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?