Notwithstanding all the arguments put forward in the previous part, the single biggest reason why I am not buying an apartment in Bangalore (or anywhere else) is because I don’t have the money to pay for it. “But who has that kind of money? You can take a home loan no?” they will say. No. I am not interested in becoming a slave to the system by falling into the biggest financial trap the modern World has devised. Thanks to hyper-inflated property prices, it is simply not possible for the “aam aadmi” to own a house without sticking his neck out and making a deal with the devil, signing away his entire life for a concrete box in the sky – Yes, taking a Housing Loan or Home Loan or Mortgage. As @clemenza famously said,[bkinfobox backgroundcolor=”#ffff88″]”A home loan is an agreement between you and the bank that you will work for the rest of your life to pay them money”.[/bkinfobox]
Home Loans, Slavery and the Middle Class Trap
After humanity got wise and banned slavery, shrewd people managed to invent other avenues of more “polished” forms of slavery to keep the revenue flowing. The “Banking-Home Loan industry” is one of those. As we speak, those who profit from this scheme are lounging at their well-appointed Mahogany desks in corner offices on the 20th floor, dressed in crisp Italian suits and evilly chuckling away thinking about all the money being raked in by their bonded laborers, the house owners who toil away their life and blood to fill their coffers with the money they spend a substantial part of their life earning. People these days seemingly work for 20 long years for only one goal: To make sure there is money in their account on the 7th of every month. Every single movement and decision taken by them in life seems to be dictated by their home loan. Not really a way to live a life, I would say.
The middle class including all its subclasses are often the biggest victims of the home loan industry. It capitalizes on the impatience and ambition of the middle class to move “up” in life, which they (falsely) believe can be done by acquiring untenable assets like cars and apartments. In reality, this not only prevents them from actually “moving up” in life but also ensures that they get stuck in the vortex of middle class-ism forever. The upper class is upper class because they are rich. That is, they have in hand tankers full of liquid cash or assets which can easily be converted into hard cash at a short notice. Middle class households do not have this. But what they have is one home loan, one car loan, one/two personal loans and four or five credit cards, making them live on revolving credit which really does not lead anyone anywhere in life. Once you buy an apartment off a full loan, that is mostly how far you would be getting in life.
No one can ever get rich if they are trapped in the loan bubble because any loan or any credit product is designed to shear the purchaser off their wealth by making them pay double of what they signed up for. By the time you finish paying up your home loan, you would have ended up paying almost or more than twice the amount you started off with. If you buy an apartment for Rs.40 Lakhs at 10% interest for 20 years, you would have paid around 90 Lakhs by the time your loan gets over. And for the first 10 years, you would be paying only interest! In case you would want to foreclose your loan before the first x years, you would have to pay almost the entire loan amount even after paying many EMIs! This is true for all types of loan. Imagine, your entire life, atleast the good part of it from when you are 30 to 50 will be slaved away to pay off a home loan. It this what your life is for?
30yr olds buy 30lakh rupee homes-30km from city-spend 30yrs repaying loan-by when they are 60 and will it to the children #whatforthislife
— Raokaalam (@Aswin_Rao) March 22, 2014
Some Money Matters – Is it worth investing in an apartment?
Yes, real estate is a big investment vehicle. Yes, there are lots of people who make lots of money out of it. But the difference is that those people already have lots of extra Indian Rupees lying around to roll. The average Joe who sees this and jumps into the fray will end up earning nothing. Yes, apartment prices appreciate greatly. But what people fail to take into consideration is how inflation affects prices of apartments. It makes sense if you had bought a flat with extra cash and then sold it off for gains, but when you buy an apartment on loan, selling it even at double of what you bought it for will not net you any gains thanks to interest and inflation. This is what the poor sods who scrape the barrel to purchase a roof and then try to “make money” by selling it later fail to realize. Real Estate gambling is meant for the Sharks. The squirrel will suffer consequences if it tries to open its mouth as wide as seeing the elephant do it.
Real Estate Case Study: Mr.Sasi sells his apartment and doubles his money.
Mr.Sasi bought an apartment 4 years ago for 30 Lakhs on loan at Bellandur Outer Ring Road, Bangalore. He sells it today for 60 Lakhs! Let us assume that Mr. Sasi went abroad and made some solid cash in commissions to pay off and settle his home loan. Even though it might sound fantastic that he doubled his money in four years, it is not so. There are no substantial gains made because there are some things we fail to take into consideration. What will Mr. Sasi do with the Rs.60 Lakhs he has now? For starters, he has to find a new place to live in.
- Prices for everything else has also doubled in those four years thanks to inflation. All flats around the same area cost more or less the same 60 L today. The nearest place where Mr.Sasi can get an apartment for Rs.30 Lakhs today is at Ramamurthy Nagar, 10 kilometers farther away on the Ring Road.
- The 60 Lakhs he has in hand has somewhat the same value what 30 Lakhs had 4 years ago. In reality, he has not gained anything. He also has not lost anything. Or has he?
- Mr. Sasi has paid Home Loan EMIs for 4 years. At 11% interest on Rs.30 Lakh it would make around Rs. 30,000 pm or Rs.14 Lakhs in 4 years. Which is only a part of the Interest on the loan and which has gone waste.
- If you look beyond the “Cash in hand”, you can see that minus the mortgage payments he actually has earned only 46 Lakhs, which is today not even worth the 30 Lakh he started out with four years back.
Now Mr. Sasi’s options are:
- Buy an apartment in Ramamurthy Nagar and spend two additional hours commuting every day, but at the same time having 30 Lakhs extra in the bank.
- Buy another apartment around the same Bellandur ORR area – Which makes no sense
- Move into a rented house around the same Bellandur ORR area and invest the 60 Lakhs elsewhere – Financially the best option.
So in the end, Mr.Sasi is left with nothing better even after getting double his investment back! And if he had used his gains from the sale of his apartment to settle the home loan, he would have been left with almost nothing. And we are not even taking into account his (wasted) effort and toil he endured in paying EMIs for four years.
But so many “common” people buy apartments, sell them and make money no? Yes, they do. And anyone can do that by following a few pointers. And it has a catch.
Financial Options and Advice on Buying an Apartment
Ask any financial expert or even the banks, and they will tell you that your monthly commitment payments (loans, rent) of all types put together should never exceed 30% of your total monthly income. Very true, but my experiences have taught me that it actually should be not more than one-fifth or 20% of your income. 30% should be put aside as investment and rest could be spent as disposable income. So if you earn one lakh monthly income, you should not pay more than 20,000 as rent or EMI of all types put together. And taking a leaf out of the “Don’t pay rent, pay EMI” people’s books, a most basic rule about buying apartments on EMI can be framed as follows:[bkinfobox title=”Do not pay as EMI more than what you would pay as Rent” backgroundcolor=”#ffff88″ ]
Based on this rule, we can put forward some more pointers.
- Fix your apartment buying budget at Rs. <50% of your monthly salary x 100>
- Take a home loan whose EMI will not exceed 20% of your monthly salary
- And of course, you MUST have the remaining amount (80%) with you for payment in cash to the builder!
[/bkinfobox][bkinfobox backgroundcolor=”#ffc4c4″]Do not go in for buying a house if you don’t have hard cash to fund 60% of the cost by yourself. The remaining 40% of the fund can be funded by a home loan. Otherwise, home loans will only lead to financial unsustainabiliy.[/bkinfobox]
For example, consider a household that earns Rs.1,00,000 a month. Their budget should be for an apartment whose cost does not exceed Rs.50 Lakhs. Their home loan EMI should not exceed Rs.20,000 per month, which means the home loan should be for Rs.20 Lakhs thereabouts. Which says that they should go about buying a house only if they have Rs.30 Lakhs or 60% of the apartment cost at their immediate disposal. This makes sense in the immediate and long-term, when returns will flow in on the incumbanceless 60%.
What if I don’t have any money with me?
Tough Luck. But hey, Dasa, there is a time for everything. Maybe it will come your way one day, or you could work towards accumulating that required money. Some ideas are: Sell Gold, your or your wife’s share, do a stint abroad (the most popular option), win the lottery, find an alternate source of income like brokering, start/partner a business, get mentioned in the will of a rich uncle and so on. Until then, stay put, like I do. There are millions of people who happily pump in their cash into apartments for the guts and glory of living in their “own” house. Maybe they all do have the money. I do not, so I am not buying an apartment. Maybe I am insane as a good friend pointed out. I earn the meager amounts I do after a lot of hardship and struggle, which I am not interested in giving away for some fatcat banker to buy his next Ferrari.
Now that we have got the finances out of the way, more detailed rationale will follow in the next part.