1. Can you afford the EMI?
We want the biggest and the best possible. A house is not only the place where you spend more than half your life but also where your children would learn, grow and express themselves. Everyone needs space, and everyone wants to be in the best place of the city. But, of course, you are constrained by how much EMI (Equated Monthly Instalments) you can afford on a monthly basis without causing any overdue stress on your financial life. With both spouses mostly working now a days, our affordability has gone up.
But, as a golden rule, never let your EMI exceed more than 40% of your total household income.
This is, of course, with the assumption that you have no other loans that are eating into your monthly income. If your home loan EMI is closing on to 50%, you can be sure that you are eating into your retirement corpus and compromising on many other important goals of your life.
2. Look at your futuristic Assets
The current generation in their 40s and 50s have worked so hard to generate wealth that they already have multiple real estates in different cities or within outskirts of the same city. The younger generation in their 20s who are just starting to earn may very well look at the existing assets of their parents before taking a call whether they really need to buy another house to stay. Parents hardly have 1-2 children now a days, and most of the parents assets are likely to come to children at some stage. It is better to take this factor into account before getting into a 20 or a 30 year housing loan agreement. Rather, you may want your savings to be invested in equally worthwhile goals like Financial Freedom, Children's Education etc.
3. Factor in the "Other Costs"
Make sure that while calculating the EMI and the overall financial burden that the new house would bring on your family, you also account for "Other" costs which are usually not advertised. These could be Parking Space, Preferred View, Preferred Floor, Registration, Stamp Duty, Club Membership, Society Membership etc. Account for all these, and many more, before you come to the conclusion regarding the affordability for your house.
4. Do a Rent Vs Buy Analysis
High prices of houses, especially in big cities, makes renting house a far more financially wiser decision than buying a house. Though a house purchase involves a lot of emotions, but if the emotions can be managed, you might want to wait and stay in rented accommodation until your family income grows or real estate prices stabilise / come down. You may also prefer a rented accommodation if you have a frequently transferable job. There are many Rent-Buy Calculators available online. You can use any of them to perform your analysis.
5. Be careful of the Loan Tenure
Nowadays, you can get loans for even upto 30 years. This longer tenure effectively reduces the EMI burden, but be extremely careful about this duration. This assumes that your family income is going to sustain for the next 30 years. Do discuss with your spouse and other family members about the longevity of your family income. You or your spouse might have other ambitions or long term plans e.g. chasing one's passion, or retiring etc. Make sure that such long term loan will be consistently funded.
6. Will You Live in the new house for at least 10-15 years
While you may be living at your present location for a long time and may have similar plans in the future, but make sure that you study the industry trends and job opportunities coming up in cities other than the one you are staying. If you foresee that you might have to change the city or country in the coming few years, you might want to just delay your decision till you have more clarity. In the globally connected world, the younger generation is more keen to explore the world rather than settling in one place.
7. Check your Liquidity
Real Estate is not a liquid investment. You cannot bank upon this investment to fund any emergency situation or any other financial goals of life. You got to be separately saving and investing for all those goals. Ensure that you have enough saving potential over and above the EMI that you are going to pay from your monthly family income.
8. Do not bank too much on the Rental Income
Rental Income is Passive Income. It always feels good when we get that rent credited to our account every month. But remember that, rental income is also an income in oyur hands and attracts taxes. In any case, the rental income at the most gives you 3-4% ROI on your investments, which is far lesser than any other investments, even Fixed Deposits. So, don't bank too much on your Rental Income compensating for your EMIs. They aren't just big enough to do that, considering the current real estate prices.
9. Check Your Builder's Reputation to Deliver on Time
You might have planned that after getting possession of the house, you can claim tax benefits and also save on the rental income that you are paying for the house where you are currently staying. But if the builder delays giving you the possession, you may not be able to claim the income tax benefits. Not only that, if you were staying in a rented accommodation, you might be hit by a double whammy - you would be paying the monthly rent for your current house as well as the EMI for your new house.
There are many such litigation cases already going on where the buyer is on the receiving end.
If you do adequate checks, there is no reason why you cannot take an informed decision. The idea of providing these 9 checkpoints is not to discourage you from buying a house, but make sure that you have the right preparation before you go for this big decision of your life.
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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.
Cheers
Manoj Arora
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