So you have just decided to buy a house, have you? You are going to add to your assets and you are feeling very pleased about it, aren’t you?
But hold on for a while; sit back and think. Do you have money available to invest in this house or will you have to take a loan? If you have to do the latter, then remember that after the initial down-payment you have to pay it back in regular installments (EMIs) for quite a LARGE number of years. Which means that for the next 15/20/25 years you have to shell out money to a bank or a lending agency for the pleasure of owning and staying in “your” home.
Does this still seem like a great idea? Maybe not so much now. So let us look at the scenario objectively, dispassionately.
A house is an asset when it brings money into your account. When you rent your house out, it brings in money and is an asset. If you are paying money while living in the house, then it is a liability for you – because your money is flowing out. But it is an asset for the institution you took the loan from – to whom you are paying your EMIs. So your home is an asset but not for you.
What if the market crashes?
You may think that your house will appreciate in value over time and hence it is a good investment. Yes it will become an asset when you sell it and get profits from the sale. But what if the market crashes? If real-estate goes into a spin? If you cannot pay your EMIs because of some financial trouble you are facing? Then the house and the home loan become major financial burdens for you.
On the other hand it is advisable to invest in instruments that provide cash inflow and to look at appreciation as a bonus. Most people do not understand this basic tenet of investing so they end up in straightened financial conditions.
In reality we are piling up our debts
A lot of us take loans against our house for various things – children’s education, their marriages, high-flying holidays, a swanky car etc. We think the house is an asset that can give us all these things. But in reality what we are doing is piling up our debts – the house becomes even more of a liability.
On top of all this we have a declining real-estate market. Builders and promoters are putting up more and more apartments while their prices are dropping. If the price does rise, it may just about keep up with inflation. So where is your guaranteed security for your retirement?
An added drain on your pocket
Another thing you have to keep in mind is that your home ownership means payments on maintenance, taxes, insurance, utilities etc apart from the EMI. That means it is an added drain on your pocket and not an income generator. It continues to be a liability for you.
Yes you can depend on your home to be an asset if you can turn it into a paying proposition. Rent it out, collect money from the tenants every month and use this to pay off your EMI and to pay for your monthly expenses. This is the only way you can create assets and build wealth.
The bottom line is think carefully before making that down-payment on your dream home – do not commit a large proportion of your income to buying what you feel is an asset but may well turn out to be a big liability.
