Self-occupied house a safe investment bet

Just the other day, one of my friends asked if he had to purchase a house or invest, which is better? This is a very difficult question to answer for reasons we are comparing two different asset classes with completely varied utilities.

While house is a physical asset, could be seen and felt; financial investment like that of mutual funds (MF) is paper based or notional. But, this debate keeps happening now and then as some perceive servicing long mortgage is painful.

There is enough dough in both the arguments, equally sharing certain setbacks. To demystify let us consider an example. Assume a house valued at Rs 50 lakh and an individual purchasing with a down payment of Rs 10 lakh while funding the rest of the amount through a housing loan.

The total repayment period say is, 20 years with an assumed interest rate of 8.50 per cent. The EMI (equated monthly installments) would turn to be Rs 35,000. The total outflow during the entire tenure through EMI would turn to be Rs 84 lakh which includes the principal and interest combined together.

Now, lets assume the value of the house which was Rs 50 lakh would grow to over Rs 3.5 crore when assumed at an annual growth rate of 10 per cent for 20 years. If one feels that the growth of 10 per cent annualised is too high even at 6 per cent annual growth the value of the house would become about Rs. 1.7 crore.

Though, the amounts are large, there are other considerations of maintenance and upkeep of the property involves costs. The other important factor is illiquidity the asset comes with and the difficulty to monetise when needed is a big constraint in physical real estate investment.

Counter to the purchase of house is the investment model and lets assume that the investment vehicle is a diversified MF. The initial Rs 10 Lakh that was used for the down-payment is to be invested in the MF which possibly provides an average of 12 per cent return (CAGR - Compounded Annualised Growth Rate) over the same period of 20 years considered for the house loan completion.

This would translate to an approximate value of Rs 1 crore (a few lakhs less actually). Now let's also consider the EMI amount that was used to repay the loan i.e. Rs 35,000 to be invested in a Systematic Investment Plan (SIP) of a MF. At the 12 per cent CAGR, the corpus would turn out to be Rs 3.5 crore.

Of course, if the entire EMI is considered for investing in MF, then the rental cost which would not be there in the case of a self-occupied home cannot be discounted. Let's now assume that a rent of about half the EMI i.e. Rs 17,500 is accommodated.

After deducting the rent, the rest of the amount, Rs 17,500 would be invested in the MF for a period of 20 years. The investment corpus that would be generated out of this SIP would be equal to Rs 1.6 crore. The effective total corpus generated from the down payment and EMI budget equals to about Rs 2.6 crore.

However, if the CAGR on the MF is assumed at any higher, say, 15 per cent then the corpus would translate to about Rs 4 crore. In an ideal world, the decision to go for home would be about the rate of asset appreciation i.e. house vs the cost of its acquisition.

While when invested the same amounts, whichever asset translates to higher value would be an easy choice to invest in. In the hindsight, there is no greater incentive for opting for house and the tedious commitment for such long intervals of time.

Real world is completely different, especially when actual returns are not as assumed and as linear as the averages calculated. The equity returns would be volatile with steep drawdowns in between many listless performance years dispersed with some high performing years.

Also, we rarely have recorded the investor to remain invested or continued to invest during these volatile years and especially in years with higher drawdowns. The law of averages catches up only at a later day when the power of compounding kicks in.

This requires greater diligence, conviction and commitment which is no less than the one discussed when opting for a housing loan. Personally, a self-consumption or self-occupied house, though not completely a rational choice as an investment could benefit considering the psychological comfort it generally provides in terms of pride, satisfaction and sense of achievement.

This could outweigh the notional gains that could be achieved through an investment. Saying that, I advice individuals to consider the loan keeping in mind the liquidity, commitment period and other contingencies.

Refrain from investing in multiple housing properties as an investment option as this involves some unseen costs of tenancy management, registration costs and other expenses which are generally not quantified.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)