“This apartment was my first major investment. I bought it as I had high disposable income. Rent would offset about 75% of the EMI amount, loan is tax-efficient and I was able to build an asset so early in my career,” he said.
Kartik, a marketing professional with a startup, was on a 30% pay cut for eight months after the outbreak of the pandemic. “I have managed to pay EMIs because I live with my parents in Delhi and as a result have fewer expenses, but I feel the pinch of the loss of rental income,” he said.
This is not a one-off case of a young professional erring by committing to an inflexible investment for the long term early in his/her career.
Moreover, tying yourself to a huge loan that comes with a long tenure of 15-20 years at the beginning of your career is something experts advise against. At this stage, one can’t be certain about the decisions they will make going ahead, as they could go for higher studies or quit the job to start a business.
“If someone does not have the visibility for at least the next five years about cash flows or the house they are going to stay in, then taking a home loan may not be the best decision. In the past, many people took housing loans fully aware about all these challenges, but it was more to do with taking a punt on real estate as it was going up and a housing loan provided the perfect leverage to get in it,” said Vijai Mantri, co-founder and chief investment strategist, JRL Money.
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Kartik is a case in point. He wants to start his own venture and will transfer the loan burden to his wife until his income stabilizes again. However, not everyone might have a secondary income to fall back on when they wish to take a break from the investment to fulfil other short-term financial goals.
The cons of taking a home loan
Home loans are considered as ‘good loans’ because you are building an asset through them and they draw tax benefits. Even then, loan repayment is a costly proposition and can overwhelm young earners as their income and saving is not stable at this stage in their career.
“When you take a home loan, you are essentially taking up equated monthly instalments (EMIs) based on future income. For a young earner, the assumption here is that she will earn a certain income tomorrow and continue to pay the loan over the next 15-20 years. At this point in one’s career, that future income stream is uncertain, particularly in today’s job environment,” said Priya Sunder, director, PeakAlpha Investment Services.
Further, as youngsters have fewer responsibilities at the start of their career, taking up EMIs of ₹20,000- ₹30,000 with the first or second job doesn’t seem like a huge burden. However, in doing so, they are taking away money from other goals to fund this one investment, said Sunder.
“If 50-60% of your surplus is going towards servicing an EMI, that will leave you with very little to fund other objectives, such as your own retirement fund or even creating an emergency cushion,” she added.
Financial planners said that a common line of thought that an EMI is a forced saving is another reason that prompts youngsters to invest in real estate. “Just as many parents buy Ulip (unit-linked insurance policy) for their children else they would squander away their earnings,” said Mantri.
“EMI is not so much a saving even though the underlying benefit is creating an asset. Forced savings like EPF, PPF, NPS fetch far better compounding benefits in the long run,” sad Dilshad Billimoria, managing director, Dilzer Consultants.
Instead, investing in equities through systematic investment plans (SIPs) is a better form of disciplined saving. It is liquid and also comes with a pause option if your financial situation changes and demands a break from investing.
CULTIVATE A SAVINGS HABIT FIRST
Sunder said instead of getting bogged down with a liability at the outset, one should start a savings habit with their first paycheque and keep investments liquid at this stage.
“Investors think that if a property is coming to them at a good price today and they defer it by a few years, it might get unaffordable. That’s not true. It makes sense to consider real estate investments only after you have enough liquid assets to ensure that if your income was to get disrupted, your loan EMIs won’t be impacted,” she said.
A residential property yields a paltry 2-3% annually in the form of rental income. “You pay 6-8% in interest on loan to earn less than 3% in rent. That makes no financial sense,” said Sunder. “This situation will work well when you are hoping to earn a sizeable profit at the time of selling the property in the future, so you are willing to write off low yield in the interim. But, whether the property will be sold at a fairly large appreciation in the future is completely unpredictable.”
This can be seen in the sub-optimal rise in residential property prices in the past six years in some metro cities (see table). In comparison, commercial rental income is a better option, said Mantri. A Grade A office property can earn you up to 10.5% annually.
However, it is no secret that commercial rental market has taken a major beating in the past 18 months due to covid-19, so investors are suggested to consider changing market trends before investing in real estate.
One can consider fractional ownership options like Reits (real estate investment trusts) to include real estate in their investment portfolio without having to make a large investment.
If you are buying a house to live in it and not as an investment, Mantri said, now is a good time as real estate is coming out of the bottom of the cycle. Additionally, home loan deals are quite attractive right now with low interest rates of 6.5-7.5%.
However, buyers should be careful about buying only from reputed developers.
“Despite the Real Estate Regulatory Authority (RERA) and other reformatory changes, it is imperative that buyers do their due diligence before buying any property. All documents, irrespective of the builder, must be checked and verified by legal professionals. Also, buyers must be aware that they can approach the local authorities to verify whether or not the concerned project is built as per construction norms,” said Anuj Puri, chairman, ANAROCK Group.
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