Hi guys,
I am in a big dilemma. Currently I have a 35-65 debt-equity allocation in my net worth. No liabilities. I am contemplating buying a house. (primarily due to family pressure). Since I am looking at independent house (instead of apartment) and its in a prime area, the amount is big. I dont want to take bank loan. So I have to touch my portfolio. Somehow I am not comfortable selling it off. Because the portfolio will be down by x. And thers also this emotional attachment with the stocks. And at the same time, i do understand that one cant put a price on it. I am sure a lot of valuepickr must have gone through this. I would appreciate if the members can share their valuable inputs.
thanks.
If this is for your primary home and not an investment property I would suggest one should go for it because the sole reason one invests is to benefit from it when need arises.
I have seen people regret because their emotional attachment with stocks is so high that they cannot sell at the right time.
To give an example in 2007 a friend of mine did not sell Reliance Capital at its peak of around 3000.If he would have done that he could had easily managed a prime property in Mumbai considering the quantiity he had. Today after 10 years the way property prices have moved and the way his beloved stock has preformed he is miles away from the property now.
I am not saying this will repeat but being in India owning a home is a necessity and matter of pride.
Even when you know renting a home is so cheap that savings bank account rate at times would yield more at times one has to buy a house.
This is my personal opinion and may be biased.
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I had started a thread which was taken down but I will list a few points you might consider
Historically funds compete for stock markets and property. Hence there will be a ratio of price of new builds to stock market valuation. When the stock market is over invested that ratio will reflect it. Currently real estate market in India is depressed. I think stock markets are over valued at the moment. Some of the value investors always say that invest in markets when no one invests and disinvest from markets when everyone is investing
I think stock market is overvalued and real estate is undervalued.
From the BRIC, all other countries other than India are in recession. Maybe India will avoid but worldwide stock markets are due for correction.
I think what they are awaiting is just a trigger. That trigger might come on Brexit vote, even if Britian remains or leaves or it might come on the next interest rate change in USA.
Besides this you always need a main residential house to be debt free. My understanding is that if one were to live a simple life one should aim to get 2 houses, one to rent and one to live. The rental money you will get will always move with inflation. Stocks might give you an extremely high return or no return but once you have your base covered the rest of the money should be on stock market because even if you lose or don’t make anything in stock market you have a safety net. You will almost always find someone to rent your place
In the end one needs very little to survive. A second rental house easily provides this without much anxiety and without needing to check for news on companies, hear or read annual reports etc. No stock market script will give you that simplicity where the value increases with inflation while giving you a monthly pension to live on for ever adjusted for inflation
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Just an addition to that, I think you get some tax breaks if you take a loan. Ask an accountant I am not sure about Indian Tax rules. It might be efficient to take a loan and keep the loan amount in a fixed deposit just to save some taxes.
But for now until we have a correction I would not be invested in stocks. I liquidated 75% of my holdings.
Its very foolish to think that the markets will always go up. Once too many people believe it the crash is around the corner.
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thanks chintan and edward. very good points.
@edward, agree that most of the stocks are highly over valued or priced for perfection. but i dont think is real estate is undervalued. in the area that i am looking at, the price has been stagnant for 2 years now. moreover, if the absolute price is high, then the price increase (even if it happens) will be very less.
i too had thought about liquidating the portfolio at its high. but it will be very difficult to build a new portfolio from scratch.
Gautham1
Exactly my point, if markets were stagnant it means they have not attracted as much capital as equity markets
Put differently, equity markets are overbought relative to other assets
The market corrects every 10 odd years
Why build a portfolio now when the markets might return to proper value and give an opportunity to buy the same companies at their correct valuation
However it’s your call
If you lived through the 2008 sell off then I think you will be able to ride this one as well but if that one caused you to panic or you were not invested then, ask people who were invested, it gets really bad. Basically you don’t want to check your portfolio for a year
Anyone who read Graham books will know he did not think investing in other countries equities gave any protection against sell offs in U.S. Markets as when the U.S. Markets crash the other markets crash as well
Put differently most markets do track the U.S. Markets atleast for now until it’s the largest economic market
The companies directly affected in India are IT and Pharma. Maybe textiles as well
Last time the fed increased their rates the markets crashed some 20pc together with the news of China bank issues
This is the reason I am a bit skeptical about immediate prospects
It is not like the past this time. There will be no significant gains in real estate. The registration cost for property is so much that people will buy for end-use only. Black money in real estate has dried up. Rental yield is no where close to an FD. Expanding infrastructure (roads etc) to city outskirts means there is more and more new area for houses. So real estate prices are not going anywhere.
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It was the same in 1993
The interest on fd was more than rent
Our economics teacher said it is foolish to invest in property
Just keep the money in bank and pay rent with interest and you still have some interest left for expenses
If it gets affordable due to prices not moving in line with my salaries, I would still move closer to city or take a bigger property
If you are buying the house for living, then it needs to be viewed as consumption rather than investment. So ideally it should not be compared on investment parameters. Rather on consumption parameters - e.g. how much emotional satisfaction will it give you and your family, how it will improve relationship with spouse and other people who are pressuring you into buying a place, level of security it will give to your family etc.
In current Indian context, due to prevailing low rental yields, buying a property will almost never come out ahead of investing in good quality stocks at reasonable valuations.
Another approach would be to negotiate with family to move into a better rental and still not lose your portfolio. e.g. Lets say you were planning to buy property for 1 cr by liquidating your portfolio by that amount. Expected return from portfolio was say 12%, meaning cost of capital is 12 lac p.a. Now, assuming that you can get a place at 5% rental yield, you could possibly move into a more luxurious, bigger place, better area where the property costs 2.4 cr. Or any such variation between 1 cr and 2.4 cr. Hopefully family might stay happy for a while and you would have kicked the can down the road!
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I would strongly say - This time it is different.
In addition to the reasons I mentioned, one also has to consider demographics. Japan’s residential property index was the highest in year 1992 and real estate market crashed and index is today 60-70% less than what it was in 1992. The same thing is going to happen in China (ghost cities). India, situation is not as bad, but property prices will not appreciate much in future. My father has 4 flats. I have been telling him to sell them for the past 3-4 years. Now he is regretting not listening to me. You can understand why…there’s just no buyer plus rents have come down.
As Mr. Damani said, one has to look at it as consumption not as an investment.
A famous fwd message from whatsapp groups
Power of equity …
“My mother is not concerned about money at all. One day, she pointed out that I put my money only in paper & never buy property.
So, I bought a flat in Malabar Hill in 2004 by selling Rs. 27 Crores worth of CRISIL shares. That flat was sold for Rs. 48 Crores 3days ago.
Had I not sold those CRISIL shares back then… they would have been worth Rs. 700 Crores plus a Rs. 50 Crores dividend.”
Rakesh Jhunjhunwala
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Gautham, It will be a bad decision to sell shares to buy a house. It is like watching a plant grow to be a big tree but cutting it before it starts to bear fruits.
I personally did this, had my learning, sold my flat and invested back in stocks again.
EMI is a big trap. Even if you are getting tax benefits, you will lose a lot when you go for a loan. If you really want to buy a house, sell all your gold (including all jewelries) and close your FDs etc to pay more down payment.
Now-a-days, modern families move a lot - within the city, inter city, inter state and international. For kids education, better medical facilities,better employment, living standards etc. So investing a huge amount on a real estate is not advisable. You can find good rental homes and you have the flexibility to move anytime. Only downside is that land owner can ask you to move out. But if you live in a big apartment, with enough notice period, you can always find a house in the same community.
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I think if you are asking this question on the forum, you should sell the stocks and move on to buying real estate. Because frankly speaking, if you were really bullish on equity market and had done enough homework on your equity portfolio, you would have had no doubt at all on where the money should remain in. I sympathize that you got family pressure. If that pressure is cracking a hole in your confidence, better liquidate now. Because being invested in stock market is going to be a very bumpy ride. You can’t have any hands loose due to any distractions whatsoever.
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As long as black money remain in our economy, real estate will always be in demand, if NDA govt does not come to power we will see huge spurt in real estate prices post 2019.
Viabhav
Shares always returns more than equity however I think not many can ace the nerves it takes to ride it
Also return on equity when back testing does not factor failed companies
No company survives for ever
When comparing Japan real estate remember that Japan equities during that period did not give a great return either
Capital will always have these 2 competitors, equity and real estate
That’s right, both real estate and equities went down for Japan (though real estate went down more than equity).
In stock market, if one is a great stock picker, there’s still good chance that he won’t lose money in long term in worst of long recessions.
If both stocks and real estate look uninteresting, one should not at all hesitate to put money in FDs.
Anyhow, my humble point is, think of buying a house as a consumption rather than as an investment .
I guess thats the biggest problem with a polished investors. Personally I feel you can’t get emotionally attached to your investment cause it has no attachment towards you.
Why are you against taking home loan ? Home Loan is the cheapest loan available in the current market scenario and if your portfolio can give you between 17-20% return p.a you end up saving atleast 7-8% after paying the EMI. Moreover if you think the EMI is getting too much you can always prepay a part or full sum of the outstanding principal and clear all your debts. Just my 2 cents of advise.
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Leaving the emotional part attached with the portfolio aside these are my opinions
It is clear from your post that
- you have considerably big amount invested in shares
- A person investing considerable amount in shares should have done enough research and invested in quality businesses
- It is safe to assume that you are sitting with considerable profit - assumption is you won’t be selling a losing stock to invest in real estate
Given all of the above
- For any share movement of +50% is the most difficult period. Once it crosses 50% then each percent movement in share price will actually give you 2% increment from the original price.
eg: you invested in a share at Rs. 100. Now movement to Rs. 150 is the most difficult movement. From then on every 1% movement on Rs. 150 = Rs.1.5 is actually 1.5% of Rs. 100.
- Dividend yield also increases over period of time
So according to me, it is better to keep the winning stocks and not disturb the portfolio and earn rich reward for all the hard efforts you put. Exponential Capital Appreciation and Dividend yield. It is always good to aim for more Xs returns and for that give time to the winning stocks.
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Hey guys my two cents,
i think one should secure a home first ( maybe 2 or 3) before investing in stocks.
Here is my logic
Home loan rates are @9.5% on an average. What is important to understand that property is the only asset class where a bank gives you a loan worth 4 to 5 times the down payment . So with a down payment of 10L you can immediately buy a property worth 50L. The interest on this is a REDUCING BALANCE interest. The final COMPOUNDED interest over a 25 year period that you would end up paying is no more than 4% on a 9.5% reducing balance. If your earning power is expected to stay the same or increase over 25 years buying property is a great way to accumulate wealth. All this applies of course if you take a home loan & service the EMIs regularly.
Here are the calculations
Interest rate : 9.5%
No of months for which loan taken = 300 mths
Loan value = 40L
EMI per month = Rs 34,947.87
Total amount you pay over 25 years = Rs 1,04,84,359.93 ( 34947.87 X 300mths )
Interest you pay = Rs 64,84,359.93 ( 10484359-40,00,000)
Compounded Interest = 3.93% ( over a 25 yr period)
As long as your home appreciates by more than 4% every year ( which is almost certain to happen ), it is a great investment ( even if technically since you are going to stay there you cant consider it as one)
I would recommend to liquidate the portfolio & invest in a home first.
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