Invest your house EMI in equity markets
Earlier I wrote a post to convince you that you should buy a house against renting, Today let’s build a case of buying house on EMIs vs investing equated monthly investment (EMI ) in capital markets
Base case
Cost of house – INR 60,00,000
Down payment – INR 12,00,000
Term – 15 years
Rate of interest – A quick search would tell you ~10% floating rate is the going rate , See below snapshot from www.bankbazaar.com
Typically as an economy scales up the interest rate goes down, See an example of South Korea , A nation which has moved from being a developing nation to a developed nation
Therefore for our base case example we can say that consumer is likely to pay a lower EMI in future however to be conservative I will assume EMI to be constant
EMI – INR 51,463 /month or INR 6,17,564 / Year
To complete my calculation I need to make few more assumptions , Rent yields let take a look at what are rent yields across the world now
In 15 years India as an economy should be closer to China / Singapore in real terms so I can only make an educated guess
Rent Yield – Year 1 3.80% , Year 15 – 2.50% (as interest rates would drop) , We need rent yield to calculate how much consumer would be paying rent in case he is not buying house but renting a similar one
Growth rates in India’s property prices had been phenomenal , read this article for more insights
In long-term as we know real estate is good hedge against inflation, The cost of owning a similar house should we today’s price multiplied by long-term inflation forecasts
Let’s review few forecasts
IMF - forecasting inflation rate to be 6% by 2019
OECD - GDP Forecast
EIU - forecasting inflation rate to be 6% by 2018
To be on conservative side I would take the following assumption
Property price appreciation - 8% per annum for next 15 years
The final jigsaw in my puzzle is long-term equity returns, A normal investor is not Warren Buffet so he has to take assistance to invest his money intelligently in equity markets this is were he turns to great Indian money managers
Who are they ?
Some on top of head
This is SIP return for his fund for last 15 years a staggering 23.67%
He has done a CAGR return of 23.78% return in last 10 years as SIP on his funds
I just gave two examples but there are few more money managers who have a fantastic long-term record
Look at below performance of select 10 year performance of few funds (all in CAGR)
What is the point I am trying to make ?
Over long periods of time in past sticking to good funds and fund managers have given a regular investor CAGR return in range of 20%
Would it happen for next 15 years, With economy expanding, opportunities increasing the likely hood is high but I would moderate my expectation
Long term return on equity investments – 18% CAGR
Putting this all together :)
In 10 years,
The amount invested with a reputed money manager with long-term record would grow to a sufficient amount to buy the same house today – Debt Free !
In 15 years,
You would have almost 50% more than what would be required to buy a similar house
This is where I end my base case on proving why instead of paying your home loan EMI if you invest in equity markets you will become debt free faster
How many people reading this would do it ?
May be 1 in 50 reason,
Equity returns are not in straight line so they would not advance as shown in table above, it would require huge courage to be disciplined with EMI to markets ( for home loans we don’t have a choice)especially in times when you see prices dropping everyday
Having an owned home has huge emotional satisfaction so people would happily opt for being borrowers for long-term
Family pressures – Investing your EMI in share market would bring you scathe of your wife , children & parents who might label you as gambler ;)
What are the odds that MF or Indian companies would do well in next 15 years let me go back to my cocoon and own a house
This is a risky strategy and might leave me homeless after 15 years when my earning power would be low and my financial commitments would be high
Will you do this in your personal situation ?
Share your thoughts below