Among the most major decisions that are driven by a investor’s psychology rather than financial factors, perhaps the biggest is buying a house, the space we occupy seems to play a big role in our view of self. Developers too do their best to exploit this aspect of human psychology. In that sense, much has changed when it comes to selling and buying property, but caution is still key
No matter how distressed developers are and no matter how reasonably priced apartments look in 2019 compared to 2008 or 2013, these three basic rules of buying a house are just as relevant as back then.
1. Identify Needs
Buy just one house in which you will live. Do not think of buying any more for investment. The first house is a need. When you take into account the fact you can stop paying rent and get a tax break on EMIs, you will realize that it is a big financial advantage.
2. Be on Budget
Don’t stretch yourself or your budget. No matter how much you would love a fancy house, the EMI should not be more than one third of your family income. That’s the maximum. Try getting by with less and ignore the lure of real estate marketing. If you’re much richer at a later date, you can always trade up to a better house.
Cash flow affordability is a function of the price you pay. If you are able to meet the first two hurdles of cash flow and down payment, then you can tie it all together with a proper multiple of your yearly gross income to see what you can afford. The max multiple is 5times if you meet the first two conditions, but 3times is better. In this case, the more you make, riskier it is to go to an upper limit multiple because of leverage. You can always refinance your home, but you can never change your initial purchase price.
3. Make clever decisions
Buy the house, not the promise. With the operationalizing of RERA, this should not be a problem. The biggest source of sorrow for people has not been houses that cost too much but houses that have not been delivered. Going by history and the kind of distress developers are finding themselves in; do not get led on by any promises.
Be practical and buy a house that actually exists, instead of being led astray either by one’s own dreams or developers’ promises. As long as savers keep these points in mind, they’ll be fine.
4. Cash Flow
Traditionally the industry says to spend no more than 30% of your gross income on your monthly mortgage payment, but you can stretch it to 50% if you think you’ll be making more money in the future. Don’t bank on it though, as this downturn has shown many people, including myself.
5. Down Payments
You should have at least 30% of the value of the home saved in cash. 20% is for the down payment to avoid PMI insurance, and the other 8-10% is for a healthy cash buffer. There are some high-risk people out there who want their home so bad that they put down only 10%, and take another 10% in the form of a maxed out home equity loan just to get in the home. If you don’t have at least 30% of the value of the home saved up.