Most of my classmates and friends have started purchasing houses. This coupled with the fact that I am in coveted DINK (double income no kids) group now have prompted me to do some preliminary research on buying a house. In my quest few things became obvious,
- Any house worth its tiles costs more than a million rupees.
- For a first house 2bhk is ok, 3bhk is good.
- An apartment with 2bhk in Chennai (where we would be based for a while) costs atleast 15L (that is on the lower side, it might be upwards of 20L)
- Making a quick decision on whether or not to have your own roof is not so easy.
So I have come up with a way to decide it based on pure numbers (obviously using excel). Here it is.
At the outset the choices are whether (1) to invest in house or (2) to invest the money somewhere while paying the rents.
The cash flows associated with (1) are: EMIs, One time down payment, tax benefits on interest and principal. And at the end of the period house value if I decide to sell. I have assumed that I would sell it off.
The cash flows for (2) are: rent, tax benefits on HRA, any appreciation of money (EMIs) through investments and tax paid on the same
The variables that control the net present value (npv) of these investments are,
- monthly rent
- basic & hra (to calculate the tax benefits on hra)
- growth rates in basic sal and rent YoY
- cost of the house
- loan %age & tenure
- interest rate (assumed to fixed through out)
- house value appreciation %age YoY
- maximum allowed tax free interest & principal payments
- tax rate
- returns on your investments if you invest it elsewhere
- returns on 5 yr. bank FD.
A sample set of values are shown aside.
My guess is you need about 4 seconds for each of these 15 values. Once you know them, you can generate the cashflow for both buy and rent options. As you can see, for this set the npv of rent is higher than buy.
1. House value need to appreciate at really high rates for it to become attractive. Something like 12% YoY. Given the current property prices, 12-15% growth may be unreasonable over a horizon of 12-20 years.
2. On the contrary even if your investments generate a modest 11% return they could be worth so much more than the house.
3. As house cost goes up so is the attractiveness of the rent option.
I have decided not to buy a house although not entirely based on this. I want to give some more time to myself and that little freedom of having a bulging savings account or whatever.
But if you want to play around and find out if the house is actually working out for you can download the excel sheet I have made. Just use the sliders to change the values, have fun. And let me know how it is. Download the house investment decision maker excel sheet