7

I am 25 year old Indian in the beginning of my career i.e this is my second year after entering the workforce. I am working in Japan.

My salary does not leave much extra after my personal expenditures. But I do have a savings plan which I am investing 1/3rd of my salary every month. I do not have any student debt.

Now my parents are insisting that I buy a house in India on loan in the next year. Their reasoning is that, since I am paying for their house rent, if I could divert it to pay for the loan I can get a property in return. I understand the logic behind that. But I am scared of getting into debt so early in my career. If I commit myself like that, it might make me less independent in making career changes till I finish paying off that debt.

My question is, is it a smart thing for an entry level employee with a basic pay to buy a property on debt ? Should I wait a few more years to save up money and then think about property ?

  • Common sense counterquestion: Could you possible stop paying rent for your parents house? Because if that is not the case - how is that monthly payment less limiting you than the monthly payment for a house credit? – TomTom Apr 10 '17 at 8:26
  • 12
    You say "My salary does not leave much extra after my personal expenditures." - that is "nice." But it totally contradicts "But I do have a savings plan which I am investing 1/3rd of my salary every month.". Which one is it? No money left over, or saving a third of your salary? – TomTom Apr 10 '17 at 8:26
  • 1
    Do I understand right that you are currently renting a house in India for your parents to live in? If you buy a house, is it also for your parents, and in the future you and a spouse would also live there once you leave Japan? – Tor Klingberg Apr 10 '17 at 11:52
  • 2
    @TomTom I consider that savings plans as part of my expenditure. After that I dont have anything left over. Their rent is a "help" I am offering. But the mortgage would become an obligation since the property is going to be in my name as well as the debt. – Kanmani Apr 10 '17 at 23:57
  • @Tor Klingberg yes, my parents would be living there. No I wont live there if I decided to get married. I would have to look for another place (rent,probably). The property would be registered in my name but it would belong to them in their lifetime. Its complicated. – Kanmani Apr 11 '17 at 0:02
5

is it a smart thing for an entry level employee with a basic pay to buy a property on debt ?

This is opinion based and can't be conclusively answered by others. Only you can make the choice.

Their reasoning is that, since I am paying for their house rent right now(I have been doing this ever since I got into graduate school), I could divert it to pay for the loan while getting a property in return

If I understand this, you are currently NRI [as you are working in Japan], you would like to take a home loan in India and buy a property in India.

In the current scenario, the EMI towards home loan do not equate to the Rent as property prices have gone up in most places. In 2002 - 2007, there was a time of low interest rates and low property prices, that along with tax breaks made it cheaper to buy than rent.

Also note that since you are NRI, you do not get any income tax rebate on interest paid. If you buy please ensure that all the EMI's are paid from NRE account. This would in future help you repatriate funds out of India, if you plan to sell the house.

But I am scared of getting into debt so early in my career. If I commit myself like that, it might make me less courageous in making career changes till I finish paying off that debt.

This is a valid concern, if you need to pursue further studies, or take a break for a change in career, it would make it difficult. Also note there are additional costs of buying a house, apart from EMI, there property tax, if you staying in society, a monthly maintenance etc.

  • Thank you. My parents keep saying that the rent is almost equivalent to the loan EMI but now that I have read your answer I know that I should decide after looking into interest rates for the kind of house they want to buy in the area they want. Thank you very much. This will help me a lot. – Kanmani Apr 10 '17 at 8:12
  • @chilvandu Yes. You would need to do some math, i.e. figure out approx the cost of property you are interested to buy, and the EMI for same. This is one aspect of it. The other aspect is even if you can, do you want to take the liability so early on. – Dheer Apr 11 '17 at 4:42
4

I would strongly consider renting; as homes are often viewed by people as "investments" but in reality they are costs, just like renting. The time-frame for return is so long, the interest rate structure in terms of your mortgage payments; if you buy, you must be prepared to and willing to stay at minimum 7-10 years; because anything can happen. Hot markets turn cold. Or stale, and just the closing costs will cause it be less advantageous to renting.

Before buying a property, ask yourself does it meet these 5 criteria: IDEAL

I - Income; the property will provide positive cash flow through renters.

D - Depreciation; tax savings.

E - Equity; building equity in the property- the best way is through interest only loans. There is NO reason to pay any principle on any property purchase. You do 5 year interest only loans; keep your payments low; and build equity over time as the property price rises. Look how much "principle" you actually pay down over the first 7 years on a 30 year mortgage. Virtually Nil.

A - Appreciation - The property will over time go up in value. Period. There is no need to pay any principle. Your Equity will come from this... time.

L - Leverage; As the property becomes more valuable; you will have equity stake, enabling you to get higher credit lines, lines of equity credit, to purchase more properties that are IDEA.

When you are RICH, MARRIED, and getting ready for a FAMILY, then buy your home and build it.

Until then, rent, it will keep your options open. It will keep your costs low. It will protect you from market downturns as leases are typically only 1 year at most. You will have freedom. You will not have to deal with repairs. A new Water Heater, AC unit, the list goes on and on. Focus on making money, and when you want to buy your first house. Buy a duplex; rent it out to two tenants, and make sure it's IDEAL.

  • Thank you very much for the detailed answer. You have introduced me to an a whole new way of thinking when it comes to investment. To be honest I am a noob when it comes to investing, since I have been a student so far in my life and never had any money left over after my expenses. Thank you. – Kanmani Apr 10 '17 at 8:15
  • 8
    “ - The property will over time go up in value. “ wait ... what? On average that is a good bet, though not proven (!), but for a single house, that's simply not always true. – DonQuiKong Apr 10 '17 at 11:33
  • 4
    "The property will over time go up in value" - but so will every other property, on average. Measured in units of "houses", one house is always worth one house. The only ways to "make money" from house price changes is either borrow more money against the higher cash value as time goes by, or move into a smaller cheaper house and keep the price difference. Over the long term (say 20 years) you can also "make money" because of inflation - the cost of paying off a long-term loan will stay fixed, but the value of the money you pay decreases over time. – alephzero Apr 10 '17 at 12:52
  • 1
    Your point E - "principle" - do the quotes mean you are employing a metaphorical use? Did you really mean 'principal'? – JoeTaxpayer Apr 10 '17 at 21:28
  • No I used the incorrect principal.. ;) Thanks for your thoughts though ;) – McFlySoHigh Apr 12 '17 at 20:39

protected by Chris W. Rea Jan 2 at 20:30

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.