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Even worse, when you finally want to buy, the bar would have moved. That 2 crore house you want to save for? By the time you'd have saved 2 crores, that house would be worth 3.5, you'd have spent 12 years on rent, and worse, you'd have outgrown the 2 crore house and now want a 5 crore house.
Don't put off consumption. Home loan EMIs are one of the best things since sliced bread, provided you keep them under control, and have reasonable confidence in your repayment capacity.
Never buy the cheapest house that you can find. There's a world of difference between a 1 crore and a 1.2 crore house in the same complex, and you will find yourself wishing you had spent more on the more premium house. In the long run, it is easier to sell or rent the 1.2 crore house, as it has more premium features, and many buyers and potential tenants are willing to pay extra for it.
Take the biggest loan you can get. If you can afford to pay 1 lakh a month, you can take a loan of 1.25 crores for 20 years. But if it is a 10 year loan, you can only take an 85 lakh loan. This means that you can buy a 1.5 crore house on a 20 year loan, but a 1.1 crore house on a 10 year loan. After a few months, you will wish you had bought the bigger and fancier house, instead of "settling" for the cheaper house. A more premium house makes a huge difference to your quality of life.
A 20-year loan is not actually a 20-year loan. Everyone I knew managed to close their 20-year loans in 10-12 years, because of rising incomes and regular prepayments. I even know people who have closed it in 6-7 years.
Moving on to whether to own or rent a house , this is ultimately a personal call that depends on many factors. IMO, if you have certainty about staying in one place for at least 5-6 years, go ahead and buy. If you are unsure, then rent.
If you are looking at a house as an investment, stop right now. Put the money in an index fund instead. The hassles of being an investor-owner are many, and there is a glut of apartments right now.
Home ownership is not a financial investment. It is an investment in your own quality of life. Once you realize this, it will change your entire perspective.
Having said that, the advice given by 9.1 is absolutely correct. If you want more friendly advice, I would do the following:
1. 6*your current monthly salary in FDs which is basically cash
2. Max out your 80C investments (you seem to be doing PF already but if some of that 1.5l limit is left then do NPS or an ELSS mutual fund);
3. 20-30% of the monthly salary should be invested in an index fund that tracks NIFTY or SENSEX. It needs to be via an SIP so you get the benefit of dollar cost averaging;
4. 20-30% can be in debt mutual funds. This depends on personal tastes and age. I am younger and have more risk appetite so I invest in debt MFs minimally, and redirect this 20-30% to #3 above or other index funds such as those that track NASDAQ and Dow Jones;
5. I use 10-20% of my monthly salary for stocks I like. Again, you need to buy quality stocks over a period and hold over a period to get the advantage of dollar cost averaging and for the value in these quality stocks to be unlocked. In case one does not like to pick stocks or does not have the ability, redirect these funds to #3 above.
6. I presume the balance salary gets spent.
7. I just keep like 1-2 lakhs in actual cash for expenses in my bank account.
8. If you are buying a house, can offset EMI costs against debt MF allocation under #4.
9. Also, please buy health insurance. And a decent LIC life insurance policy.
Lastly, while above is good advice for anyone, specifically for SA, since you already a lot of cash stacked up, I would increase the percentages under #3, #4, #5 appropriately so that aggregate monthly investment is greater than your salary and you need to dip into your cash savings every month. Once the cash savings are invested over a period of time (again you will get the benefit of dollar-cost averaging), and you portfolio is normalised/balanced, you can as per the pointers above.
Cheers!
For that matter if you were to take a 700 sq. ft. - 1000 sq. ft. 2 BHK in Andheri West or Vile Parle West, it would cost in the range of 1.8-2.25 cr.
Kudos to the guy who sold his 1 BHK to buy his own 2 BHK.
For anyone looking for good advice about buying a house, comment #3 is on point.
@LI mods - isnt this trollish ?
If your question is: how do I take a call between buying and renting, then it's a question of which is a more financially prudent decision. The moment a question turns on financial prudence, then the relative dis / advantage of an asset class becomes relevant.
On your point about home loan rates, IIRC this is the lowest home loan interest rates have ever reached. So, it's a great time from that standpoint. However, since all loans are now MCLR+ based, they're floating and it is more likely than not that the interest rates will rise rather than fall in the medium to long term. That being the case, you'll need to keep a little buffer for the maximum EMI outgo you'll want if the rates increase. So, while doing my calculations, I'll keep this in mind. I'd assume 10% at least as a margin of safety.
- have you bought a house or planning to buy or renting?
- if bought or planning to buy, what kind of range you are looking at?
- how much of an EMI are you planning to take up? Higher EMI for 10 years or lower EMI for 20 years?
- apart from noida any good neighbourhoods to buy my first (and perhaps my only) house
Just saw Kotak has reduced home loan rates to 6.5%
The Nifty50 Total Index Return (ie NIFTY50 with dividends reinvested aka growth MF) gave 15x returns over 21 years (https://in.investing.com/indices/nifty-total-returns). So ~13.8% CAGR, which means about 5-6% real return (return over inflation). The rolling average returns of NIFTY50 is much higher and that would in fact be more representative of a retail investor's return (rather than a date to date return - that's actually a poor representation of the return profile of an index). This investment in NIFTY50 would have been entirely passive (ie without requiring any effort on your part), with very low transaction costs (stamp duty + capital gain, etc.), and completely liquid and without counterparty risk. It would of course be subject to volatility and that seems to make most people react emotionally to the stock market but always remember: volatility isn't the same as risk. On top of this, the only wager you would have had to take to make this investment in NIFTY50 would have been that the Indian markets will get more efficient and the top 50 Indian companies (by market capitalisation) would make money.
Real estate is an extremely local and cyclical market, the last cycle ended around 2013 or so. Very rarely do most investors have an accurate understanding of the local market or any cogent reasons for making investment in a property in a specific area. The rent yields for non-commercial properties are very low in India (1.5 - 2.5%) and even this low yield is tax inefficient (if you're in the 30% bracket, your effective tax rate for renting out a property will be ~20%). So, effective post tax rent yield is about 1.2 - 2%. The capital appreciation for non-commercial properties isn't (on an average) all that great, IIRC (and I could be wrong I read this a while back) around 2% real return. To take your example, 6x return over 15 years is 12.7% CAGR and over 20 years is 9.8% CAGR. If you think 12.7% and 13.8% CAGR will give you close-ish returns: then realise the difference over 30 years between 12.7% and 13.8% CAGR is about 36% difference (calculated from the lower amount) - that's an absolutely massive crazy number. 1/3 more money at the end of 30 years with a 1% compounded return difference.
Money is always about opportunity cost and relative risk to return reward.
I have also invested in PPF and have a separate corpus of about 12-13 lacs, and I ensure that I put in 1.5 lacs per year in this account every year. But every word in your advice is true and I will surely try to invest in a better manner as otherwise it is clearly losing its value. Thank you for your guidance and I will stop being lazy.
1. Buying property is not a liquid investment. You can buy whenever you wish but selling one may/may not happen as per your wish as regards the timeline and the price.
2. You will be incurring huge costs in terms of stamp duty. In Maharashtra, it is currently around 5 percent.
3. In South Bombay, rental yields on property is a meager about 2.5 per cent annually.
4. Don't buy property. Renting one is anytime cost-effective. Instead, invest the down payment as lump-sum and home-loan EMI as SIP into equity funds and easily earn over CAGR of 12 per cent returns over a period of time. Become financially-free rather than tying yourself up to a law-firm corporate job you may not like but have to continue just to be able to service the home-loan EMIs.
Hope this helps.
Your 70 lacs of "pure cash" is losing real value due to inflation very fast. If this has accumulated over your career of 4-6 years as SA, it has been losing value every year. Even with FDs you at best broke even on inflation and lost money. If you had invested this money from the start in a mutual fund, your corpus may have been close to double by now.
If you're not sure when you'll quit (which seems to imply you aren't sure of a long term law firm career), you should put your money to work so that decision on quitting becomes a lot easier.
Having options in life is what everyone wants, but having all your savings in liquid cash and not deploying it to work for you over a period of time is definitely not the way to create options for yourself. Every year your cash hoard buys lesser than it did the year before.
You are relying on your earning power to increase your corpus. By not putting the money to work you are shooting yourself in the foot while trying to run a marathon.
Just friendly advise.
2. If you have capital, buy an house for investment purpose but only without an EMI. Buy and forget you bought it and sell only a decade or so. Later.
3. If in Delhi-NCR rent a place. The rent to price ratio is so screwed in Delhi-NCR as it's criminal to buy a house. For Ex. In South Delhi you could rent a property for INR 50000 and the market price would be 3 crore. In Noida even worse. You will get palatial houses for 30-35K.
Cost of house is 1.6 cr.
For a 15 year loan, ball park figure for EMI would be 1000 per lakh.
If it's for investment purpose, you won't get more than 2% of the capital cost as rent per year. This is not counting the interest that you will pay the bank.
Good luck