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Why the house you live in is not an investment

One of the biggest purchases we make in our lives is our home. Many consider it an investment. We get a place to live in that is our own, we make regular EMI payments. Besides, that money goes towards a useful purpose and not towards unaccounted expenditure. Plus we get a tax break on the payments we make. Additionally, everybody approves!

Wait!!! Not so fast please! The flaw in this reasoning is that we have misunderstood the term investment. Just because you pay money monthly/periodically and get a tax rebate doesn’t make something an investment.

An investment gives you an income or appreciates in value and can be liquidated or converted into money when needed. A very simple example being a bank fixed deposit, it either gives you a return or increases in value and can be broken when needed, or when it matures.

dense residential development

Now coming to a self-occupied house, it is first, difficult to sell.  Second, it may not yield the expected price. Both these factors are common to all real estate deals. But what we fail to consider in a self-occupied house is the fact that once that house is sold too, we will still need a roof to live under. So we either have to buy a smaller or cheaper house which will reduce the cash in hand, or will have to put down deposit and rent a house, which will increase expense. Then how is a home you live in, an investment?

Here is the big open secret: It is actually an asset being put to use. That qualifies it as consumption expenditure, not really an investment!

It is similar to buying a smartphone, a refrigerator or home theatre on EMIs, but just much larger in magnitude.

So buy yourself a house that you absolutely need and can afford. Also, make sure you do not depend on it for any future expenditure or to attain any financial goal.

Buying a home is also about feeling like you have arrived and can provide security for your family, in case of your death. But consider your motives as well as whether your wallet can afford this long term cost. Be careful that this big purchase doesn’t turn into a millstone around your neck. See if renting might work just as well for you here.

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