At 30 years of age should you buy that 90Lakh(1500 sqft) Apartment in a large city ? Is the question which many of my friends have asked me over the last 2-3 years and each time i wanted to tell them it is a foolish thing to do because …. But held myself back and advised them to really think if is makes sense allowing them to commit hara-kiri. Most of my friends tell try to justify this as retirement planning , i think that’s a convenient justification . Today after reading the wonderful article on <Children in parents ego trap> i felt that this needs to be examined in several lights (Practically as well as from a Finance point of view)
Buying an apartment at 30 years thinking that you are making an investment towards retirement planning is almost akin to buying a car and using it for the rest of your life , the car will simply not last long enough. Let me explain
- If you decided to buy a 90 Lakh apartment(1500 sft) for which you have made down-payment of 30lakhs and the rest of the 60 lakhs is own loan it would mean that you will pay ₹59k EMI over 20 years . This means that the total cost of apartment would be Rs 1.4 crores(towards EMI) +1.3 crores (30 lakhs down-payment earning compounded interest of 8 %). Thus the apartment costs 2.7 crores Rs in practical terms and not 90 lakhs as u imagined . This is the most important aspect which is missed in investment i.e people always say i paid 90 lakhs for my apartment and now it is valued at 1.5 crores and boost about it to friends.
- Average Life expectancy of Indian male is now 68 years , since this is the average across people living with access to lower income and healthcare level , it would be safe to assume that you and ur wife would live for 75 years. You may live longer , but hey am quoting statistics here
- Average life of a RCC structure is 30-40 years, with enough focus being given on maintenance of the building else it would be much lower at 20-25 years . This means that when u are 70 years and still statistically can live for another 5 years your home may not be livable ! or worse you may need to spend money out of your pocket for repairing the home to make it livable. This is the reason why flats are never to be seen as investment opportunity because the value of the building starts to depreciate fast in fact most bankers start depreciating the value of the building in 10 years !
- Now come to the value of land (undivided share of the land belonging to you) i.e if the building is demolished and sold how much will your share be worth ! . As the building as such is not worth anything after 15-20 years only thing that is valuable is your share of land. From my personal experience and discussion with several of my friends who own apartment i understood that a 1500 sq ft apartment would mean that you get an undivided share of 600 to 800 sft (depending on project having open amenities like garden , swimming etc) . So the valuable portion of what you have invested in an apartment is only 800 sft (higher side), which means that when you are investing Rs 2.7 crores towards the 800 sqft of land this translates to Rs 33,000 /sqft in real terms. Now what is expectation of the land prices after 20 years ? Will it be more than Rs 33000/sqft if so by how much more ? i will leave the judgement to you … If Mumbai was a benchmark i think it is possible that in a city like Bangalore we may have a rate of 33000 Rs in a normal locality of Bangalore after 20 years . So it really is not an investment as there is no returns or returns if at all would be very low !!!
- Also when we consider the practical issue of flats aging and needing to be demolished . Imagine what would be the situation then ? You need to get all the owners together to agree to demolish the building before you can sell the land to another developer . Each owner would have his /her own dynamics so getting all of them to agree to a common terms will be a big challenge. I know this has been done in Mumbai where apartments over 50 years have been demolished and the land sold to new developers , but imagine the hassle of doing this when u are old !
So what is the practical way out, should one not invest in an apartment at all ? I think it would be simpler to do the following
- Stay in a rented home during most of your working life (say till u are 55) => Lets calculate what this means . Lets us assume you would spend 15k to rent a apartment of your choice(similar apartment to what you can buy) . Assuming rental inflation of 5% each year you would end-up spending 85lakhs over 25 years. This way you always get to njoy the best maintained properties without the hassles of owning it !!! , but you dont own any asset ..:( . Yes that is a downside but upside is that you have only spent 85 Lakhs as against 2.7 crores , so you still have 1.9 crores in net savings as opposed to a home purchase !.
- Now when it time to retire i think of 2 real options => Move to another city (tier-2 or tier-3) . Remember that 25 years down the line most cities will have all infrastructure that we will take from granted in a major metro cities , so moving to tie-3 town does not mean you are compromising on any thing at all in terms of life style , but yes properties there will be much more lower prices than the major cities. So buy an apartment with your corpus of 1.9 crores …
- Second option would be to continue to stay in rented home , but of lesser requirements i.e move into a 1 bhk instead of 3 bhk now . Anyways kids will not be around then
I am sure these options may be sounding outlandish and too idealistic , but what am trying to highlight is that your 90 lakh apartment is not an investment !!! At best it is a way of saving money up for long term. The same objective can be achieved by putting money into stocks, fixed deposits over a long time. To give you the prespective , it is believed that over long term 20-25 years equities offer 10 -15 % returns thus instead of investing into an apartment you can save up a bigger corpus from the same money spent towards EMI. I can understand the emotional angle to own a house is also there but my point is that we should never mix up the emotional parts and the financial parts. Purely from financial point of view i think buying an expensive apartment (90 lakhs +) is akin to buying a lottery and hoping that you make much more than what you have paid for !…
To discuss more you are always welcom to write me @ firstname.lastname@example.org …
PS:(Note-21st Sep,2019) This article was written in 2011-2012 I recently found a copy of the same from Wayback machine to bring it alive.