Investing in a home as an asset
Apart from providing shelter, people have been investing in homes as an asset class. Here's why...
If financial goals were to be ranked on basis of importance, there's a good chance that owning a house would be the top three priorities of every investor. Unlike other asset classes, there's a lot of emotions at play while buying one's own house. Intangible benefits, such as peace of mind, the pride of ownership and security are important and play a crucial role in the decision of buying a house.
Yet, there are many logical and tangible reasons as well, why one should look at home ownership as an investment decision. Here are a few of them:
The most obvious financial benefit of owning your own home is price appreciation. Price appreciation helps build home equity. In simple terms, home equity is the value of ownership built up in a home or property that represents the current market value of a house. This value is built up over time, as the market value of the property appreciates.
While a ready to move property seems expensive, one can avail tax benefits for the same immediately, as compared to looking at options of moving into a building which is under construction since here, one can avail the tax benefits only after the full payment. If the property is self-occupied, interest deduction up to Rs 2 lakh is allowed under Section 24 of the I-T Act, including 1/5th of interest accrued during the construction period. If your annual interest is lower than Rs 2 lakh, your deduction is limited to your annual interest.
Recently, the government proposed an additional Rs 50,000 deduction on interest on loans for first home buyers for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh and tax incentives on development of affordable housing, besides exempting Real Estate Investment Trusts (REIT) from dividend distribution tax.
The tax benefits are as per the current income tax laws and rules and any other current applicable law. Investors are advised to consult their tax advisors before investing.
Over time, rent payment may not yield in any equity addition but buying a house will do. As time passes the mortgage balance will reduce and equity will build up.
The concept of 'forced savings' comes to play when you buy your own house. You start saving more when you own a house.
Unlike a rented house where every year the lease amount goes up; one need not worry about the same in the case of your own house. The equated monthly installment (EMI) is fixed and so is the monthly maintenance owed to the society.
So, we can clearly see that owning a home can help an investor create a sustainable future in many different ways. Long-term tenants lack financial stability because a high percentage of their income usually goes toward housing expenses that are constantly on the rise. Locking oneself into a mortgage payment helps level out living expenses, so when income goes up it can be budgeted elsewhere. Paying off a mortgage allows homeowners a long-term plan to significantly reduce their living expenses as they start investing in a retirement corpus.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.