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POSTED BY ON May 29, 2013 7:05 pm COMMENTS (23)
What would you do if you are faced with this dilemma?
Jack stays in a rented accomodation. Jacks longs to stay in a house of his own. However:
1. If he takes a home loan there is a danger that he might never invest enough for retirement due to the EMI. He has only considered houses very similar to or even lower in facilities than his rented accomodation. He has considerd all possibilities of loan durations etc.
2. If he chooses to stay on rent forever he will have to treat rent as an expense in retirement. If he does, the amount he needs to invest is way more than he can manage.
3. He has considered increase in investment due to income increase down the line.
4. He has considered taking a loan, closing it early and investing all he can later.
The problem remains:
Thats is even if the emi equals the rent and emi stops says 15 years from now, the probabilitiy of achieving the retirement corpus needed is low.
Of course possibilities like working longer etc. is possible. However Jack is 30. No one can predict if he can or cannot work 30 years from now.
What would you do?
Note: I am not Jack. I am considering making a rent vs. buy calculator. But no calculator will help solve this dilemma. Hence looking for opinions.
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i think , one may dare to compromise /make a part of retirement planning a house buying in the circumstances stated in query , particularly ‘Thats is even if the emi equals the rent and emi stops says 15 years from now’.i presume the house to be bought is in urban area. in case of need , in retirement , the house could be utilized as equity, i.e. sold off , and shifting to cheaper place then. and there will be still 15 yrs after completion of emi.
Thanks. Mathematically viable perhaps but how may would, 15 years prior to retirement sell their house and shift to a less expensive place? probably only those who see the reality of their retirement corpus staring at them
@FFC
I am not asking to sell 15 yrs. prior to retirement.it is to be sold only after retirement , in case of need. what i am suggesting , if the emi equals the rent and emi stops says 15 years from now, then one may dare to buy (as , anyhow, he has no extra expenses , on the contrary, he is protected by same EMI for 15 yrs, instead of increasing rent, in case of renting). , and as such , his saving for retirement goal remains intact for these 15 yrs. and next 15 yrs after completion of EMI. of course he may have to use his accumulated fund for providing required down payment. however considering his age 30, he can make up .
Fine. the practical aspects of emotion and family remain.
Retirement goals never remain constant for anyone. They change each year and definitely by a large amount over 15 years for someone who has not be contributing enough.
Whether he can make up or not depends on many factors. i am only considering a situation where he cannot make up.
Dear Ashish, Reverse Mortgage is about generating cash by way of loan from the existing residential property in your retired life while you are falling short on money for your regular expenses.
Regarding the retirement homes, we are talking here for 2045-2050 & onwards period.
Thanks
Ashal
Dear Ashal,
Be it 2045-2050 or later, these retirement homes so not come cheap. being working in Real Estate industry as Marketing person I understand the planning that goes into a retirement home.
In order to keep them economical, developers have no option but to look at either distant locations which are not at radar as of now or price them very close to an affordable housing project. Therefore buying a retirement home in a city, today or even in future lets say 2045-2050, it will be same as buying an apartment today.
The concept may pick up in coming years but still the question remains, can a developer sell these homes at a much lesser price than the regular homes available in market?
Ashsih
Dear FFC, I want to add one dimention here. Instead of purchasing right now & full house, one may think to purchase a retirement specific accommodation (Retirement homes or Sr. citizen Homes), which ‘ll certainly cost less than a normal house in post retired life.
thanks
Ashal
Dear Ashal,
The idea is good, but there are a very few developers who are into retirement homes / senior living homes as it is yet to pick up. Therefore if someone wish to go for such houses the location (at present) is a hurdle. I know of such homes in Bhiwadi (close to Delhi), Lavasa (close to Pune), Bangalore and Mysore but again these may not be very cheap, though their may be a price discount of about 10-15% over an affordable home in that area.
I heard something about reverse mortgaging but not sure about how it works and would it be any use?
Ashish
Ashish,
fund from Rev. Mortage will typically not be enough for financial freedom during retirement.
Also there will be personal and emotional issues attached. Best not to depend on it.
Ashal,
It is a nice idea and it is certainly part of my personal plans! However it may be difficult to convince someone in 30s about this idea. Not owning a roof has severe emotional issues attached.
Have you looked at this:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0
However, in the above a major point is does EMI equal Rent? As a general thumb rule, if the rental cost is <3-4%, which in actual terms as an example means a rent of upto 16k for a house of 50L, then it is ‘cheaper’ to be on rental. While if it is more AND there are funds, buying makes a lot of sense.
Thanks for the link. it is a very good calculator.
‘itrust has a very similar one.
Radhey Sharma (Wealth Wisher blog) has a comprehensive calculator.
Trouble with all these
1. As you mentioned rent as a fraction of property cost and cost of appreciation of property are crucial is deciding.
2 is they do not factor in retirement. So when we ask someone to rent on the basis of these calculators, we need to ask them if they can afford to save enough if rent is an expense in retirement
3. if we ask them to buy we need to again see if they have enough time to invest enough for retirement.
The complexity involved is not something can be resolved by math.
As mentioned by Ashish, I guess all one can do is buy as early as possible and take our chances.
“buy as early as possible and take our chances.”
That is an out-an-out emotional response to the situation with no regard to the actual costs and the risks.
If one is so emotionally involved in buying a house (at any price), then there is no need for the calculator. Maths cannot compete with emotions.
The appreciation cannot be ascertained.
Retirement corpus is a different thing altogether. Maybe you need to really put some actual world numbers to give you an idea, and to run those numbers across say last 5,7,10 years scenario.
I find it a big problem if someone has money to buy a house but not to rent and fund the retirement. Mathematically, it appears to be an impossible scene. But I have not made any calculations yet.
What if one has money to buy house but cannot afford in the area where he wants to stay and his family is comfortable to settle in that area? (my situation)
Should one still defer to purchase a house, or purchase in outskirts where property may be cheaper (and at one’s younger age)….
I may be crucified for asking this query repeatedly, but taking different opinions should be ok.
Financial planning done, retirement SIPs in place and not planning to compromise the same.
Rgds,
Jassi
If you cannot afford to buy in an area where you want == just means you cannot afford buying & Renting is the only option provided you want to live in that place. No question of bringing emotional needs in here. You just do not have the money to buy. Period.
If you are purchasing a house somewhere else, then it just becomes an exercise of investment (and not for consumption, as above) and then other investment instruments come into picture with risk/reward ratio of each of them competing with each other. Do you think equity returns are more than real-estate returns and you have the expertise for doing that? Etc.
The above does not change anything about your rest of the FP, SIPs, etc.
Thanks for your earlier comment, Ramesh. Blatant truth…
Yes, read many a time at Subramoney’s blog that Real estate returns are less than equity returns in long term….
So one should not buy real estate even from asset allocation, diversification point of view. And should buy only when one can afford for own consumption, even if its post retirement??
Rgds,
Jassi
Not at all.
Real-estate investment should be done for Diversification purpose, but only after considering things properly.
For eg:
1. It should not form 80% of your corpus not because it provides less return, but because 80% of money locked in an illiquid (or not-so-easily-liquifiable) asset is risky.
2. A single real-estate investment. Is that diversification? That is akin to saying a single stock. 4-5 real-estate locations at different places = that is a reasonable diversification, I would say.
3. No, there are no REITs currently available within India. There are some PE ventures but those are too opaque as compared to a similar investment vehicle like MFs.
4. There are 2 international funds which deal with Real-estate. Check them out and see if they are fit for you.
5. Buying RE when you cannot afford it from your own pocket and have to depend on Loan – that is a big no-no. While, you have the money to buy it and you are still getting a loan after making proper calculations of the return of your money vs loan, then yes go ahead.
The real questions are:
1. Is it consumption or investment? Investment horizon vs expectations with consideration of rental yield.
2. Source of money to buy?
3. Single place or multiple places.
I agree that math cannot compete with emotion. However not all emotions can be tagged as illogical.
Chances here refers to a person hoping that income will increase in years to come. May or may not happen.
A 30 year who says I am tired of living in rent all my life. I will buy what I can afford and hope I can later make up for delay/insufficient retirement investing cannot be criticized.
All one can do is make all the facts and possibilities clear to him.
This is not done in the buy vs rent calculators.
Thanks Ramesh for a detailed long answer.
4-5 real-estate locations at different places :). Looks like a full time job to buy and manage the properties…….
International funds — never thought on this…
for own consumption, whats the rule to buy? how much % loan should one take?
Is the thinking ok, to buy one at younger age, sell at near retirement and move to a better smaller place?
Rgds,
Jassi
International Real-estate funds (eg ING ‘s fund). As well partly the L&T Real Assets (feeder) fund.
I was just telling you the diversification part. Otherwise, it just becomes a ‘hope i got it right’ investment.
I would agree to at least a 50% downpayment power for self-consumption house. Otherwise, keep delaying it.
That thinking assumes that Real-estate always goes up and provides a risk-reward which cannot be had in any other asset class. Is that a realistic scenario?
Dear FFC,
I can correlate myself to this situation. Before buying my own apartment, I was staying with parents / relative’s rent free accommodation. I was 31 when I bought my apartment taking a home loan. At that time loan amount looked big and tenure of loan was 15 years.
I had the same dilemma, should I purchase or stay in a rented accommodation. But then I chose to go for home loan and purchase. I moved into a ready to occupy unit so that I don’t have to pay any rent and continue to pay EMIs. At the age of 30-35, you have greater chances of growth in income and same happened with me. Loan was closed in a lesser duration than initially anticipated 15 years. The EMIs gave me tax benefit and thus I could save more.
Now at 37, I am in a loan free accommodation and now saving for the current goals (child’s education, his marriage and my retirement). For me it was a lot easier since ours is a double income family but for a single income family it may not be as easy but even in such case, I would still vouch for buying own property at an early stage.
Ashish
Dear Ashish,
Thank you for sharing your experience.
There are two aspects to this issue:
As an individual I fully agree with you: Buy something affordable as early as possible and take a chance. This is what I will also do.
As an enthusiast and certainly when you sit down to use or make a calculator, this problem is troubling.
These days many people have started asking me this question and I tell them to factor retirement in the problem. For a person with low salary I find it difficult to ask them to buy.
Dear FFC,
Yes I agree with low salary and real estate rates going up, it is difficult to purchase / invest in real estate. In such a scenario, I feel the person should concentrate on retirement as a goal and continue to stay in rented accommodations.
For example a person earning about 20000 with monthly household expenses of 9000 (including education fee etc), rent of about 6000 and other average investments of say 2000 (insurance, RD, FD, MF etc) he will not be able to afford home loan EMIs and thus best is to stay on rent and keep increasing his investments as and when their is income growth. I think he would be better off with more funds after retirement and can possibly take care of rent and other expenses even after retirement.
Ashish