Buying a House vs Renting — but not the usual Bull S**t you have heard…
You might be bored with the usual Bull S**t from leading Financial Advisors who claim renting a home is much better than buying one.
Guess what? It is true. But most would not act, because they look at the numbers objectively and walk away unconvinced. Numbers look good in a spreadsheet but not in the human mind — people need a psychological reason to stick with a decision, not just a snapshot of numbers.
I am sure you might have already done the math on why renting a home is much better than paying an EMI for 20 years. If you are yet to do it, let me illustrate it for you once, I promise you this will be quick.
A 50,00,000 home loan at a 10% interest rate for 20 years will cost you an EMI of 48251 per month. At the end of your tenure, you will end up paying 65,80,260 as interest alone, you add this with the original principal that had to be repaid (50 lakhs) — the total will become: 1.15 crores.
The same funds if you invest in an SIP at the same rate of interest (10%), your returns at the end of 20 years will be approximately 3.69 crores.
There is a difference of 3.69 minus 1.15 = 2.54 crores — how does that really make sense??
Even if you rent an apartment for an additional 48251 per month, you would still have a balance of 3.69–1.15×2 = 1.39 crores with you.
It all makes sense only if the home you purchased has a resale value above 3.7 cr at the end of 20 years. A house on a piece of land could have 7.5x appreciation in 20 years, but I do not really know if a flat/apartment is an appreciating asset. Honestly, who would want to buy a 20-year-old apartment then?
Ideally, a rational investor should have decided to rent instead of buying a home by now but the majority of them do not act. The reason is not because these numbers are too hard to digest, but because of social status.
When I enquired with a select group of people, most of them preferred to buy a home via a housing loan rather than invest the same in an index fund or balanced advantage fund.
The real reason is discipline!
Who would have the financial discipline to invest a pre-defined amount for 20 long years? Since investments are contributions that are done voluntarily, most of them would hit the pause or stop button in case of any financial emergency.
A loan on the other hand cannot be stopped, it’s a commitment. You have no choice to stop a monthly installment, you are forced to contribute. If you miss a few installments, banks will charge a penalty. Your credit score will go down too. If you continue to miss the installments, the bank’s collection agents will turn up. If you are still missing your EMIs, the bank may be forced to recover their asset and throw you out of your home.
People are so obsessed with loans. Many businessmen are still hanging onto their loss-making enterprises due to the monthly debt. A majority of middle-class households are 3 months away from bankruptcy if they lose their job, that’s how much the debt has caught up to them.
Honestly, why do you think people become slaves to bank loans? The reasons are social pressure and status symbols. If you decide to live below your means, your bank balance will be in surplus. If you borrow and live above your means, you will be in debt.
The need to show off is the major reason why the people in our country commit to buying a house/car now and paying it later via installments. If they decide to postpone their house/car purchase, their thought that society may not accept them takes precedence.
And that is the real reason why they chose to ignore the calculations…
The takeaway from this article is that, if you have the same commitment to invest in SIPs just like your monthly EMI amount, you will be able to create 4x more wealth in 20 years. The scientific reason is the interest compounding principle i.e. your returns generated on investments will also start generating returns the next year. Whereas in a loan, the numbers are not expanding, it is diminishing…
PS: All these calculations go for a toss if you consider taxes and tax exemptions. Any capital gain you generate is taxable and interest rates on debt are tax exempted for business people. So buying assets via debt makes perfect sense for business-class people.