Buying a first home – A case study

In the last post we saw the issues related to first time buying of a home. In this post, I wanted to clarify some of the context through a case study. Note that though the names are changed, all other data is accurate.

We are talking of a family of 4 – Ravi, his wife Madhuri and their children Ankit and Naina. Ravi has been working in IT for about 9 years, is 31 years old. Madhuri is a freelance web designer now and the children are 3 and 7 years old. They currently live in Hyderabad in a rented accommodation and are looking at buying their first home. Some data on the case are presented below:-

  • Their total take home income is about 2 lacs per month, out of which Ravi contributes 1.6 lacs.
  • Current 3BHK home in a Gated community costs them 28000 Rs, inclusive of maintenance.
  • Their other monthly expenses ( including one time ones ) come to about 40,000 Rs and they feel it may increase to about 50,000 Rs once Naina goes to a regular school.
  • They are currently able to invest about 1 lac per month, based on their goals. The rest of the money is for Gifts, Charities and indulgences.
  • Ravi is reasonably certain of being in Hyderabad for the next 8-10 years, till Ankit goes to college.
  • They are looking at a home which is a Gated community in West Hyderabad. The total costs will be in the region of 80 lacs and associated expenses like interiors, replacement furniture etc will move it closer to 90 lacs.
  • Ravi can look at a down payment of about 10 lacs and another 10 lacs for the interiots and furniture. He will therefore need a loan of some 70 lacs to buy the apartment.

Now Ravi can get a loan of the needed amount with an EMI of 75000 Rs for 15 years. Over the period of time his overall payment including principle and interest will be about 1.35 crores. Let us now ubnderstand how this will affect the cash flow of Ravi and Madhuri.

  • Once they move into their new home, savings on rent and taxes add up to 34000 Rs.
  • Excess cash needed for EMI will therefore be 44000 Rs per month.
  • As they were having surplus of 30000 Rs for gifts, charities and indulgences, they could look at funding 10000 Rs from that. It can also be more but that will seriously affect their lifestyle.
  • Investments per month will now come down to 66000 Rs as compared to the earlier 1 lac. As their income grows over the period they can bring this up gradually.
  • In the interim period if their expenses go up due to some reasons, investments will suffer further.

On the balance, it seems that Ravi and Madhuri can go for this. Factors to consider will be the stability of Ravi’s job, the ability of Madhuri to get a regular job if needed, adequate life and accident insurance for both of them etc. As long as these are taken care of things should work out fine.

What happens though, when the income of a couple is not at such a high level? Does the equation change? We will look at an alternate case study tomorrow to understand this.

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18 thoughts on “Buying a first home – A case study

  1. Sir , a very well needed and often debated topic . I would however like to ask about the implication on people with company provided accommodations. Here , the actual rent paid ( or a part thereof) is taxable for the employee as perquisite ,no tax exemption on HBL , but also there is no maintenence / HBL interest etc..

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  2. I follow your articles since one month. They enlightened me about various aspects of investment. It motivated me to learn more abt investment and to think abt ppf,MF, equity.
    Thanks a lot sir. Special thanks to brahmareddy who introduced me to this group.

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  3. I have an opposite view from yours.

    At the start of your career 22-35yrs Better go for wealth creation by investing the down payment amount in diversified MFS and EMI amount into sips ..continue this investment for 12-13yrs…u will be in a position to buy a flat on cash when u r 35yrs old…at dat time also one should go for loan and not buy on cash …let the dividend from MFS be used for paying emi !

    Owning a flat too early in life ..before 35yrs of age..is the biggest mistake youth r making these days ..
    your own house so early is nothing but creating a liability for yourself..offcourse unless and untill u r of that mindset that i want my ow home..so that i can brag abt it :D….buying own house at the risk of not creating wealth by doing high value sips or no lumpsum investments doest sound good to me !!

    No wonder y only FIIs make money in india ..and we r mere consumers of top notch companies and not shareholders.

    We r too emotional ..and buying gold , own house and having multiple Fds..this is all we know and feel proud about 😀

    Time to change !!

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    • I do not agree with you, one should buy a house if one can afford it. What should not be done is over leveraging on loan for something that you can’t really afford.

      I am not saying you can buy a house at 25 – read the case study carefully. Even to have the one time payment of 20 lacs you will need to save for a few years !!

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      • Its a simple logic..

        Real estate bull run lasted from 2003-2013
        2013-2023 real estate is in a bear run
        Real estate will give single digit returns for next 10 yrs …if black money bill pases ..even after 2023..u might not c a bull run in real estate the way it was during 2003-2013.

        Mfs next 10 yrs will easily give more than 16+ cagr….try to use the spread of 6%…create wealth ..delay buying own house !

        How m gonna plan this out

        My age 25yrs

        I will buy my own house at 38-40 yrs of my age

        Since 22 yrs old when i started my 1st job till 40 yrs ..on avg my sip amount per month is 50K..which is too less when we compare it with the EMI which i would have had to pay ..if i would have went for loan n all

        50k X 12month X 15yrs X 6 times my wealth when m 40 yrs old

        Last 15 yrs with recession..wars..corruptions scams …good sips still have made 8 times .. i will b conservative here and hence only 6 times

        5.4Cr i have cash at the age of 40 😀

        My rent for 15 yrs..45 lacs only ..25k on avg !!

        When i wil b 40 ..todays flat which cost me 1cr ..will b priced ad maximum 4-4.5X 1 cr
        4 – 4.5cr

        So basically i have all the cash to buy a nice flat for myself 😀 …No need of huge lumpsums or huge emis ..all u need is a proper plan and good sips.

        With 5.5cr i will not buy on cash..i will take loan and pay emis from the dividend i will get from my MFS portfolio .
        .while doing this i will repay all emis at the same tym will create wealth as my mf portfolio will only appreciate even after taking dividends !!

        Time to change and act smart !!

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      • Sorry, your logic is fundamentally flawed and is biased on hindsight. Stock markets can have prolonged periods of flat trajectory so multiplying by 6 times etc is a wrong assumption altogether.

        Secondly the RE market growing by a single digit is utopian. My flat in Chennai has appreciated more than 5 times in 10 years, so there is nothing to say that prices will not move in future too. More importantly, Real estate has availability constraints, after 20 years what you want to buy may well be beyond your reach even with more money.

        You are welcome to think of yourself as smart, my best wishes on things working out the way you have planned for yourself. I would be very wary of planning it the same way and definitely not advise anyone to do so.

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      • 15 yrs is a preety long investment horizon…u take out any 15 yrs since the inception of indian stock market and u will c markets have given way more returns that real estate

        2) I agree exactly 15 yrs from now we r not sure if markets will be in bear run or bull run..but den m in no hurry ..m defientely not amongt majority of indians who use buy high sell low strategy ..i have the liberty of increasing or dicreasing my horizon by +4 or -4 yrs.
        So i might buy my house at 36 or at 44 as per equity market scenario.

        3) your chennai flat might have given u 5 times in last 10 yrs only Bcos of the bull market of real estate…u will not c such kind of bull run for a long long tym in real estate henceforth…real estate market is already discounted for next 5 yrs.
        Also if u try to sell ur flat for 5times the valuation ..u will not get the buyer..its just on paper..it will not get sold for more than 4 times specially aftet removing property tax and al that stuff

        4) I will get a good flat after 15 yrs too in a good society bcos i have no issues of buying resale property .destressed propoerty !!! So availability constraint is not der as such

        I will not b working in a job after the age of 45yrs …want to be financially independent and take retirement at 45 from private job and start my own business after that.. liability of buying a house so early in life for no reason doesn’t sound logical to me !
        Der r so many more things to do than just buy a house 😀
        I will definitely ping u after 15 yrs to tel u that i have succesfully executed my plan 😀

        Best luck to all who will take a hefty loan so early in life and create no wealth for themself and slog all their life in a private sector job !

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      • Swapnil, you are wrong in so many ways that it will be difficult for me to educate you. To start with modify your tone and language of commenting. It is not right.

        I do not have to explain anything to you but will say one simple thing. A SIP of 50000 Rs per month in 15 years will not be 5.4 crores as you think. Try any SIP calculator with 12 % returns and see.

        You also seem to think that you know about bull and bear markets both in equity and RE. Even after being in the market for 20 years, I do not make that kind of claim. It is amazing that you think so and are planning to act on it.

        My sincere advice to you – improve your attitude, learn how to write properly, understand finance much more than you do now and then make any plans. Better still, go to a financial planner and get a proper plan done.

        Pls note, I will not be publishing any comment from you that is rude, contains offensive language and is written with Grammatical and spelling errors.

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      • My two cents .. first , the assumption of rental expenditure based on simple increment each year (somebody has actually calculated it as a constant spend , although averaged, spread over 15 years!!) , this is a horribly wrong calculation. The rental spend will increase with the increase in other expenses, the house will have to be bigger , the locality will have to get better with the increase in salaries and lifestyles and since it is rented , the period of occupation depends not on the tenant but on the land lord. I am really not considering people who want to earn /save money just for the heck of it and not have any lifestyle spends/improvements with growing family and income.There are many assumptions by Swapnil which are completely flawed, keeping the rental spend same and calculating linear returns on investments are just 2 of them , I am not making any judgements here , but a net saving of 50,000 Rs. each month starting age 22 is a tall order, If Swapnil here is capable of it , it’s great , but for most people , it will not be easy . Also assuming that the real estate will be in a universal degrowth/bear run for the next 10 years is as flawed as thinking that it was in a bull run for the 10 years preceding across markets.I know of many stories in Kolkata itself where the real estate has been stagnant for the last 8-10 years.
        In my view , buying a home should be among the first priorities for anybody starting to work , and pay off the loans as soon as possible , postponing the buy is just based on speculation , although there can be some people who can completely avoid buying a house altogether and spend whole lives in rented accomodations , for them I have no comments , but we have to realize that life has to be “lived” and not just spent , the wisdom to identify between spends that bring good experiences and the ones which can be avoided is crucial.

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  4. A family with a monthly income of Rs. 2 lakhs would ideally be looking at a house worth 1-2 crores (as a thumb rule, 5 to 10 times their present annual income) for a locality and space in keeping with their economic status.

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    • Good that you know all the answers and have no need to learn anything. For your information looking at history is a totally wrong way to estimate future , but I am sure you know better.

      If you can predict markets so accurately for such long term then you can do this full time too, why work in a job at all?

      Anyway, let us not drag this conversation, I think there is very little point in doing so.

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  5. Mr. Roy,

    31 yr old guy working for 9 years earning INR 1.6L p.m – i think this is the essence of the entire story.

    One has to be lucky to be able to earn this amount at 31. I am sure there are folks with a package of INR 12L as well, after 10Y of professional experience depending on how and where they started off, and how they progressed in their career.

    My only question in this case is tangential to real estate but relevant in terms of planning. Ravi would have 11 more years till his son starts off on his higher education – i.e a bachelors degree. In today’s age where cost of education has sky rocketed, don’t you think the INR 44K EMI would be a stretch, or rather Ravi would have to be absolutely certain of his job prospects atleast for 5 years after purchase of the flat?

    Lastly – given the INR 1.6L pm salary, i think he can contribute much more than INR 10L in terms of down payment. Lets assume that first 4 years of his career, savings were minimal. But in the next 5, he should have definitely saved more than a cumulative of INR 10L. Or, is the assumption that he would not be liquidating a part of his investments (say in stocks/MFs/a piece of land etc..) to make the additional down payment? Could you pl clarify?

    Thank You!, and i will await the next case where (hopefully) the article will talk about a couple that are doing not so well. Could be a case of a single person working in the family as well – just to illustrate a moderate base.

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    • Thank you for your detailed question, it shows you read the post seriously.
      Yes, I am assuming that Ravi is not liquidating all his investments for the down payment. Equity investments are best made for long term and Ravi will have other goals such as his son’s education and his retirement. The other issue about job safety is important but that is a chance all of us need to take. The only guarantee there is to keep adding value to yourself and the job you are doing. As far as other goals go, you can see that he is still investing in them even though it is reduced post EMI.
      Finally, salary levels are unique to each person and we must cut our coats according to the cloth we have. In the next post, I will look at another situation to deal with.

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