Traditionally, the goal of acquiring one's own piece of Real Estate has reigned supreme within the list of our financial priorities. Over the years, Real Estate has been seen alternatingly as a symbol of financial stability, of 'having arrived', or a worthy bequeathment for one's children. Although millennials have been labelled a 'generation of renters', anecdotal evidence points to the fact that most people, regardless of their age, would like to buy their own real estate sooner rather than later. In this article, we'll mull over the question of what is the 'right age' to acquire real estate. The answer differs based on your objective, that is - are you purchasing real estate as a leveraged investment, or as an end user?
The dynamics of taking out a home loan to 'invest' into real estate can be tricky. Take, for instance, a property worth Rs 1 crore, for which you make Rs. 20 lakhs as down payment and borrow the rest as a 20-year loan at 8.75% (an EMI of Rs. 71,000). Since home loans front end the lion's share of the interest, you'll have paid off just about 9.25 lakhs of principal in the first 5 years (your equity in the said property will be roughly 30%, against a total outlay of roughly 62 lakhs). It's not difficult to see here that your property price would have to double within 5 years for you to barely break even!
Since home loans are usually long-term commitments, your 30's would be the best time to make a leveraged investment. Lenders would be more willing to loosen their purse strings for you when you're at this age, as the natural assumption is that you've got your best earning years still left. Additionally, starting early can allow you more wiggle room to extend your time horizon from 5 to say 10 years, just in case you're at the receiving end of a bear market in 5 years' time.
In today's age of steadily increasing retirement ages, it's not unusual for people to continue working into their mid-sixties or even seventies. For this reason, even your 40's isn't too late for taking a loan to purchase real estate, if a suitable opportunity were to present itself. At this age, your decision should be more contingent upon the strength of your asset base and your own confidence in your earning capacity over the next couple of decades. Lenders will be more unwilling to extend loans to you when you're in your 50's, as your number of remaining earning years are relatively few at this stage. Your existing portfolio of assets would play a role in the banks' decision to lend or not to lend to you.
What if you're looking to buy real estate as an end user, without the intent to flip it at a profit in a few years' time? In such a situation, there's really no 'right' or 'wrong' age to buy real estate. The psychological benefit of moving out of the destabilized life that living on rent affords can be noteworthy. Also, owing real estate will provide you with the unique sense of financial security that can only really be provided by robust physical assets. Additionally, it'll help you with your legacy planning, in case you're planning to bequeath assets to your children at some point.
If you're looking to make a leveraged investment, and have the cash flows to do so, start off in your 30's and have maintain an investment time horizon of a decade, for best results. If you're looking to buy as an end user, there's no real 'ideal' age. If you're got enough liquid assets to buy a good piece of real estate and add it to your portfolio, go for it!
"This article was contributed by Guest author, Aniruddha Bose, Editorial Consultant with BW Businessworld and was posted on www.businessworld.in.”
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