planner and if I remember correctly as a researcher in this area , dont people understand this very simple common sense topic ? why are they going out of way ?
Manish
“….in whole year .. but there number is less ……” –> *their!
#typo
coming to point now, i have the same question………why can’t peops understand sch a simple thing!! its no rocket science!,…….its plain common sense!……~
besides, people tend to think on v. short term basis!…….avoiding long term gains!…….& we all know the power of compounding & the returns it can get, if sch useless expenses can be diverted into investments!!…………ofcourse, provided u are ready to accept tht its not a *need*~
PS: kudos for the write-up!
Nikhil
its common sense , but tough to have
. People priority have changed in recent times , Instead of being satisfied and living simple , they want everything every fast , it can be home , car or international holidays 
Manish
Dear Manish, I’m fully agree with the soul of the topic. Some people missed it completely. Your topic is not about restricting the purchase. It’s about prioritising our ‘needs’ & ‘wants’.
In my own case, I purchased a 2BHK initially within my budget thru employer loan & now after almost 4 years, I upgraded to a 3BHK thru a bank loan.
Thanks
Ashal
Ashal
Great to hear that . Did you pay off your 2 BHK loan in 4 yrs ? Great !! . Or you are selling the 2 BHK and now upgrading to 3 BHK ?
Manish
Nice Thoughts! I accept it at some level. Can’t agree more when you say, it comes down to the person who wants the product on EMI and he is the better judge of if its a necessity/comfort/luxury!
Sriraj
Thanks for your comments
.
Manish
Very well written. Real situation and scenario have been shown. This is what happening and young people are getting engulfed. I fully agree we dont see what is being required and necessary. As a EMI facility is there so we go ahead and feel we can afford it and possess it because of various reasons except utility and requirement (in most o the cases).Fully agree with your view Manish. TRUTH IN REALITY .
Ratnesh
Thanks for your comment . Most of the young people do not understand Personal finance maths and hence do not take calculative actions . Keep coming . Are you paying any EMI , why not ?
Manish
Manish,
I liked this article immensely and echoes my sentiments exactly. I agree with you regarding the way people go overboard on the car loans and personal loans to satisfy their craze to keep up with their friends and neighbours. But I would differ on the home loans. For most people, buying a first home is an emotional decision especially if they want to occupy it for personal use. Even if the value of a self-occupied house appreciates substantially, it is only notional as you don’t want to sell it.
I want to relate my personal experience on the home purchase. We are a joint family and about 14 years back, we (my husband and I, both working and earning) purchased a 2 BHK flat in a Delhi suburb for 11 lakhs. We wanted 3 BHK flat badly but could not afford the EMIs although it costed only 2-3 lakhs more . But a few years down the line, both our incomes increased and on hindsight we repented the decision of not going for the 3 BHK flat. Now the cost of the same 3 BHK flat is close to 80 lacs which is quite unaffordable. So my point is, while deciding on the home purchase, look for present affordability as well as future earning potential. Also buying a house is any day better than renting it out if you have no plans of relocating to any other place.
Regards,
Meena
Meena
I agree that the decision would depend on the the current affordibility and the future earning potential . However in your case as you said that you were not able to afford the 3 BHK that time , does it mean that you were not able to pay any EMI if you took 3 BHK or for next several years . I think the mistake happened in not able to factor out your earning potential of future ? Correct ?
I would like to hear your views on why you said that “Buying a Home is anytime better than renting out if you are going to stay at same place? “. Under what assumptions do you say that ? Will it be true for any case , do you also consider the other alternative of investing your money some where else ? Are you biased towards emotional attachment related to this overall buying home issue ?
Manish
Hi Manish,
We anticipated that after paying EMIs for 3 BHK flat would have resulted in a liquidity crunch for some time. So we did not take the risk at that time. But what we did not factor in, was that the liquidity crunch would have lasted only for a very little time as the incomes also increased.
When I said that the buying is better than renting, is not an emotional decision but a pragmatic one. 1. For one, investing in a house is good for your asset allocation – you are spreading out your investments in Equity, debt, real estate etc. 2. I do not buy the argument that the money spent on EMIs are better deployed in other investments like MFs or stocks. Atleast in metros like NCR, the real estate gives decent returns over the years (a CAGR of 12-15% in 10 years as in my case). 3. Also renting a house has many hassles : Rents increase @ 10% p.a. and you are at the landlord’s mercy as he may ask you to vacate anytime. 4. You get very good tax breaks when you own a property.
All these are good arguments for many people to invest in atleast one property.
Regards,
Meena
Exactly my point!
and Manish you said about sleeping on the floor when a guest arrives. Really, that is taking it too far! I mean, the house you have should have some spare capacity. Homes in which we live is the best indicator of our financial status. What point is served being a crorepati, if one has to sleep on the floor if a guest comes in !! And what if by chance there are 2 guests staying overnight?? really embarrassing !
Rahul
You took it too literally
. Sleeping in the floor means sleeping on the matress , not “on the floor” 
. Dont we do it ? There will be instances when you have it no matter how big your house is , even if you have 3 BHK , It can happen that you have many guest which can be accomodated on beds and in different rooms , That is the time you always shift on the matress on the floors , Thats what I meant 
.
And it depends from person to person what is embarassing for them or not , I personally would rather be embarrased squeezing my financial life and being in debt upto neck rather than sleeping literally “on the floor”
. Its a personal choice , nothing wrong 
. What do you say on this ?
Manish
I would prefer squeezing last available drop of my finances to get a house as big as possible..:)
Rahul
Why not .. Nothing wrong on it if you decide to choose that
. Its all about saying at the end , I knew that I am doing 
. Good luck 
Manish
Meena
I will agree with some of your points .
1. Asset Allocation : Yes , you acheive asset allocation by investing in Real Estate, but in the early phase if your debt and equity is not high , then even asset alllocation is streched on real estate side much , for example , if one has just 2-3 lacs in Debt and 4-5 lacs in Equity and buy a real estate of 50 lacs , that 85% Real estate , 5% Debt and 10% Equity , though there is some asset allocation , but still most of the portfolio is in Real estate , However what you say about allocation makes sense when there is good balance between all the 3 .
2. This can depend on what kind of investor you are and your concept about “owning home” . For a investor profile like yours , it will actually not makes sense because your priorities are much different , you feel more satisfaction in “owning home” and thats your priority , however there are many readers i have interacted with and know them who are more comfortable with the option of renting out and that makes them more comfortable , It might make sense for them to deploy the EMI – rent money in other investments , at the end , if you know what you are doing makes sense .
Also regarding the returns from real estate , there are 25% returns , 15% returns and even 5-6% returns also in last 10 yrs depending on the location and timings
. In the last 10 yrs the situation has been very different and next 10 yrs will be different than those , What you get in returns as % terms at the time of selling the property will actually matter and not for the time when you actually Hold . So its my rough guess that if you live in the same flat for next 20-30 yrs and then sell the flat , you will find out that the returns over the period of times will be in single digits , may be 10% max .
Historically real estate has never given more than 9-10% over very long term (very long term again) in the last many decades (even centuries) , so I dont see why it should be different now . Real estate runs in cycles and they are long , a 10 yr return in real estate can be very differnt than very long term returns figures , while I say this , I will also say that real estate in india is promising and next 1-2 decades can be exceptional and give returns on the higher side of average till date .
3. Renting has hassles , but has advantages too , just like owning our own house has hassles and advantages of its own , so what you call as hassles might not look like hassles to some one else . Its different for different people , and every one is right for them selves
.
4. Thats very temporary and introduces some years back only, in the DTC earliar there was proposal to take the tax breaks out , but with updated draft I think its still there. no one knows if that will remain or go away in another few years . So tax breaks is not a criteria to decide if one wants to go for real estate or not . You should read subramoney.com real estate articles ,you will get a clear picture on what I am saying
Manish
Manish
Guess What Manish,
I loved the post. But what saddened me more is the most of the ‘yes sir’ responses. It tells me that the audience here is more or less aware of the issues mentioned here. Or the people who are learning about these issues here or may have already committed such mistake are just silent. But i feel, there is a vast majority of people out there who have forgotten these basics and hence the current state of affairs. There is a real need to reach out to such people. Not sure if they will come to the blog on their own or even if we suggest them.
If you ever come with any initiative to reach that category of people i’ll be very happy to lend my helping hand in what ever small way possible.
Regards
Raja
Raja
Great to hear that .
Why not take an initiative and start thinking of ways to bring these category of people to this blog or teach them about these topics somehow , what are your ideas on this , As we are in Bangalore and soon I will also do a readers meet , we can think of some offline initiative which works on one weekend in 1-2 month on these issues and try to contribute offline .
Atleast for now , your medium is your blog , so you can mention about this post there if you like
Manish
I have some thoughts on the points we discussed here. Let’s discuss those when we meet at the bangalore reader’s meet. Or may be just let me know, when you go for the next trekking trip from BMC. I’ll be very happy to join
Regards
Raja
Sure
. Do you go on BMC treks ? by the way , Neeraj who own BMC is my team mate in company 
Manish
Oh that’s great!!
No, i have never been on BMC organized treks. But would surely love to.
Regards
Raja
What is BMC ? can you share the POC details to join the trekking ? Thanks
Venkatesh
http://bmcindia.org/
Manish,
This is absolutely right. There is a big industry flourishing on “how to get you into debt trap” mantra. The best remedy against this trap is self discipline. The temptations are high which tend to divert your attention. My wife is asking me to buy own house but I have only one answer thee are expensive. She asks, Property has been expensive for last 100 years, it will never become cheap. Right but for me inexpensive means within my reach. The house I want to buy should not come bundled with Headache, High BP and insomnia. What I tell her is that we will buy a house when 1. the total cost of the house is not more than my 4 years income. 2) We have enough savings to pay a down payment of at least 30-40% of the price. 3)EMI must not be more than 10 years long. So now for me to buy a house either prices have to come down or my income has to go up. BTW I am betting on the prices to be stagnant and my income to be growing for at least next 3 years looking at the supply that is coming up in NCR. In Greater Noida alone where I live, more than 70000 units will be available within 15 Km in next 3 years.
For car, I prefer a second hand car from Maruti, It is always good. Most of the depriciation takes place in first two years so let someone else pay for that and you enjoy the ride.
Pramod
Haha , Wife is a very scary word when it comes to decision of buying Home , I have already talked to several people here who’s wives are bugging them like anything for owning house .
You are correct on the “industry working on getting everyone in Debt trap” . over the pricing of real estate , the bubble is strong and I cant say when it will burst , but whenever it does , it will be very bad day to see
.
However even if it does not burst , Still living on rent is so affordable in todays times that we can do it for next several years .. after all if everyone will buy and buy only , who will live on rent
?
Manish
Yes, Today I am residing in a flat with a rent of 7000. If I were to buy that it costs 30Lacs. At 80% loan which is 24lacs the interest @ 5% (flat equivalent to 10.5% reducing) comes out to be 10000 a month. Remember I am only talking about interest here so that comparison should be only in the costs. Add society maintenance, maintenance (paint, pest control, seapage repair), property tax, etc to the cost & surprisingly you will find that rent is cheap. Also if I add the oppertunity costs i.e. investing the EMI and front cost minus rent in a MF with only 10% return it will become 1.32 Cr in 15 years so if the flat in which I live today is available for 1.32 Cr after 15 years, its OK, Nothing to worry.
, Will you ever get such wonderful chance to enhance you luck so easily in your own house 
Secondly detatch emotions from house & treat it like a commodity. I often ask people when you dont have car do you whine about using public transport or do you feel embarassed about hiring a taxi. If no then why the hell you shy living on rent. Just pay that cheque & save all the bothers of becoming a landlord. One more benefit of rented house ” You can always change it easily when your astrologer tells you that it is not VASTU Compliant
Way to go!!! We need many more pramods & manishs!!!
Pramod
you are one of the rare found die hard fan of renting
. While your views are more biased on renting , which I fully agree 
. You have taken out some of the things which drive people to own home and that can be pure emotional reasons and its fine 
. Some people will feel suffocated enough to live in rented house and the idea of not having their own home will kill them each day , this idea of renting if better than owning and blah blah will not work on them no matter what one does 
While I am with you on renting , the point I want to make is renting vs buying has its own positives and negatives and nothing wrong about it , just that a person should understand which boat he wants to sail in
What do you say pramod ? Read Meena’s comments above , you will get what I am saying
Manish
Manish,
And also we have seen many old people who spent their lifetiime savings owning a house and are still struggling to meet lifes basics in the last stage of the life. Is house really an investment ? So remember 1st house is always a commodity that you are going to use and 2nd, 3rd …nth property is investment only so do not buy the argument of returns however use these “returns” to check the affordabilty factor for you say X years down the line if you will still be able to buy that flat.
I am a fan of renting as long as the rent remains with in the 3-4% range of the property value. As I shared with group I am also planning to buy a house but only when it is affordable. I do not want to spend next 20 years of my life in stress & sacrifices. As far as Meena’s points are concerned, I am 120% in agreement with her on point no. 3 and that is the single most reason that provoke many to buy a house. But in these days of apartments you can negotiate well as owners know that an empty flat is going to cost him the maintenance and it always depend on your relations as well as demand supply situation.
Coming to other three. Point 1- House as investment, An investment by def. is something which you are going to encash upon value appreciation. So your first house is never going to fit into this axiom. Are you going to sell it after 20 years ? 99.9% people wont, so what kind of investment?
2. The investment in MF vs Real estate depends upon your kitty. Till the time I have 5-6 lacs accumulated cant even dream of buying a property even on loan so it always depaend on your networth and no arguments on this point as it is very personal.
3. On this point I agree but again it is emotional and depends on market. In Gr Noida where I live 50% city is empty so no dearth of flats on rent and I can negotiate.
4. This is one thing which comes as the ultimate logic for buying a house. Lets see. The principle amount is incl in 80C so after PF, Children fees & insurance what the hell is left. For interest you can claim amx 1.5 Lacs. Any one who can buy a house worth 30Lacs must be earning 50K & in this salary the HRA usualy is 10000 approx. so if you take benefits of 1.5l interest payment you have to forego 1.2 lacs benefits of HRA which brings it down to 30k. Is it worth to buy a house to save maximum 9000Rs. Better not watch some crapy movies and save 200 rs on a popcorn which is available for 10 Rs outside the cinema hall.
Finally indeed renting and owning has its own pros and cons but here we are discussing these things from personal finance angle not emotional otherwise nothing can replace the joy that I can see on the faces of may family if I take them to switzerland but can I afford it
Pramod
You have made some excellent points
. However on one point I would like to comment . You said
“Are you going to sell it after 20 years ? 99.9% people wont, so what kind of investment?”
Yes, you are correct that most of the people would not like to sell and will not sell. However if the price of the house is a lot and one has got soem good return like 15-16% CAGR in last 20 yrs, one will be sitting on a very expensive house
and it can act as like an emergency fund to them , If a person house is costing say 2 crores and they can buy the same kind of flat on the other place at 1 crore , may be in other city , in the times of job crises and loss of income , one has an option of selling the first home and moving to the same quality/size house at other place and cash on the rest in some instrument which will act as a monthly income to them .
So overall I would say , even if a person does not sell a house , he/she has some good unused advantages
.
the conversation on this topic is so mind blowing that its time to use this whole conversation in a seperate post and lets brain storm on the whole idea of buying verses renting along with other readers
Manish
Manish
I totally agree with Manish’s views that even if you have no plans of selling your house, you are sitting on a wealth which would give great peace of mind when you have repaid all the EMIs and the house is all yours. My father bought a house in a prime locality in Delhi 40 years back for Rs 30,000. I calculated the CAGR of the property keeping the current market value in mind. It is a cool 18% return that we see here. If my father had thought like Pramod and other fans of renting, he would have a tougher life as a retired person living in a rented accomodation in some outskirts where rents are cheaper.
I also agree with Pramod that the first house is more a commodity than an investment. But if you are not going to buy the first house, where is the question of buying second property as investment. The tax benefits of the second home (if you can afford) is even better. You can get the deduction of the entire interest amt from the taxable income. So by totally ignoring this avenue of wealth creation, you are missing out a vital component of your asset building. Mind you, I am not discounting the importance of PPFs, MFs etc here.
I am still a great fan of owning the house in spite of very persuasive arguments put forth by Pramod, Manish and others in favour of renting
-Meena
Wow!! that’s a really a interesting conversation going on here. Just would like to add my 2 cents here.
1. Rental price as we discussed, is a function of demand and supply. Essentially meaning that the renter is not so much in control of how much he might have to pay for the same accommodation on a future date. Just calculating it as 3-4% of the current property price and ruling out the future rental price appreciation doesn’t sound too prudent to me. When a person buys a house on loan he basically locks in his outgo in form of EMI to a certain extent. Of course drastic interest rate changes on upside can alter his calculations. But i think in the mid to distant future India has a better chance of seeing interest rates softening like so many developed nations than it moving drastically up from current 10% range. Whereas when someone is depending on rental mode of accomodation he is exposing himself to drastic future variations in rent.
Take for example the case of a tier-2 city like Bhubaneswar. Not so long ago (around 5 years back) the rent for a decent 2 bhk used to be in the range of 2-3.5 k. In just 5 years time it has sky rocketed to the range of 6-8k for the same accomodation. The rise is mainly attributed to a rerating of the city as small IT hub and factor’s like growing number of IT professional employed with Infy, Wipro, Satyam etc…Now someone who had the affordability to buy a house 5 yrs back but didn’t do it is surely ruing the decision. Of course property prices too have risen in similar fashion so buying now is even more difficult.
2. I am not aware of the statistics but i guess most of the new houses are bought by people when they are of marriage age. So, probably the age profile will be in the range 26-34. This means the main cash outgo in form of EMI will be ove by the time they in age range range of 41-49 (Assuming an average 15 yr loan). There is a good 16-24 yrs of life left after that (Assuming life expectancy of 65 years). What am trying to say is with buying a house one will be done with the most of hard work in his prime working years. Whereas rent is a never ending story, one has to keep on paying the rents for his lifetime.
3. Reverse mortgage – Even if one were to see some bad time during old age reverse mortgage can come to rescue.
4. If the roof over the head is assured it’s easier to live off one’s savings for few months/years if one were to see bad times in form of loss of income. isn’t it ?? I mean it’s not impossible to live with just food-transport-communication expenses in the bad times. Add the rental expenses to this list of expense and suddently the it would seem little difficult to manage. Of course the assumption here is the bad times are after one has paid off the EMI’s
Regards
Raja
Nice views
Excellent Point Man,
I live in bangalore and even if i can afford, i do not plan to buy a car. for going to office I get a cab, for small distances i use cycle( health benefits free) and how many times i go out. With Bangalore’ traffic it is a pain to park in malls on weekends, i simply use bus or auto. So the overalls sums i spend on autos and rented cabs is still pittance compared to maintaining a car.
Same case with me
. Good points 
Manish
The best part of rented house i like the most is that you can leave the house whenever u want… u may shift from 1 bhk to 2 bhk to 3 bhk in a matter of few days….
do we have such flexibility in our own house…..
secondly in ur own house, u have to take careof every small thing…. from every single breakdown, to all repair & maintenance…. the cost of ur property may go up & down… plus u have to pay interest on ur loan and u leave the chance for growth in the value, had u put that downpayment for purpose of investment….
Anuj
You should read the comments of Meena above , there are many people which are in favour of Owning own , while I agree with your points, while you can leave your rent house anytime
, it can be very difficult and bad situation when owner asks you to leave at anytime he wants and may be that time is very inconvinient for you 
Manish
This is really a fantastic article and in fact this reflects my life . A few years ago, I made a mistake of buying a huge house without thinking about the future. Since the interest rates were low, it looked affordable and I bought it . 2 years ago, when recession stuck the industry, the interest rates shot up and the EMI used to eat up my “ENTIRE” salary and I was in a big shit.
Venkatesh
This reflects a lot of people life who are not speaking up or have not read this article
. We have to take into affect current as well as future consequences 
Manish
Dear Manish
This is a beautifully scripted article from you and really an eye opener..
Hats off to you..
Regards
Atul
Nice to hear that you liked it
. Keep coming 
Manish
Hi Manish,
I am a silent reader of your blog. I have real experience of buying a huge house and regretting now. I bought a house in chennai with 90% (yes really) as loan. Though myself and wife are working professionals and afford ( 60% of take home of our income) to pay back loan, i still think it was a bad decision. Though my wife’s wish for own,bigger house had bigger influence in taking that decision, i will owe it to the zero/little financial planning of myself.
Below are the some of the reason that it was a bad decision:
1. We bought house which was so big ( two times of our need)
2. Finding hard to do asset diversification
3. Having a plan to start own business venture. This loan emi will have huge influence in making it real.
4. Hard to Help my close relatives/friends while they are in real crisis
5. Sometime there are arguments between me and my wife because of this decision.
We have a happy life but still this loan always in mind what ever we do.
So friends if you thinking that buying a great home will bring great HAPPINESS , it may not be true. My point is take more time to analyze before coming the decision.
Murali
yes , thanks for shaing your story , I think the mistake you did was overshooting your requirement and being in more debt than you should be , What I think is if you would have put even 3-4 hour of actual quality thinking about this decision of buying house , you could have settled with a smaller home which suits you and you could have paid less for that and now your over situation would be good .
Why dnt you sell you current house and again move to smaller house , whats the blocking point ?
Manish
If you are buying an flat, you need to consider depreciation over the period of time. This is something missed out.
Well have written my thought in my blog as well.
http://indian-amps.blogspot.com/2010/07/4-common-debt-trap-to-avoid.html
Guha
thanks for providing your thoughts on this , well appreciated
Manish
Hi Manish & all,
Good article.
I had a question If some one has amount in hand to buy a House (let say 25Lcah),Is it
good still to take loan or its good to pay all amount from pocket.
Whats the best approach is such cases ?
Regards
Yogesh
Yogesh
Govt gives attractive tax breaks for House loan , so one should take that opportunity
Even if you have 100% of money for buying house, you can look at taking some house loan which is affordable to you and keep the tenure less lik 5-6 yr so that you can take benefit of tax deductions
and also dont streach your finances .
Manish
manish! perfect yar…
I agree with your point…. Thanxs for good article…
Nice . keep coming
Manish
this article has lots of valid points. The comments part is more interesting. I can see people debating over renting Vs. buying advantages and disadvantages. One point I would like to make in case of buying a real estate(Flat or bungalow to be specific). As most of the readers says that real estate appreciates over time in terms of price but we should also consider the it’s depreciation over the period of 15 or 20 years. Many of you may not agree on it but looking at the current poor construction quality that builders provide how many of you seriously think that the house will last for another 40 or 50 years ? What if your property(house) didn’t appreciate after X years as you expect it to be since it ended up with lot of construction flaws ?
any more input on this
Amol
Yup , thats a good point actually which even I didnt think about . So the houses which are bought today , what are the possibilities of that house being around after 50 yrs or say 75 yrs, Can we use it as something which can be handed over to next generation ? How many buildings do we see in todays world which are 50 yrs old ? They are mostly independent houses which are build on land and that too we can see in Mumbai and Delhi and places like those .
Manish
Manish,
Today, we can see the buildings which are 40-50 years old. The real fun starts when you actually start living in such houses. One has to count on maintenance issues that occurs day by day. So, after X years (which is quite big numbers like 15-20) one can not claim same price to such old apartment that any new apartment costs. It’s very logical as to why someone want to pay same prices to something which is 15-20 years when the new apartment costs same. And this depreciation figure should increase with time.
Moreover, when I say above I am still talking about the constructions which I can see today. So they are built prior to 20-30 years from now when the construction quality must be good because of less competition and many other factors. Now a days people(not necessarily all but many of them) start complaining about their construction flaws immediate after they start living at that place. Through web media, there is a huge discussion going one online where people share their experiences(construction flaws) with newly built homes.
You can probably post a new article and invite people to share their post buying experiences(in different cities, if required). I am sure you will get huge response.
Manish,
I have a question.
What do you advice if I have the spare cash to buy a car with full payment.Should I go in for a loan(as some suggest that since car is a depreciating asset I should leave the risk to the lender) or should I buy it with cash.
Assuming I have 5 Lakhs in hand at the moment.If I invest in a mutual fund for 5 years and I buy the car in a loan of say 10% P.A.Would that be the correct option?
Venkatesh
You should buy with cash. It does not matter for the lender how your asset is doing, he will get the same amount if asset is appreciating or depreciating . You should be worried for depreciation .
Manish
Amol
Yup , I agree with you
. I think the rise in appreciation would slow down , Note that I am not saying about appreciation , I am saying rise in appreciation , so first few years its increasing like 10-20% , then just 8-10% and then may be stay stagnant or may be decrease because of the property condition .
Manish
dear manish , is it stll advisable to open a PPF account when the present govt is planning to remove tax exemption for the amount which investors get finally?
kindly reply…
With the revised draft , now PPF is not taxable at end .
Manish
This indeed is an interesting topic especially for me since I am getting married soon.
During my bachelor days I never really paid attention to Real Estate /owning an House etc. But Now I find my thoughts very much wandering across the EMI Vs Rent Debate.
Me and my fiancée both are working in the so called IT industry and combined income of ours is sufficient to buy a house with 30K EMI. This EMI would be 1/3rd of our combined monthly gross salary and even after EMI deduction we would have enough cash left to live a good life.
Inspite of this I do not intend to buy a house in immediate future. The reasons for this are many which I would list in order of importance
1. Even though our combined gross income is High but still not enough to pay EMI for a 2BHK house in case my wife decides to quit job after we have Kids. I am very much reluctant to make her share this burden for the rest of her life.
2. I am currently working in Gurgaon but I don’t want to settle down here because of not sufficient job opportunities in my field. Our company is headquartered in Bangalore and can any time wind up Gurgaon operations. Moreover I would like to keep my options open in case I get a good JOB offer at any other place. And lastly Gurgaon’s properly market is Highly inflated without any Infrastructure in place
3. Lastly Real estate market is full of speculators and very few end users and I have a feeling that this is not the right time to buy. I will never buy into speculative theory arguing that Real estate price will always increase. People seem to forget the nineties housing bubble which lasted for 10 years.
So instead of owning so called dream house I have decided to tread this path.
1. Rent a good house near to place of work for around 20% of take home salary, save the commuting time and spend the quality time together during early phase of marriage.
2. Invest around 30 % of gross in mutual funds/ppf/fixed deposits etc. A good portfolio of diversified, balanced mutual funds along with PPF is good strategy for long run.
3. Keep 10% of salary available for meeting emergency funds
4. That still leaves 40% of salary to be used in household expenses, shopping, movies etc.
5. Also I don’t own a vehicle as of now but need to plan as the public transport situation in Gurgaon is pathetic. Since we both would be living near to place of our work we only require transport during weekends etc. Still in dilemma whether to buy a four wheeler or two wheeler.
Fortunately my fiancée agrees with my plan and I need not worry about that dream house which would make us fixated to a place for rest of our lives so early.
Ajay
Good to see crystal clear clarity on what you want , you are on right path . Here is my take on your situation . Most of the people by 4 wheeler even if there are just 2 of them (hunband and wife) for “god-knows-why” reason . If the reason is “I am passionate about 4 wheeler” , thats a different case , but You can always have just a 2 wheeler , if one has money today for 4 wheeler , just keep it somewhere to buy 4 wheeler at some later point when you “really” require . I see 4 wheeler more of requirement rather than enjoyment , I am biased
As you have future plans of moving to some other city like Bangalore or Hyd . You can consider buying a property which is fairly priced in Bangalore or Hyd and comes under your budget and for some time live on rent in Gurgaon , this will demand a tight hand as you will have two commitment (rent and EMI) , but considering you guys are earning close to 80-90k and your wife would be earning for some more years . It shoudl be acceptable, The assumption here is that real estate price will move up in next 4-5 yrs in this case.
The other thing which you can do is to live on rent and aggresively invest money till you can see next real estate bear market which can be anytime around the corner and use that opportunity to buy a home that time . You should not be disheartened if prices dont come down for some more year. . whenever it does , it will be big and one has to act fast that time
.
Overall very good comment from your side . Nice one , You might want to read the latest article on real estate : http://www.jagoinvestor.com/2010/09/3-thought-provoking-questions-before-you-buy-real-estate.html
Manish
Manish
For many, 4 wheeler is safer than 2 wheeler.
Thanks a lot Manish
Definitely Agree with your thoughts, Makes a lot of sense.
I think the only time I would buy a house is when I can pay EMI of not more that 33% of my salary alone. As you rightly mentioned I should plan aggressive investment which I have already started using SIP of 10K per month in mutual funds varying from mid caps, large caps and balanced funds,
Besides this I would be investing in debt primarily via PPF.
Since my SIP portfolio is a bit on aggressive side I would also plan my wife’s portfolio on a bit safer side. That would require some more planning later.
I certainly can wait till time when property prices are reasonable and I can minimize the EMI burden.
As far two wheeler vs four wheeler is concerned the issue with two wheeler is as follows.
1. Risky in Gurgaon like city as people lack driving ethics. With fairly wide roads and relatively less traffic everyone on road seems to be riding a formula one car.
2.Extreme climatic conditions in Gurgaon. Unlike Bangalore here winters are chilly, summers are unbearable and in monsoons its wet everywhere.
3. Because of mall culture we still have to rely on malls for some household items which cannot be carried on a two wheeler.
Ajay
Ok great , Go for 4 wheeler then
.
Manish
Absolutely agree with you.
Infact, I have seen so many on mine non-finance friends so much un-aware of down side of EMIs. Sometime back, I actually wrote on my blog how to compute EMI (in MS Excel, which most of the PC has).
I am putting the link here to the same, hoping it will be useful to everyone
http://ivijay.blogspot.com/2010/10/how-to-compute-equated-monthly.html
Not sure, whether your comment policy allows link sharing… if not kindly delete this comment.
Vijay
thanks for your comment
Manish
Truly said, “Its better to live in a 1 BHK and breathe easy, rather than a 3 BHK and suffocate every day from the burden of the heavy EMI”.
Vivek
Thanks , have you experienced this part in your life ?
Manish