Buy a house for post-retirement benefits

Buying a house is a priority for most of us. By house, we mean residential property, independent house or apartment for self occupation.

The question is: Should you buy a house or should you prefer a rental property?

In this article, we discuss the financial factors that should drive your decision to buy a house.

We also show why the benefits from your self-occupied property flow to you typically during your post-retirement life.

Leverage effect

There are issues regarding owning a house. You have to incur significant maintenance expenses as the property ages. And then there is the home loan. Given that banks primarily offer floating-rate loan, your repayment costs could go up if interest rate increases. So, why then are you keen on buying a house?

One reason could be that “investment” in a house appears attractive due to leverage. Suppose you want to invest Rs 20 lakh. You can buy shares worth Rs 20 lakh. Or you can use the money to make a down payment towards a house worth Rs 1 crore. If you buy the shares, you can generate gains of Rs 2,40,000, assuming an annualised return of 12 per cent. To earn a comparable return of Rs 2,40,000 on the house, your “investment” should translate to 2.4 per cent return on Rs 1 crore. That is not difficult to achieve even in a poor housing market.

But this argument does not consider two factors. One, you have to pay an equated monthly instalment of, say, Rs 82,000 on Rs 80 lakh loan for 20 years at 11 per cent a year. To compare buying a house on leverage with buying shares, you should also consider the return on Rs 80 lakh, as if it were invested in stocks. And two, calculating the return on self-occupied property is notional; you are unlikely to sell it. That said there are benefits of buying a house for self-occupation.

Retirement benefits

Consider the benefits. For one, you can use the property as collateral and take a loan to supplement your post-retirement income. In the US, home equity line of credit and reverse mortgages are typically used to generate income for the retirees.

These products are especially optimal for individuals who are asset-rich and cash-poor. For another, you can generate income if you rent out a portion of your house. Rental income typically increases with inflation and hence offers protection against purchasing power during high inflationary condition.

Other than living in it, the benefits of owning a self-occupied property do not accrue to you during your working life. Yet, you should buy a house for the benefits you get during your post-retirement life. But should you buy an apartment or an independent house? Typically, the choice between the two will be based on your financial ability.

But what if, for the similar “investment” outlay, you have a choice between buying an apartment inside the city and a small bungalow outside the city? You should prefer an apartment within the city limits. You save on transportation cost and the stress related to modern day travelling. But from a post-retirement investment perspective, a small bungalow outside the city limit may be worthwhile. Why? You can convert the bungalow into apartments at a later date. Even if you live in one apartment and sell the others, you would receive enough cash to support your post-retirement lifestyle.

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