Is buying a house an investment?

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If you live in a city away from your mother, you’re probably no stranger to regular good morning messages and the occasional forwards that can make you roll your eyes in exasperation or burst out laughing. 

Sometimes, she interrupts her regular messages with a link to a new property that’s just been listed on the market. If it’s a listing she particularly likes, she even calls in an attempt to make you ‘see sense’. 

And you've had this conversation often enough to know exactly how it goes. 

She gives you a long list of reasons to buy a house. 

And you respond to each of them with reasons for not buying one. 

Finally, in exasperation, she always reaches out for the most convenient reason - “At least it’ll be an investment for your future.”

But is buying a house a good investment? 

You generally invest in an asset either to generate income from it, or to profit from some increase in its value. And any asset that gives you more than it takes out of your pocket is a good investment. Simple enough.

But does residential real estate fit that bill? Well - that depends. 

In some cases, a house may make sense as an investment. And in others, real estate may give you much less than it truly costs. Let me take you through both sides of the story.

3 reasons why a house may not be an investment

If you, like most people, believe that it’s a good investment decision to buy a property — we’re genuinely sorry but this may burst your bubble. It is essential to know the good and bad of it all. Take this as your sign to look into renting vs buying a house too. Here it all goes!

Reason 1: Your house may not appreciate much in value 

The idea that a house is a good investment stems from the fact that property prices have historically been on an upward trend. That’s partly true. Between 1995 and 2015, the Indian real estate market did deliver significant returns for investors. 

We all know someone - a great uncle or a grandfather - who supposedly purchased a house in the then-suburbs for ₹5 lakh and then sold it 20 years later at a whopping ₹1 crore. 

But that was then, and this is now. Post-2015, real estate prices have flattened out and become stagnant. 

Why, you ask? Two words - housing finance

Before the housing finance boom, people typically saved up for a house and then purchased it. But in the 90s, with home loans becoming more accessible, people started to use borrowed money to buy houses. It made real estate more affordable - at first glance. As a result, the demand for homes rose, and so did the prices. 

Here is a simple depiction of this phenomenon.

HOUSING FINANCE BOOM


ACCESSIBLE HOME LOANS


ACCESSIBLE HOMES


INCREASED DEMAND FOR HOUSES


RISE IN REAL ESTATE PRICES

But now, the real estate market is overexposed to housing finance. Everybody has access to home loans. You can simply get a home loan online, in just a few minutes!

So, it’s not practical to expect a similar rise in house prices today.

Reason 2: You may never be able cash in on the rewards

Your house can never truly be an investment if you cannot cash in on the returns it offers.

If you buy a property and use it as your place of residence, you may convince yourself that it’s an investment. Because you can sell it later, once it appreciates in value. 

Now, let’s say it does - 10 years later. So you sell it, and what do you do with the funds? Use them to buy another - perhaps a bigger house?

If that’s the case, your house is not really an investment because your money is trapped in the asset. That doesn’t mean ‘home ownership’ is a bad thing. After all, housing is a basic necessity. But in most cases, your home isn’t really an investment simply because you don’t get to cash in on the returns. 

Reason 3: The true returns may be far less than what’s promised

Take the case of the great uncle from earlier. Remember he purchased a house for ₹5 lakh and sold it for ₹1 crore? This is the classic case of 20x in 20 years that real estate was historically so popular for. 

But in today’s market, you need to take a loan to buy your house. Not to mention the many different kinds of repairs, maintenance and upkeep expenses you’ve to pay for over the years of owning the property. 

If you factor all this in, the total cost of buying or owning a house goes up. And it brings the true returns from your house down.

Let’s crunch some numbers to understand this better. 

  • Say you buy a property for ₹40 lakh. 
  • And after 30 years, you sell it for ₹1 crore. 
  • At first glance, your profit appears to be ₹60 lakh, isn’t it?

But the true picture can be starkly different. Check out the numbers below to get a better idea of the true returns.

Particulars

Details

Total cost (in Rs.)

Cost of the house property on paper

₹40,00,000

Registration fees at 5% of the cost

₹40,00,000 x 5%

2,00,000

Down payment (at 25% of the cost)

10,00,000 

Home loan amount 

₹30,00,000

EMI to be paid for the loan


(EMI calculated at an assumed interest rate of 10% over a period of 20 years)

₹28,951 per month 

Total amount to be paid over 20 years

(28,951 per month for 20 years)

69,48,155

Minimum maintenance costs (calculated at % of the cost of the house)

₹40,000 per year

Period over which you own and hold the house in your name

30 years

Total maintenance costs over 30 years

₹40,000 per year x 30 years

12,00,000

Minimum total cost of buying, owning and maintaining the house (A)

93,48,155

Sale value at the end of 30 years (B)

1,00,00,000

Profit (B - A)

6,51,845

So, your actual profit comes out to be just a little over ₹6.5 lakh. The true cost of owning a house is often overlooked, read here to know more about it.

And now, 3 reasons a house may be a good investment, after all

It’s not all bad, though. There are some reasons a house may prove to be a lucrative investment too. 

Reason 1: Your house is in a prime location

Location matters a great deal in real estate. Check out how the real estate prices appreciated in different cities in India last year. 

City

Annual appreciation in real estate prices in 2021[2]

Ahmedabad

7%

Hyderabad 

7%

Bengaluru

6%

Chennai

5%

Kolkata

5%

Delhi NCR

5%

Mumbai

4%

Pune

3%

As you can see, the increase in property values varies from one city to another. And even within the same city, property prices in some locations may appreciate more than those in other areas of the city. 

Generally, if your house is located in a well-connected part of the city, you can expect a rewarding increase in its value. It also helps if your house has several USPs going for it. Like being located on freehold land (example: an independent house built on land you own) instead of leasehold plots (like owning an apartment within a large building complex owned by an organisation), having a wide range of amenities, and generally good infrastructure in the area.

Reason 2: You earn a good rental income from your house

The first house you buy may not be an investment in the true sense of the word. But the second one you buy can be. Provided you rent it out, of course.

Renting your second or spare house out helps you earn rental income regularly. This, coupled with the fact that you don’t have to pay rent since you live in your own house, can give your finances a nice little facelift.

Here’s a little bonus tip if you’re planning to go down this road:

Living in the suburbs and renting out your house in a prime location can be a smart financial move, because you can maximise your rental income this way.

Reason 3: The tax benefits could really help

Lastly, buying a house with the help of a home loan gives you a ton of tax benefits. Let’s list them out.

Section of the Income Tax Act, 1961

Deduction available on

Maximum amount deductible (in Rs.)

Section 80C

The principal component of the EMI

₹1,50,000 per year

Section 24

The interest portion of the EMI

₹2 lakh per year if you live in the house


No limit if the house is rented out

Section 80EE (for first time home buyers)

The interest portion of the EMI

₹50,000 per year

Information asymmetry in the real estate market is a real thing. Now that you know both sides of the story, you're the best judge of your financial situation. If you can financially justify purchasing a house as an investment, you know what to do. But if you believe that buying a house doesn’t really fit into your investment portfolio, you can always rent a house. 

If you’re still in a dilemma about this, check out Fi’s Rent vs Buy calculator. All you need to do is plug in a few numbers, and this nifty little tool will help you make the right decision. 

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