Do not let your Dream House become a Nightmare!

In the current scenario, everyone is in a rush to buy a dream house. There is nothing in wrong in doing so, provided you follow a simple checklist:

Is house an asset or liability?

The notion that a house is an asset is prevalent since many generations. It is a myth that is pushing people to buy a liability by thinking of it is an asset. It does not mean that you should not buy a house, but do not buy it thinking that it is an asset. When Robert Kiyosaki mentioned in his book “Rich Dad Poor Dad” that house is liability, he was severely criticised. But, after the sub-prime crisis in the USA, everybody started agreeing with him.

So why is house a liability? Why not an asset? What do you mean by an asset? 

Asset is an investment that puts money in your pocket! When you buy a house, money is taken out of your pocket. Consider EMIs, Property and other municipal taxes, annual maintenance, etc.

When a person brags about the exponential increase in the price of the house from 20 lakhs to 50 lakhs, what are the chances of that person selling the house? Even if that person sells the house at the increased price, purchasing a new house will cost almost the same amount of money! House cannot be an asset for you. It is an asset for you next generation!

Who owns the house?

Most of the house buyers opt for a loan. It’s Ok to do so if the EMI is affordable. However, never forget that you will become the real owner of the house in 15-20 years, or earlier, when you repay the loan. Always keep in mind when you say that you bought a house with a loan, the bank is the actual owner!

Will housing prices keep growing?

People believe in the myth that housing prices will keep on increasing because the prices have increased substantially in the last 5-8 years. We need to understand that real estate pricing is a function of demand and supply. This demand and supply function is governed heavily by the location of the real estate. For example, why is there a huge difference in the price of a house with the same specifications in Tambaram as compared to OMR road? It is because OMR road is high in demand. Tomorrow some other areas will be high in demand thus causing an increase in prices. The demand supply matrix is highly subject to fluctuations.

How much EMI is right?

For many families, housing loan EMI takes the biggest chunk of their monthly incomes. The salaried individual’s monthly income is spent for taxes, EMIs, household expenses, and some savings.

You need to ask yourself about the other goals that you have in life apart from buying a house. If you do want to plan for children’s education, retirement, foreign trips, etc, you have to give a thought to keeping money aside for that. If a major part of your income goes towards EMI, how will you efficiently plan for your other goals?

Ensure that your EMI is not more than 40% of your net income.

Do I need to seek professional help before buying a house?
Yes. The right financial advisor will help you to calculate your cash flow and give you sound advice on your decision to buy a house.