Home Truths: Think before you buy a home

Buying property was a no-brainer choice in the past. But with prices being tepid or falling in many major markets, financial assets are, currently, considered a better alternative. Many, who may have the ability to buy a home, are opting to rent.

In this changed landscape, prospective buyers need to better understand the pros and cons of home ownership. It helps to analyse the costs and benefits as well as other factors that are applicable to your specific case before taking a decision on this big-ticket investment.

There are several reasons why people prefer buying a home. One, taking a home loan provides a way to save systematically. For many, this is often the first step in financial discipline.

Two, a home is perceived as a long-term investment as owners often do not consider selling this asset to meet their needs. This is partly because selling involves a lot of work, but mainly because there are sentimental values attached to property. Three, not having to pay rent — a monthly outflow — provides comfort for many families.

In the past, property prices were on an uptick, with double-digit growth in many localities. Hence buying a home purely for investment purpose also played out well. But with property prices correcting in many markets, home buyers need to better weigh the costs and benefits of buying a home.

If we look at buying a home as purely an investment decision, it is important to analyse numbers such as price, appreciation, tax savings, income and other expenses. As mentioned before, unlike in the past, property prices have been falling in many key markets in recent years. Hence other assets such as equities have been offering higher returns.

Homes also incur various expenses that must be accounted for when you weigh the attractiveness in investing. For starters, you must pay stamp duty and registration charges when buying. On an ongoing basis, there are property and other taxes to be paid.

There could also be regular maintenance costs such as for painting and other expenses such as upgrades that may run to 2 per cent of the property cost. Also, when you sell the home, brokerage and other charges may further dent your profit.

These costs must be thought through, not just because they lower returns but also because they require you to have cash to pay the dues. Given the changing dynamics of the real estate industry, these costs now have a great bearing on your buying decision.

Also, some of the reasons that drove your buying decision earlier may not apply in your specific case. For example, if your job is not stable, taking a home loan may add to your stress rather than provide comfort.

Likewise, if you may have to relocate, owning a house in one city could lead to issues in managing it remotely.

Property management services are still in their infancy and often your personal efforts may not be financially rewarding.

Liquidity is another aspect to ponder over. Property transactions are time-consuming and since each home is unique, there are a lot of pricing inefficiencies. Selling a home may take a long time and may not fetch the price you expect. So, if you need money urgently, having money locked in a home is not advisable.

But before you write off property as an investment, know that there are positives too. One, there is tax benefit on interest paid. Also, you can save on rent if you occupy the house.

These benefits do not exist for other asset classes and hence you must look at pay-offs a little more broadly.

The writer is co-founder, RaNa Investment Advisors

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