People when they purchase a place to live in, they consider it as an investment. It is indeed a big investment as the ticket price is very high. With easy credit availability, aggressive advertising and last 10 years of upward trend in real estate market, people start thinking that why not to buy another home/flat as an investment and keep it. The general belief is that the price will increase in proportion with how it has increased in the past decade.
This is a kind of greed which is churning out a category which is house RICH and cash POOR.
Investment in real estate is not a bad idea, but one must have done basic investments rightly and must have enough cash buffer to take on emergencies. Also, the person should factor in the potential extreme property market swings. Since house purchase is a big ticket investment, one must weigh all necessary parameters carefully before taking the plunge.
Purchasing first property for self occupation cannot be considered as a pure investment. Everyone needs a roof over the head. First property provides this roof over the head and even in worst scenario, you will have your house intact – a shelter for you during your bad times.
When you are out to buy your investment property, then a lot of parameters kicks in to be considered before you buy your investment property. You have to safeguard yourself from emergencies, invest certain amount at other avenues which can be cashed in bits and pieces when required. An investment property is a big chunk of money parked and you cannot sell it piece by piece.
Some thoughts on when you should start investing in real estate
- You are adequately insured (life cover)
There are plenty of thumb rules and formulas floating around which will give you an idea of how much insurance you should buy. Do a little bit of research and purchase a good term plan to cover your life.
- You have sufficient funds for taking care of emergencies
Again as told earlier, property is a big ticket purchase. You cannot sell it at will and money gets locked when you make purchase. So to safeguard yourself, you must create one emergency fund which will take care in case of any emergency.
- You have adequate medical insurance
Whether buying property or not, you must be covered adequately for your health. Cost of medical treatment is increasing hence you must take adequate cover for you and immediate family.
- You have a good Debt folio
Again in investment pyramid, a good debt investment comes at the bottom stage – that is initial stage. You should invest some amount in instruments like FD/RD/Debt funds/PF/Bonds etc.
- You have a good asset allocation and a mix of equity into your investments folio
Based on your age and investment appetite have proper mix of equity and debt. You must have relevant equity exposure to gain from the rising markets.
- You have at least 40% cash for making down payment for the investment property
Having 40% as down payment, you save yourself from huge EMI going out monthly against home loan / mortgage. You must aim for maximum down payment so that the EMI doesn’t pinch you and you can have a peaceful life.
- You have adequate funds to cover schooling of your kids
Again the investment in property should not leave you with insufficient amount for your kids education. Amount for kid education should be kept and invested into a separate account.
- After paying off your EMIs you still have 70% of your in hand salary at your disposal
You should aim to restrict your monthly EMI for home loan to not more than 30% of your monthly take home – post taxes. This will give you a good 70% amount for running house and incurring other expenses. This is a healthy ratio.
- In case of job loss, you should be able to support your EMIs for a good 6-9 months
You should have enough in your emergency fund to tackle job loss scenario and you should be able to sustain 6-9 months with your EMI in case of job loss scenario.
If all the above basics are in place, then only one must look forward to buy an investment property. One should not become House RICH and cash POOR, as you have many other costs associated with your life & family.
If you play it too tight, the EMIs will hurt you, you will be broke if you lose your job, you will not be able to pay property taxes /maintenance. The cash flow will hurt you and you will be rich only on paper.