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Owning vs. Renting: 38-Year-Old Couple Navigates Housing Options

Ramalingam Kalirajan |7290 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Nov 01, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Anand on Oct 31, 2024Hindi

My name is Anand (38Y), My spouse and I both work in stable government jobs with a combined annual income of 30 lakhs and a 60-lakh NPS corpus. We own an investment home currently worth 1 crore, generating 20,000 in monthly rental income, and expect to receive a compensation of 50-60 lakhs shortly as we move out of a joint family setup. Given this, we’re exploring three options: (1) leasing a 2-3 BHK home and investing the balance in children’s education funds and mutual funds, (2) buying a second home with an additional loan of 80-90 lakhs for potential appreciation, or (3) renovating our existing investment property (With 10L) and moving in, while investing some of the compensation for our children's (B1:9Y & B2:7Y) education. Each choice has trade-offs in terms of cash flow, equity, long-term growth, and stability. Which approach would you recommend to best support our family’s housing and long-term financial security goals?

Ans: Anand, your current financial situation, combined with a stable government income and a strong asset base, offers an excellent foundation for thoughtful long-term planning. With your goals focused on housing stability and financial security for your family, each option you’re considering has distinct trade-offs. Let's evaluate each option's impact on cash flow, growth, stability, and family security.

Below is an in-depth assessment of each approach, with recommendations for optimal financial growth and stability.

Option 1: Leasing a Home and Investing the Balance
Leasing a home and investing the bulk of your expected compensation could yield benefits in terms of cash flow, flexibility, and long-term investment growth.

Cash Flow and Flexibility: Leasing a home requires no large initial payment, leaving most of your compensation available for high-growth investments. This improves cash flow and provides flexibility if you need to adjust your housing situation in the future.

Investment Potential: By investing the compensation in mutual funds and children’s education funds, you can benefit from professional portfolio management, growth, and tax efficiency. Actively managed funds, especially those chosen through a Certified Financial Planner (CFP), offer higher growth potential than direct stocks or index funds. Regular fund management also shields you from index fund limitations, such as a lack of flexibility and fewer defensive options in bear markets.

Educational Corpus for Children: Setting aside part of the compensation in a dedicated education fund for your children (aged 9 and 7) could grow into a significant corpus by the time they need it. Investing through systematic investment plans (SIPs) in equity-focused funds can yield good returns over a long horizon.

Disadvantages: Leasing means you won’t own your primary residence, which can feel less secure. Rental costs may increase over time, and there’s no property appreciation to consider. However, the flexibility and investment potential generally outweigh these disadvantages.

In summary, leasing keeps capital liquid, supports long-term growth, and provides flexibility, making it a financially sound choice.

Option 2: Buying a Second Home with an Additional Loan
Purchasing a second home involves additional debt and capital allocation, which can impact cash flow. While real estate has growth potential, this choice has notable implications.

Equity and Asset Growth: By purchasing a second home, you would own a valuable asset that could appreciate over time. However, real estate appreciation is unpredictable and depends on multiple factors such as location, infrastructure development, and market trends. Real estate investments are also less liquid, which can be a drawback if quick cash is ever needed.

Loan Implications and Interest Costs: Taking an additional loan of Rs 80-90 lakh would require significant monthly EMIs, reducing your available cash flow. This additional debt may restrict your ability to save and invest in other higher-growth options. Considering interest costs, the total outlay on the property may exceed its eventual appreciation, especially when factoring in maintenance and property taxes.

Impact on Financial Goals: While a second home provides housing stability, it limits cash flow flexibility and diverts capital away from investments. Building a diversified investment portfolio generally yields higher returns than real estate over the long term, given the additional costs and capital lock-in associated with real estate.

Disadvantages: Real estate is a non-liquid asset, which means you might face challenges liquidating it if needed. The additional loan also impacts debt load and monthly expenses. Given the potentially higher returns from mutual funds and other asset classes, this option is relatively less efficient for building your retirement or educational corpus.

In summary, buying a second home provides stability but limits liquidity and diverts capital from potentially higher-yield investments.

Option 3: Renovating Your Investment Property and Moving In
Renovating your existing investment property allows you to reduce capital expenditure while owning your primary residence. This option offers an effective blend of stability and cost control.

Capital Outlay and Ownership: With a Rs 10 lakh renovation, you transform your investment property into a livable space without needing significant debt. This allows you to avoid monthly EMI costs associated with buying a new home while giving your family the security of home ownership.

Investment Opportunity: The remaining compensation can then be invested in mutual funds, children’s education funds, or other assets. By diversifying investments, you can build a substantial corpus for retirement and your children’s education. Systematic, regular investments guided by a Certified Financial Planner can help grow these funds efficiently, offering tax benefits and capital appreciation.

Cash Flow and Income Stability: Moving into your own property reduces monthly rental expenses while retaining rental income from your other property. This keeps cash flow stable and frees up funds for investments. The rental income can also contribute to family needs or children’s education expenses.

Benefits of Avoiding Additional Debt: Renovating the existing property instead of buying another home keeps debt at bay, which supports financial flexibility and lowers your financial burden. Without the stress of EMI payments, you can focus on disciplined long-term investments that align with your goals.

Disadvantages: Renovating may not increase property value significantly, as returns on renovation are limited. You will also need to ensure that the renovation makes the space comfortable and suitable for your family.

In summary, renovating your investment property is a balanced approach, offering housing stability without taking on debt, while freeing up capital for investments.

Comparative Analysis: Which Option Best Supports Long-Term Financial Security?
Each option has merits, but let's look at which aligns best with long-term financial security, cash flow, and growth.

Option 1 (Leasing and Investing) offers high flexibility, liquidity, and investment potential. It’s ideal if you prioritise long-term financial growth, given the compounding potential of mutual funds and education funds. However, you won’t own your primary residence.

Option 2 (Buying a Second Home) ensures property ownership but requires substantial debt and reduces liquidity. While the property may appreciate, the cash flow impact of EMIs and the limited flexibility make this option less ideal for maximizing investment growth.

Option 3 (Renovating the Investment Property) strikes a balance by allowing home ownership without additional debt. This frees up compensation for investment, supporting educational funds and long-term growth while keeping cash flow healthy.

Final Recommendation
Given your goals of securing housing stability, ensuring your children’s education, and maximizing long-term financial growth, Option 3 (Renovating Your Investment Property) appears the most suitable.

Why Renovate?: By renovating, you avoid additional debt, which protects your monthly cash flow. Moving into an owned property ensures housing security, while rental income from your other property adds stability. This approach also allows you to direct most of the compensation toward high-growth investments.

Investment Strategy: Allocate a portion of the compensation to actively managed mutual funds for growth. This includes investing in funds tailored to education goals, which will grow over time and ease your future financial responsibilities.

Maintain Flexibility: Without loan EMIs, your cash flow remains flexible, and your financial resources are more accessible in case of future needs or opportunities.

By focusing on renovation and investment, you balance housing stability with the potential for substantial growth, aligning with both short- and long-term goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Asked on - Nov 01, 2024 | Answered on Nov 02, 2024

Dear sir, Thank you for your insights on the options and we are convinced about not not buying a right away. But, since children are small and they may find it difficult to adjust to new school if we move into our investment home on renovation right away, hopefully shifting to a lease/rented home near to school or to my office for time being and consider shifting to a renovated/new home as the situation pan out, is it not a good option? Also, advice on how this compensation of 50-60 Lakhs will be considered? will it be taxed? and how? how can we make not taxed may be by taking multiple cheques in me, spouse and children? Thank you in advance!

Ans: . Yes, leasing near your children's school for now is a sensible option, providing stability and convenience. Regarding the compensation, tax implications depend on its nature. Diversifying this into family members' accounts, if possible and permissible, may reduce tax liability. Consulting a Certified Financial Planner and tax advisor can help structure this efficiently while aligning with your overall financial strategy.

Best Regards,
K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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