23 May, 2011

Buying a property

Seema could not contain herself after a look around the property and the amenities. She particularly liked the layout of the home and the fact that it was overlooking a waterbody. According to Vastu, it is a good sign. She almost saw herself living in that home. Rakshit did not share her exuberance. He was calculating the overall price to be paid and the loan they would need to take, to buy this home.

Rakshit was as interested in buying a home as Seema. Only, that he was being pragmatic. The couple have been wanting to buy a home since they got married about a year ago. But the prices were way above what they could afford, due to which they postponed the decision. Now, again they were bitten by the bug and here they were…
Seema & Rakshit were both working. Rakshit was earning about Rs.35,000/-pm after deductions and Seema was getting about Rs.21,000/-pm, post deductions. They did not have any dependants. After initially looking around, they had given up. They were investing the money so that they could use it for the home, at a future point. They had accumulated about Rs.3.45 Lakhs now. Rakshit can get another Rs.2 Lakhs from his company at low interest rates. That’s all they have now. But, this home they have set their sights on, would cost them Rs.57 Lakhs. Now, that is way beyond what they could afford.

They were worried. Everyone around them is telling them that prices of properties will only go up in future, when it will be even more expensive and unaffordable. They were in a state of panic and despondency, when they came to me.

After understanding their situation, I wanted to know how long they might be in Mumbai. They were not sure. I knew that Rakshit was from Kanpur and Seema from Delhi. I was then intrigued as to why they wanted to buy a flat in Mumbai. I tried another tack. Will they be willing to shift to another city if they get a good opportunity, I wanted to know. They were clear, they would. Then, I wanted to know the logic of buying a home in Mumbai. They wanted to save tax, they said. Also, their logic was that the rent was going down the drain, but the rent plus some more investments would create an asset.

I then queried them if they are claiming the rents for deductions. They said, they were doing it. If they move into their home, the rental amounts would go and along with it the deductions. They also accepted that. The tax deduction on the EMI would be much higher, they felt, as they would pay a considerably higher amount ( compared to rent ) as EMI. I had to dash the cup from their lips… I informed them that they could claim only upto Rs.1.5 Lakhs of interest component, irrespective of what they are paying as interest, in case of their residential home. This surprised them, as they thought they are going to get full tax deductions.

Secondly, I also drew their attention to the fact that the EMI would be impossible to service with their current income. Even assuming that they did, if they want to move to another city, they will have to continue to pay the EMI and also the rent in the new city. I offered that the rent in the new city may be compensated by the rent they may get in the home they plan to acquire in Mumbai, subject to the property being ready to be rented out and their interest in renting it out. But, if they move to the new city and stay in a rented place, it beats the purpose of taking all the trouble of to acquire their own home.

By this time, they were really down. I knew I had punctured their most cherished dream. I resolved to apply the balm. I informed them that property may grow at a longterm rate of about 8% or so and they need not despair that they cannot buy it in future, provided that they invest their surpluses judiciously and build a corpus. A proper investment portfolio could yield higher than 8% returns and hence even if you want to invest in future in a home, they will have a corpus which would have taken care of the inflation in property rates. “I get the drift”, Rakshit said. “Guess, it is a sensible option to continue in this house and invest in a home later when we have dropped down anchor”, Rakshit added. I couldn’t have put it better. I just smiled.

Article by Suresh Sadagopan; Published in Moneycontrol.com on 7/2/2011

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