This is a late post. Late by many
years, considering how old my thoughts on this one are and how the property
prices have ballooned. But if you have read any of my earlier posts, by now you
know I am a lazy writer, so blame my moods not me.
A few weeks back, I read this post
by Jason Zweig. If you read it, I do not
need to write on the emotional aspect of owning a house any more. But, there
has been too much chatter on why investing into a house is not a great idea.
Too many people who claim how pure equity investing is Oh! So much more
lucrative and better for you as an investor.
Too many people glorifying the fact that renting it out is so efficient
for your portfolio and may take you to heaven when you die. Now, don’t you get
me wrong! I haven’t been paid by the builders to write this post nor am I
trying to seduce you into Real Estate. I am better off evangelising mutual
funds over Real Estate any day; at least the former is healthy for wealth
creation and fetches me a cute pay check at the end of the month too.
Before you read ahead you may want
to know that:
- I am not a fan of real estate but strongly believe in owning one debt free house in which you aspire to live immediately or eventually.
- This investment should be done as early in your career as possible.
- I am strictly against buying many properties for rental income. It is like buying a dairy farm when you need 1 litre of milk. In short, you have better options for ‘side income”.
Now that I have fairly immunised
myself from hearing your criticism for recommending real estate, I shall try to
tell you why investing into a ‘home’ is much more than just that ‘investing’.
It is a way of life.
Most of us have read about the
renowned investor Rakesh Jhunjhunwala, about how he sold his CRISIL shares in
2005 for 27 crores and bought a flat at Malabar Hill. If he had remained
invested, that money would have been worth some 600 crores by 2015. The flat at
that time was worth some 65 crores. This story has hindsight wisdom written all
over it. Imagine if instead of CRISIL he had shares of Hindalco. 27 crores
worth of Hindalco shares would have been approximately worth 18 crores at the
end of 2015. This story reeks too much of survivorship bias. Also, what he did
made his mother and wife much happier. He probably saved his marriage and
ensured that his mom continues to make the best Dal Baati Churma for him. Jokes
apart, no stock market returns can parallel the happiness of your near and dear
ones. Sometimes you do things to comfort the people in your life who matter.
When you enter your grave, nobody will remember how much CAGR you earned on
your portfolio but people will remember how much love and respect you earned from
those around you.
I had come across these beautiful
lines by Prof Robert Shiller in one of the articles “A rental doesn’t have the
same permanence as an owned property. There is an instinctive sense of
territoriality shared by people and animals that a rental probably can’t fully
satisfy”. Did you know many animals mark their territory by peeing in that
area? We are then humans for god sake. The most evolved thinking animal. Homo
sapiens have that natural tendency to mark their area too. Not by peeing of course
but by buying it. We are quite decent that way. The emotions, the sense of
belonging, memories, attached to a house that you own can never be matched by
a rented property. I remember the TV ad of a Housing Finance Company, where the
child is colouring the walls with crayons and the mom lets him do by saying ‘Apna hi ghar hai’. You don’t have to be
careful where you hammer the nail for that painting, that the wall colours are
not as per your taste, that the windows need attention but the landlord has no
time and you are not willing to change them as you only pay rent. Owned house,
however small it may be feels home but a rented apartment however magnificent
it may be; will never make u feel the same. Partially may be but totally, nope.
Another ludicrous suggestion I
read off late was to invest into equities in formative years and then buy a
property in late forties, assuming you have built wealth investing by then. I
found it quite cute the assumption that you will continue with your job and
high salaries to be able to pay EMIs in your late forties or early fifties,
when I see voluntary and sometimes forced retirements all around me. By late
forties, you may have gotten used to a certain lifestyle which could be
difficult to cut down with the huge expenditure of a house and sudden erosion
one will see on their liquid portfolio (for a drawdown to pay for the house).
If the same house is bought early, you learn to live within your means. One
tends to work out their lifestyle accordingly. Stable EMIs with rising salaries
only further helps to improve one’s standard of living. Also, rent is nothing
but a sunk cost. The lower the better, even if you are claiming tax benefit, it
remains money spent which did not build you an asset. I wonder how many of us
are truly judicious with our disposable income, most of us end up spending on
too many things to impress others and depress our investments anyway.
Leverage if used efficiently and
prudently is one of the most beautiful financial concepts to my mind. Reckon, that
leverage when used to buy a property fetches us tax exemption but the same leverage
used to buy stocks popularly known as derivatives is considered a taboo by many
a prudent investors. Warren Buffett has rightly called them the ‘weapons of
mass destruction’. What is important to my mind is the leverage multiple when
you buy that mortgage. To put it simply, it is the Total Loan to CTC ratio. The
essence is to keep this multiple in check. Stretch it too much and suffer
sleepless nights, too low and you probably look foolish few years later for having bought a property much below your aspirations. The look, feel and comfort of a tangible asset can be very
satisfying and will continue to remain so at least till the time you are able
to stay in those demat accounts where you run huge leveraged positions. Can u
ever comprehend leveraging yourself heavily year after year to buy the most convincing
stock ideas? It is an extremely specialised field and requires phenomenal skill
to make money out of leverage trades in markets, but owning a house does not
need any special skill. There is a surety that after paying a certain number of
EMIs, I shall have a roof which I can call my own.
Staying on rent forever with a
great equity portfolio sounds quite exciting when you are young. Do you want to take a minute and imagine
getting old??? Trust me, when you get old this same idea may sound criminal to
your mind. One does not have the energy, patience, willingness or strength to
endure the burden of a rental home. Because all said and done, you still remain
at the mercy of your landlord or land lady who may decide to pack you up if
some eventualities arise. Also if you are pinning hopes on you children to stay
with them at that age, you may also want to pin hopes on night outs with their
friends. The moot point being, have no expectations from anyone but you.
Another argument I usually get
is: But, I do not intend to stay in this city. I am working here and I need to
access the best facilities while I stay in the best of locations. Ok. Fine, I see
no problem in this one. A very valid argument, but ever heard of the word ‘future-planning’??
So plan, decide and buy a livable property in some corner of the world, be it
Timbaktoo, as early in your career as possible. The place which will shelter
you when you are out of this rat race rubbing tea tree oil on your weak knees.
I can at this juncture entertain
disagreement in this entire argument depending on who is buying the property: Salaried
person or a Business person. I am kind that way. When the stream of income is
pre-defined like in case of salaried employees, buying a house makes more
sense. But if you are living by the adventures of self -employment or upcoming
business, etc. renting it out and not hurrying into buying a house can be a
more logical thing to do. As your return on capital employed in your business will
be far higher than blocking money into a house (Or so I hope and wish is the
case with entrepreneurs)
Reverse mortgage is another fantastic
financial innovation. Where a couple gets a stipulated amount every month
depending on the value of their property and when they both die, the bank will
offset the accrued interest and principle of the annuities given and whatever
remaining is passed on to the rightful owners. I am not saying this is the most
efficient or cost effective tool but all I am saying is this benefit also exists.
Why would I want to leave my house to my kids after I die? Why can’t I instead,
live a better life even when I get old with zero expectations that my children
should bear my monthly expenditure, medical bills or cost of travels? I personally
aspire to give them the best education and then leave them to fend for self.
Sounds great, till they don’t read this!
Your wealth can dwindle, plans
can go haywire, money can be philandered or lost, businesses can wipe out,
medical ailments or court cases can leave you broke but a house remains. When I
was a child, I remember my dad suffering a huge business loss. Eventually, it
stripped us of all our savings but the house which he had bought in earlier
days stayed. He was desperate to sell it and get rid of the bad loans. I
remember having prospective buyers at my home but my mom would send them away,
saying the house was not for sale. The house remained. It also gave us a reason
to be in the city and fight it out. My parents together struggled, suffered but
the house remained. We sought comfort in the fact that we eventually have some
final asset left to bail us out of the mess. That gave strength. The house was our strength.
I gravely deride all the
suggestions of 100% equity investing and firmly believe in owning a tiny abode
somewhere. It will leave you with reminiscences and peace of the unmatchable variety.
Go Get it.
