This is a post totally opposite to the topics which I write. This is not on markets and is some crazy Sunday Thoughts.
Its a biased/stupid/senseless view of a Full Time Equity Professional and in love with Equity who has bought a Flat recently part EMI ( ah tax benefits etc ) but still stays on rent and has been for many years for various logical reasons. ( Needs a Different Post) .
If you do not like the post its fine 🙂 This is not what am good at so can just trash it.
In my profession i meet people from various backgrounds/profession and a very peculiar section is a lot of mid-aged people frustrated with their jobs or at a plateau in their careers either because they hate the work they do or many other reasons .Constantly in a race to earn more with not much of savings left from their salaries but live in a superb locality thanks to their parents or themselves having pitched in with the EMIs.
Let me tell you about a couple of sample cases. ( One can change the nos as per their city and friends.)
This example only is for a particular sample of working professionals. City in Example - Mumbai.
1) A 35-45 year old Spouse and Spouse with 1/2 kids in a 12 lakhs in hand per annum job. Could be both working or only one. Roughly 18-48 lakhs p.a family income.
( if you are not in the above set or will not be in the future please do not read ahead )
Financial and Personal Condtion.
Parents have either expired or one of them is around and some stay independent. ( Lots of probable medical expenses in future )
Flat of 1 bhk/2 bhk at Khar to Town - Worth 4 crores. ( you can take a good locality in your city.)
So there are 3-6 people staying in this house and family income is roughly 12 lakhs with single earning member or 18-24 lakhs with two earning members.
Annual Expenses - 10-15 lakhs.
Liquid Savings in FD/MFs etc – 10-20 lakhs
LICs ULIPs etc – 5-10 lakhs
Credit Card Loans/Emis. ( Car Loans, Home Loans )
For the last many months Mr X is trying to find a new job or start a new business. Nayi Job mil nahi rahi aur business karne ka risk apetite hai nahi. Totally frustrated and irritated all the time. Not able to give time to the family. Slogging in a job which takes away 10-16 hours a day.
What can he/she do ?
1) Continue to crib about the job he/she has started to hate. ( even people business / self-employed can hate their work.)
2) Remain irritated and frustrated. Watch News Channels on TV and debate about Modi to Indrayani.
3) Keep thinking and dreaming about the great business idea he/she has !! ( never looking at whether it is feasible or not. Every other friend dreams of opening a hotel / restaurant or a startup. )
An interesting solution which is very tough to take !!
Taking a case where only one of the Spouse will quit.
1) Sell the House for 4 cr. ( Log Kya kahenge ? Ghar Bech Diya – Loot Gaya ye to. )
There is not much expense in selling a Flat. ( Stamp Duty et all mainly paid by the buyer )
2) Search a flat in Andheri to Kandivli or even Navi Mumbai / Thane. ( most offices / jobs/ biz are anyways shifting there.)
It will cost you around 2 crores to buy a 2 bhk which will be much bigger then the one in Khar-Town.
3) Invest the money in Fixed Deposits and some in Equity MF. Start the new business.
If you put 1.5 cr in Fixed Deposits should get around 80k-100k in Interest Income. ( This is equivalent to your Current Take Home )
The 50 lakhs in Equity MF can help in creating some Retirement Fund in next 20-30 years. ( would not be anywhere close to what you need but something is better than nothing in equities )
Now you need not worry about the Monthly Income !!
Neither do you need to worry about your Job.
You can start a Business with your earlier Savings and hope to not lose it all. Even if you do your monthly expenses are taken care of. You can even think of a "Sabbatical".
4) Go back to the same Job.
You might start loving your job or find a job which you love even if pay is lesser
But Will you Do This or even Think about it ?
Another solution which is more tougher/crazier according to people.
1) Sell the House for 4 cr.
2) Keep 3 crores in Fixed Deposit. 1 cr in Equity Mfs etc.
Interest Income would be 175k-200k.
1 cr in Equity MFs will help in retirement income.
3) Take a rented house of 3 bhk. Should cost you max 1 lakhs per month. ( taking this on a higher side as lot of biases about renting.)
Can pay the rent as well as your Monthly Expenses with the interest income.
Now you need not worry about the Monthly Income !!
Neither do you need to worry about your Job.
You can start a Business with your earlier Savings and hope to not lose it all. Even if you do your monthly expenses are taken care of. Also it can be a "sabbatical" or an attempt to try what you like.
4) Go back to the same job
You might start loving the job or find a job which you love even if pay is lesser.
But its tough to do Any of It and doubt anyone will do it or even think about it !!
Hopefully in above solution you will spend more time with yourself and your Family.
In any case the hunt is to strike a Balance where your X square Feet
But !!
You are actually looking at buying another Flat as you read in the newspapers that Real Estate Prices are falling and you can get a good deal. You will find a new job at 15-25% hike so you can pay the EMI for the second flat and when your Son/Daughter starts earning he can continue the EMI or you finish the loan and let the son/daughter get married and stay in this Flat or take a bigger flat in the future or give it in inheritance.
You were a Slave of Your House and do you want your Next Generation too ?
Try calculating the no of Hours you actually spent awake in your house in a week. Its 25% approx of your time.
See how much of your income/networth is going into the house.
Amazing returns given by real estate in last decade or two has never allowed us to think financially. I hope returns continue in the next decade and we need not think and life goes on.
But personally I think Real Estate will not be able to do that over the next decade.
The myth that real estate will always beat inflation is going to start hurting a lot of people.
COMMENTS/SOLUTION FROM READERS
Adding some interesting comments and solutions from readers. Will keep posting this.
1) By Mr Chetan Shah
2) Sebastian
HI Nooreshji,
Well done,
September 20, 2015
Great piece. Most sensible decisions are the hardest to take as they appear risky or stupid. Robert Kiyosaki said this long back ‘Your house is not an asset’ but many still don’t get it. One alternate not included by you is. Rent your big house and go on rent elsewhere. That creates Cash flow and allows you to do something else without selling your premium location.
September 20, 2015
Hi Rohit,
Renting a bigger house for same rent or lesser as received of older premium location house is also a decent option.But that does not make a big cash flow difference or give you any freedom just some more square feets.
September 20, 2015
Yes Chirag,
Did not this post will see so much interest.
Hopefully can take more examples with comments from readers.
September 21, 2015
very nicely put the case. never read ur blogs before but liked it.
September 21, 2015
there is a lesson here, we always feel that our problem/situation is unique and need a unique and complex/hard decision. sometimes, the solution is very simple, it just need execution. I have been thinking this for a long time minus execution. my heart skips a beat when I realize that I paid 100% of my loan in interest and the principle is still to be paid…
September 21, 2015
Well someone put this up as an article.
Have been propagating this to the family for the past 10 years and have been recommended visit to the mental asylum.
“Quit a bigger(unwanted) and move to smaller(need based)house, move to way of suburbs (none is employed, no sr.citizens) what will people (should you care) think “we are bankrupt or having financial difficulties.
But keep cribbing No parking space, so much traffic, pollution, cost of living is high blah blah blah….
September 22, 2015
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September 22, 2015
I bought a house on loan due to parental pressure. Paid the EMI for about 8 years… slowly realized its not the wise thing to do…(of course after reading subramoney and few such blogs!!) withdrew my EPF amount, closed the loan, sold the house, moved to rented house… slowly deploying the capital into equities. Feeling great and looking forward to a prosperous future. Will buy a house again only if I can pay in full cash and only if my financial situation justifies the expense. Yes, I will treat buying a house like any other expense like buying a TV, Fridge, AC or a car.
September 22, 2015
Hi Nooresh,
The plan is really good, but I did not understand why will anybody pay such a hefty amount to live in a second hand apartment !
September 26, 2015
It does not appear this idea works. Am a Bangalorian and will explain from Bangalore perspective.
2+ BHK / 30-40+ Houses:
1) These Apartments / Houses at GOOD Locations within 12 Kms of Bangalore costs Above Rs. 1 Crore (You might get at 1 Crore if you search hard, else average Rs. 2 Crores). These areas have good transport facilities, roads, Malls, Parks, Restaurants, Low Water/Electricity Problems.
2) Apartments / Houses at BAD Locations within 12 Kms of Bangalore costs between Rs. 80 Lakhs to 1.5 Crores. These houses/apartments are usually located at Slums, Near Filthy lakes/Drainage Channels, etc. Though the other facilities are good, you won’t feel like living in such locations amongst Mosquitoes / Bad smells / Outdoor Noise / Bad Roads.
3) Now if you consider outskirs of Bangalore, there are a few decent areas where you can get houses / flats between Rs. 40 L to 80 L. These areas of decent facilities (Though there is water problem), but far from offices / Malls / Parks are not well maintained and dust.
Now eliminating 2nd Option, Consider you sell home at 1st Option and Buy home at 3rd Option, you might feel free financially, but you have to start facing new problems. You will have to depend on Tankers for Water, You will have to think before traveling anywhere like functions/parties/movies/shopping as Traveling time will increase by 2 Times. I agree, Money is important, but living life peacefully is also equally important.
You might try this idea only if you are going to quit your job to start new venture as you will need capital. But I would suggest buying house at smaller cities/towns than outskirts of Bangalore.
Whether new business/find a new job, if you WORK, you will grow both financially and professionally.
(I was living in 3rd Option a few years back and now living in 1st Option and I can say that I feel more happy to live in 1st Option than 3rd Option)
September 30, 2015
Every city has its issues.
But one common issue is every Bangalorean who has spent more than 5-10 yrs suddenly has realized it has traffic 🙂
Ever considered renting ?
October 7, 2015
Nice post. The biggest challenge I face is to nudge my parents to sell unproductive assets (plots, house in home town with no rental yield). Any amount greater than 1% into equities in any form is considered reckless and resisted.
October 7, 2015
I Tried to explain something simmilar, although on smaller values. But was not accepted by my wife, parent, in-laws and relatives as well. I had to giveup idea after 3 years.
Anyway, nice post, I will show this article to my daughter after few years. She is 10 yrs right now.
December 15, 2015
I had the same thought process but London changed me. I think renting in Mumbai makes sense but one has to plan for life after retirement and ensure you have a self-owned property somewhere. India’s growth means that retirement will be much more expensive for us than our parents. Having own home to retire provides some assurance.
Coming back to London, things are different here, it is a mature market and rents are almost same as mortgage repayments. Having own property is a no brainer if you can afford the upfront costs.
Now – as an investment – depending on markets there is potential to make substantial returns. I bought a one bedroom maisonette in London with only a 5% deposit in 2007. Spent 20% of the property price extending it to two bedrooms and sold it 7 yrs later. The profit on this transaction was 230% of the investment despite the recession and property downturn. People would have seen bigger profits in India but UK does not grow at 6-7% and mortgage interest is 2-3%!
Used the proceeds from this to buy and refurbish another property in last 15 months and that gave me 100% returns.
It is possible to make money in real estate but it needs a different strategy.
December 15, 2015
Hi nilesh
Interesting to note that you made supernormal returns
But i think you are calculating profits on your downpayment plus mortgage payments. How much was the rise in property price since 2007.
On leverage returns can be supernormal but what if prices fall by 20% your capital could be wiped off.
What you have done is essentially trading on leverage i suppose
December 15, 2015
True and prices did actually fall due to recession. Anyway Mumbai and most of India is different and it may not be possible to replicate this in India.
Agree on leverage and that is the biggest benefit of real estate investment if the interest cost is low. On the other side, in India, inflation and income growth will reduce the mortgage overtime.
December 16, 2015
So what has been the absolute price rise in UK home prices since 2007 and last 1 yr ?