Investing in real estate might not be a good idea if you are young


“This apartment was my first major investment. I bought it because I had a high disposable income. The rent would offset about 75% of the EMI amount, the loan is tax-efficient and I was able to build an asset so early in my career, ”he said.

Kartik, a marketing professional at a startup, suffered a 30% pay cut for eight months after the outbreak of the pandemic. “I managed to pay the IMEs because I live with my parents in Delhi and therefore have less expenses, but I feel the pinch of the loss of rental income,” he said.

This is not a one-off case of a young professional making a mistake by committing to an inflexible, long-term investment early in their career.

In addition, experts advise against tying yourself to a huge loan with a long term of 15 to 20 years at the start of your career. At this point, one cannot be sure what decisions they will make in the future as they might pursue higher education or quit work to start a business.

“If someone doesn’t have cash flow visibility for at least the next five years or the house they’re going to be staying in, then taking out a home loan might not be the best decision. In the past, many people took out home loans fully aware of all of these challenges, but it was more about taking a kick out of real estate as it grew and a loan. housing was the ideal lever to access it, ”said Vijai. Mantri, Co-Founder and Chief Investment Strategist, JRL Money.

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Kartik is one example. He wants to start his own business and will shift the burden of the loan to his wife until his income stabilizes again. However, not everyone may have a secondary income to fall back on when they want to take a break from investing to meet other short-term financial goals.

The disadvantages of taking out a mortgage

Home loans are considered “good loans” because you build an asset with them and they have tax advantages. Even then, repaying the loan is an expensive proposition and can overwhelm young workers as their income and savings are not stable at this stage of their careers.

“When you take out a home loan, you basically take equivalent monthly payments (EMI) based on future income. For a young employee, the assumption here is that she will earn some income tomorrow and continue to pay off the loan over the next 15 to 20 years. At this point in his career, this future income stream is uncertain, especially in today’s business environment, ”said Priya Sunder, Director of PeakAlpha Investment Services.

In addition, as young people have fewer responsibilities at the start of their careers, the resumption of EMIs from ??20,000- ??30,000 with the first or second job doesn’t seem like a huge burden. However, in doing so, they are taking money from other targets to fund this investment, Sunder said.

“If 50-60% of your surplus is going to service an EMI, that will leave you very little to fund other goals, such as your own retirement fund or even creating an emergency cushion,” she added.

Financial planners have said that a common line of thinking that an EMI is forced savings is another reason why young people invest in real estate. “Just like many parents buy Ulip (unit-linked insurance policy) for their children, otherwise they will be wasting their income,” Mantri said.

“MIL is not so much an economy even though the underlying benefit creates an asset. Forced economies like EPF, PPF, NPS generate much better profits in the long run, ”said Dilshad Billimoria, Managing Director of Dilzer Consultants.

Instead, investing in stocks through systematic investment plans (SIPs) is a better form of disciplined savings. It is liquid and also includes a pause option if your financial situation changes and requires a break in your investments.

GROW A SAVINGS HABIT FIRST

Sunder said that instead of getting bogged down with a liability up front, one should start saving with his first paycheck and keep investments liquid at that point.

“Investors think that if a property comes to them at a good price today and they postpone it for a few years, it could become unaffordable. This is not true. It makes sense to only consider real estate investments once you have enough liquid assets to ensure that if your income were to be disrupted, the EMIs of your loans would not be affected, ”he said. she declared.

A residential property earns a measly 2-3% per year in the form of rental income. “You pay 6-8% interest on a loan to earn less than 3% rent. It makes no financial sense, “Sunder said.” This situation will work well when you expect to make a large profit when selling the property in the future, so you are prepared to amortize the low return into the property. interval. But, whether the property will be sold at a significant enough appreciation in the future is completely unpredictable. “

This can be seen in the sub-optimal rise in residential property prices over the past six years in some metropolitan cities. (See table). In comparison, commercial rental income is a better option, Mantri said. A Class A office building can earn you up to 10.5% per year.

However, it is no secret that the commercial rental market has taken a hard hit in the past 18 months due to covid-19, so investors are suggested to consider changing market trends. before investing in real estate.

One can consider fractional ownership options like Reits (Real Estate Investment Trusts) to include real estate in their investment portfolio without having to make a large investment.

If you’re buying a home to live in and not as an investment, Mantri said, now is the time because real estate is coming out of the bottom of the cycle. In addition, home loan offers are very attractive at the moment with low interest rates of 6.5-7.5%.

However, buyers should be careful to only buy from reputable developers.

“Despite the Real Estate Regulatory Authority (RERA) and other reforming changes, it is imperative that buyers do due diligence before purchasing a property. All documents, regardless of the manufacturer, must be checked and verified by legal professionals. In addition, buyers should know that they can approach local authorities to check whether the relevant project is built according to construction standards, ”said Anuj Puri, chairman of ANAROCK group.

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