Why we chose to pay more to live close to work

In most of the big cities around the globe people live around 20-30 Km away from where they work. There are many reasons for this decision but one of the most important one is rents are higher closer to work than 20Km away. When we shifted to the new expensive city we also had to make the same decision.

We considered our options at length and came to a few conclusions:

None of us wanted to spend over 3 hours every day in traffic burning our money. We value our time and both of us get cranky when we have to spend extended hours in sun and rain doing nothing more than getting from one point to another. In a city known for its traffic jams you would have to really love sitting in a car to be able to justify 3 hours a day.

We wanted the flexibility of leaving work early to get something done at the house or not taking entire day off because something had to be fixed. In past one year since we have moved we have had multiple handymen come in at odd times, a lot of things delivered and for most of the things it has been possible for one of us to take a quick ride to home and take care of things. This is also quite handy when family is visiting.

We don’t own a car and moving 20KM+ away would require us to trade our trusty motorbike for a car. This would mean a lot more money than we would like to dish out on commute. This regular expense would be in addition to shelling out monies to get a four wheeler.

Meeting future needs. Currently there are just two of us but if we do extend our family we would need to be able to run the triangle of home work and day care. Increasing the distance simply did not make any sense. To be fair we have not raised a kid before but none of us were interested in keeping the child on road for long traffic logged hours.

Above are some of the reasons we decided to live within 10 minutes driving distance from our house. That being said we have spent over 20 minutes covering the 2.5km ride because of traffic, congestion, broken vehicle rains or marches. Now imagine how much would these factors affect longer commutes where your time increases at every single red light you have to stop at.

But there are some other factors which might have affected our decision

Even though we can easily afford our current rent, which is over 10K higher than the cheaper suburbs, it does make us question our renting choice multiple times. For many however 10K might be the difference between taking up the job or not. Commuting longer to ensure that you can actually work is a great option provided you cannot find a new job closer to where you live and you cannot find an alternate living arrangement like hostels or paying guest/roommate setting.

We are also blessed to be a dual income household (which does affect our affordability) where both partners work around the same location. This has allowed us to share commute costs as well as ensures none of us have to face longer commute. Most people work at different location than their spouse. So it might be a conscious choice to live closer to one of the spouse’s work in case the spouse is responsible for household errands, managing kids or has any other constraint where being closer to the house is better for them.

We value our time a lot but we also value our living conditions. We are usually not interested in swanky apartments (unless someone else is paying for it), but we need decent clean surroundings and good construction. Our definition of that though might be very different from someone say with kids for whom a park nearby is a requirement. Same people or those taking care of elderly parents might feel a safer environment to be a gated township/society. We are sure we will require these at some point of time, today however we are perfectly content with where we live.

We have parents and guests who live with us every once in a while. We are happy however renting a 1bhk instead of a more common choice of 2bhk or 3bhk to provide for visiting family. We are happy to let our parents use our bedroom and lay a mattress in living for a few weeks in a year that they are here. There are many who rent bigger simply because they need to have space for people to come and visit. If that is a need you would probably be better moving out to suburbs so that you can afford a bigger dwelling.
A few of above factors are the reason why we rent far cheaper than a lot of our colleagues living within the similar distance from office. Others who live over 30Km away spend hours travelling back and forth though a few of them do get the benefit of office provided transport.

Two of the houses we liked last year were 1 bhk and 2bhk for 23K and 30k respectively. Though we deeply debated the pros and cons with the later coming ahead on locality and building services our current location won in terms of price, proximity to office and being the amount of house we could maintain.

Currently our housing expenses make for over 50% of our household budget and we intend to increase the number by reducing our monthly expenses. With current 10% increase in rent we would have spent almost 4 years in the house before the rent would catch up to the other house’s starting rent.

What have been the factors you considered before you decided how far from work you live?
For those who own their house this might have a lot more factors but I am sure we all have theory of what is the best option.

Real-Estate followup: Was buying a house right decision?

Real Estate
Was buying a house right decision?

Last month I did a post about buying a house and in the comments we discussed whether we were crying over nothing. We also started looking into real-estate as a potential income source. So we decided to do a bit of follow up on that.

The background

When we bought our property in 2013 we took out a 10 year loan which we equated in April last year. Since then we have run the numbers and invested a part of the money we were parking in max gain. This has allowed us to achieve a balance between higher returns and interest paid.

We are currently finishing 4 years of paying the loan and our remaining loan if we take our all the remaining amount right away or at the end of the year. Should we wait another 18 months the time frame will be reduced by another 3 months. We therefore stand to finish off our only debt by the end of 2020 before either one of us is 35. That is definitely a nice thought and we do have some money we can throw at the loan, over and above our current investments and EMI after the yearly raise we just received.

Our calculation of current return vs investment old us that we would have fared better had we invested the money in 2013 instead of buying a house. Let us take this a few steps further to see how owning this piece of real-estate will fare for us:


In the last post we calculated that

Rent earned from property (80% occupancy, 10% hike, tax at 20%): 13,00,000*

Expected Property value: 58,00,000

Money paid (Loan EMI+ Out of pocket): 31,00,000

Total addition to net-worth: 71,00,000

Net gain from property if it sells for peak price at the time: 40,00,000

Increase in net-worth in case the money was invested: 67,04,570

This means we will end up ahead in 9 years with the property (rental coming in) than we would have by simply investing it. This rosy scenario depends on multiple things.

  1. We are able to sell the house when we want to and are able to get a fair value for it. The value above is dependent on an average of the appreciation in last 4 years.
  2. We actually earn the rent we believe we will. 80% occupancy and tax on rental income brings this into quite realistic rental gain.

Once we retire we would probably be living in the flat ourselves unless we end up buying another property. If we do buy another property then one of them will be a rental which will provide us with recurring income.

To add or not

Most people include real-estate equity in their net worth. In our current calculations we consider rent as an income but we don’t include the home equity in our net worth. The reasons for those are multiple and not being able to sell the house as quickly as we want is definitely one of them. Other reasons are the unpredictability of housing market and various reasons the price of the house depends on. We might be a great landlord but if the resident associations is a PIA or suck at maintenance our house might lose value.

We are doing and redoing multiple calculations for scenarios where we do invest further in real estate and in ones where we don’t. Real estate has a huge potential of recurring investment post retirement and an increased income during our net-worth creation phase. If we do add the value of our real estate holdings in our net worth as well then the figures start looking great. I would rather err on the side of caution and not include it.

Do you include your real estate equity in your net worth?

We will keep you updated as we go along and improve our finances and take measures to build a nest egg which can take care of us for a considerable amount of time. In past few months we have done many changes to how we invest along with a few experiments to gauge how we can benefit from various investment strategies like dividend investing and others. We really appreciate the feedback we get from our readers which is the major reason for us starting the blog.

Was buying a house right decision?

It is common knowledge that we own a flat back in our old city and we have made considerable progress in paying off the mortgage. However every now and then I am forced to rethink if we made the right choice. There are a lot of things we did right (and wrong) but was that the best thing we could have done with our money. Was Buying a house worth our hard earned money? This is the question we want to talk about today.

This post contains a lot of numbers and follows my twisted mathematical pattern. If you are averse to so many numbers you might want to jump to the end.

Without factoring in the ongoing interest, it cost us 25,34,641 for a two bedroom flat in a new township with a resident’s association. This also includes 1 year of maintenance paid upfront to the builder.

This was at a time when most of the people around us were investing money into houses which started at twice the price. When we were deciding if a two bedroom house is a good deal for us we were driven by what we can afford today instead of what we will need down the line. Some might call us really short-sighted and maybe we were but with a job which moves us every few years it just made sense to us.

Buying a house: What IF??

We know if we go back to living in the city as a joint family we will need to either rent a bigger apartment or another apartment next to ours. That time is clearly not coming in next 5-6 years and none of us know what we will want at that time. Had we chosen to go for a bigger house almost 4 years ago when we booked the flat we would have put money in something which we would not need for another 10 years. It would have resulted in more loan which means more interest, longer loan term and reduced liquidity.

When we booked the flat the income(gross) to price ratio was a comfortable 1:2. Though we were driven by our desire to spend less then, this ratio in hindsight is something we are quite proud of.By the time construction was complete and we got the keys the ratio had gone down to 1:1.5.

Buying a House: The Math of it all

If we were to sell the house today the average market price would yield us 29,60,000; an approximate 16% gain total in over 4 years since we first put a dime in. for the sake of simplicity let’s calculate how things stand today.

Home ownership cost= direct costs till date- tax rebates

Direct costs till date= Amount paid by us+ Loan EMI

Direct cost= 6,67,688 + 11,43,678 = 18,11,366

Tax rebates(assuming 20% tax bracket)= 70,411 + 20600= 90,411

Home ownership cost= 18,11,366 – 90,411 = 17,20,955

Loan remaining= 10,65,000

If we were to sell today our loan would be taken over by the buyer, therefore the amount we will be entitled to on selling is.

Amount earned= 29,60,000-10,65,000=18,95,000

Profit= 18,95,000-17,20,955= 1,74,045

% return= 10.1%

We currently rent out our flat and that has therefore resulted in both costs as well as returns. Let’s take a look at that.

Land lording costs include furniture and fittings for the flat along with rent agreement costs and other fee. For us this came out to be – 35,315.

Rent earned till date:52,500

Net return= 17,185

Tax on profit from property= 3540.11

Actual profit= 13,644.89

Total profit including rent= 1,87,612

% return= 10.9%

Buying a house: Flip side of the money

When we started in 2013 nifty was at 6,000* and today it stands at 8,400. For the sake of easy calculations I have taken 1st April as the bench mark for every year. Currently we maximize our PPF account but that has sadly not been the case for any FY before this one.

Assuming the same distribution of money i.e. maxing our PPF and investing rest into NIFTY index funds would bring us to 23,45,267

If we were to invest everything into nifty index funds we would stand at 21,79,484.

We are not considering FD route because that is something we have never believed in.

Extra tax we would have paid: 70,411

Final standing

Scenario1: 23,45,267- 70,411= 22,74,856

Scenario2: 21,79,484 – 70,411=21,09,073


Scenario1: 22,54,856-17,20,955 = 5,33,901= 31%

Scenario2: 20,89,073-17,20,955 = 3,68,118= 21.4%

These numbers are quite sobering and definitely make us want to kick ourselves. It would not be wrong to say we lost a lot of money and tied ourselves to the bank for quite some time. In this calculation I have not included the money we put in the OD account to equate our loan. This money earns us no interest but we don’t pay interest on principle amount equal to the money we put in the OD.

We have always lived on rent because we are posted in a different city than the city we own the flat in.

buying a house
Under construction

Talking rationally buying a house was not a good monetary decision and would have put us far ahead in our FI calculations. If we assume that we would have earned an average return of 7% and all the money we have either put in OD and house as well as what we will put in next few years would have resulted in 67,04,570 in 2026. That is over 20% of our FI amount.

We have in last few months discussed investing in real estate but the numbers as we stand today don’t really look good. Not just that the prices have definitely climbed quite up since we last put money in the market. However we do believe that the equation will look quite different in a few years’ time when we are done with the loan. In case we still have a tenant and the housing market continues to go up we can expect the house to maybe close the gap with the invested money.

There is however a fact which we cannot overlook which is how difficult it is to get the money out from this investment. We fully expect to not be able to sell the house at a fair price should we need to in an emergency. This is one of the major factors why I am skeptical if we will ever buy another property. That being said we can definitely not afford to buy a house right now.

I know of a few financial bloggers who have made their riches in the real estate world. Unfortunately I have not been able to find someone like Financial Samurai in the same market as us. We however need to understand the sector and actual return from it before we can think of putting our hard earned money into it.

  • For those wondering if the figures above are actual, well they are pretty close if not accurate. However it doesn’t matter much since the rate of return remains the same no matter how much we put in.
  • If you know of any bloggers in India who have been writing about real estate strategies we would love to know of them.

How has buying a house been for you? Do you believe that it was a great decision?

Becoming a Landlord- Lesson Learnt

August for all means and purposes was a good month and if September could take a cue from that it would be nice. You can read our monthly update here. In August we found a tenant and became landlords ourselves.

Renting without an agent

We are the kind of people who forgo services of agents and other service providers for renting. We do this for two reasons. Firstly, it saves us some money (quite considerable in some cases) and secondly it is easier for us to do it ourselves than coordinate with others.

When we had to look for an apartment after our move to the expensive city we took it upon ourselves. We were told by many including both the renters and landlords that hiring an agent was required. We persevered and landed an apartment which costs us at least 10% less than what we had been told apartment like ours run for. Add to that paying the broker additional 1 month rent and we did land a sweet-sweet deal. The difference is enough to make up for another year’s rent hike which if not negotiated would be around 10%.

Most of the landlords who are looking for self-servicing and industrious tenants also avoid agents. This was the same case last year when we had to shift bases in the old city to be closer to office and reduce our rent. We found a cozy two bedroom place which was 10 minutes from office parking and never had any issues. We are also the kind of tenants who believe in being fair to our landlords. If it is a small repair like replacing a tap, we’ll do it ourselves. However if it is a permanent fixing which we will not be able to take away with us- the landlord pays.

Why we used an agent this time

Even after knowing and first hand experiencing the benefits of not using an agent we had to use one to find a tenant ourselves. We have a few reasons behind the decision:

  1. Our property is in another state so travelling there to vet the tenant, draw rent agreement etc. are not just bothersome and inconvenient they also cost a decent sum.
  2. The agent we found charges quite reasonable rates which are far less than what we would have spent on a trip. These charges cover for leg work of showing the house to multiple tenants, tenant background check and drawing up rent agreement to name a few.
  3. Most important reason was that the house had been empty for almost one year. Once we concluded we would not be able to find a tenant ourselves we resorted to looking for an agent/property manager to help us out.

How it went

Months after contacting the agent we were told that they finally have a tenant who is pretty interested but believes the rent is too high. We did come to a mutual agreement on a certain price and let it out. The reason we came down on our previously decided rate were two

  1. Empty property was simply eating up maintenance costs which the tenant will take off from our hands and is over and above the rent. Even though we do have a good home loan it still means some interest which will be completely taken off our hands.
  2. We would finally start an additional income stream which would help us add more to our savings.

From what our agent and tenant tells us the going rent for a furnished flat with decked out kitchen, wardrobes and other woodwork is a bit lower than what we are currently charging. After we got the possession we had thought in depth about the way we can furnish the said flat. The cheapest option came out to be buying furniture online and avoiding the hassle of a carpenter. The itch to deck the flat was real and we had to hold ourselves back from spending more money on the flat.

Our reasoning was simple; once we have a tenant lined up we can buy the furniture and get it delivered which is what we did. The couple we are renting to were in a hurry to take up the house which meant they were there when a lot of fittings were done. The furniture required will be delivered to them so our need to have a property manager went away

We have been tenants almost all our working lives and the one time we could have avoided that we moved for our job. Mr. S has rented most of his life and I have seen my family managing tenants. This means we know what real pain points are for a tenants and how much they would be ready to wait for; or so we thought.

We were not ready for the continuous communication which will be required with a 32 year old man who is unable to find a handyman we were paying for. More than that inability to coordinate with them once we find a person from 600Km baffled us. This was very different from our approach of talking to the landlord, getting stuff done and then adjusting in the rent.

Lessons learnt:

The entire year from getting the keys to our flat to finding a tenant has taught us quite a few things.

  1. It is difficult to manage a property from distance esp. another city. We believe if we had been in the same city we would have been either living in the flat or at least been able to spread the word around better and would probably not have had to pay for the agency. More than that, getting fittings done and making the flat tenant ready would have been an easy task being in the same city.
  2. It is OK to get help and pay for it. When we finally realized we would need an agency to take over the renting process it was a bit late. We would probably have had a tenant earlier if we had understood the enormity of the task sooner.
  3. Not everyone is like us. We almost always assume that every tenant thinks like us and so do all landlords. Turns out we were wrong. People have different priorities just like we want our privacy and sleep more than not having to clean ourselves.
  4. Getting another income stream started is more important than worrying about 500/- every month. This was something which was pretty difficult for me to do- reduce rent. We finally reconciled that not accepting the tenant would result in a far bigger loss especially if you add the society maintenance and electricity we had been paying.

It is definitely a happy ending with some rental income coming in and unloading of the expenses we were incurring simply by owing a flat. Not just that with a new income stream we have the capability of saving more than what we have been doing. It will take us a few months before we recover the expenses made on the flat. Post that it is pure returns on a property.

Real Estate as an Investment?

Real estate is a great option but unfortunately the returns are still not enough to tide two of us over every month. I am not including rent here, just food and other expenses. Apart from this there is the huge cost we have already sunk into the house. We have discussed viability of real estate as a retirement plan quite a few times but don’t really see it as a real option for us. Will we fare better with a few cheaper properties in addition to our desired net worth? For sure and we might be able to live with just the rent and never dip into our investments. Will that push our retirement back? Definitely. That being said we are still looking into all options and there is a possibility we might surprise you with a new property in coming years. The chances of that are low for sure.

What part of your portfolio is in real estate and how much of your retirement income do to you expect from rentals? Do you have some tenant stories you would like to share?