The above image has recently gone viral on social media due to rents in cities like Bangalore increasing 30-40% compared to the pre-COVID period. Our thesis in this article, what buying a home in a major city is essential, is based on two observations:
educational costs are going up
starting salaries are not growing much
For the first point, here is an image showing how fast IIT fees have increased over the last 15 years.
Fees in private colleges have grown faster, especially for medical degrees. In contrast, starting salaries, taking IT fresher intake as an example, have seen slow growth.
In major cities of India, where most of our children will be starting their careers, there is a much smaller proportion of houses available for singles / bachelors.
This phenomenon, while not new, makes house hunting a difficult proposition for many new joiners.
In such a situation, the combination of
high college degree costs
low salary growth
high rents in the major cities
less number of apartments made available for singles vs. families
builds a strong case for creating a real-estate asset solely to stay in it, not investment, at the beginning of the career. If the house purchase is delayed, we are implicitly assuming that the child or parent has the ability to create greater wealth via financial assets, like mutual funds.
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How can parents help?
The fundamental investing and income equation applicable to this case is
Lifetime income of both parents and child is used to fund
education, house purchase and other child-related goals
Whether there is an educational loan, a home loan, or both, the parent and child ultimately pay for these goals. There is no alternative.
FAQs on investing for a child’s house downpayment goal
Which is the right city to buy the house?
If the child starts their first job in a major Tier 1 city, it can be chosen for the house. If they later shift jobs and go somewhere else, the house can be sold or given on rent, and the same rent can be used for the new city.
To make it easier to sell the property when needed, under-construction properties, though cheaper, should be avoided.
If the city is not a major Tier 1 city, choose one in the nearest big city of the same region where the parents can be selected. For example, if the parents are from the north of India, Delhi NCR may be chosen. Or if they are from the South, then Chennai/Bangalore/Hyderabad etc, may be selected. The same logic can be extended pan-India.
Which kind of property should be bought?
There are three things to keep in mind here:
the property should not be too big or too small
the property should be easy to buy now and sell later
the builder should be reputed and not currently under any dispute
Under-construction properties may go into dispute or face delays and, therefore, should be avoided.
Recently completed apartment complexes of big brands, where many young families are already staying, can be an option. Choose the size (2/3/4 BHK) depending on where the decent amount of demand is so that exiting is easy later.
What if the child goes abroad?
There is always the possibility that the child goes abroad for higher studies or job opportunities. In such a case, there are two options:
sell the property to fund the course or settling-down / property down payment costs in the new country. It is, therefore, essential to buy a property that is easy to sell
keep the property on rent if there are adequate assets in the family, and keep the option open for the child to return to India and stay in their own house
Who pays for the EMI of the home loan?
The house purchase can be structured in this way:
the parent pays part or whole of the down-payment and other closing costs
the child pays the EMI on a best-efforts basis
any EMI amount the child cannot pay needs to be paid by the parent
As long as the loan is active, the parent should maintain partial ownership, up to and not beyond 50% of the asset. Once the loan is paid off, the parent may choose to withdraw their ownership claim on the asset, replacing their ownership with that of the child’s spouse, if any.
What if the parent cannot invest for this goal today?
You cannot take a loan for retirement
The priority of the parents when they are investing their money is to invest for their retirement.
We are, therefore, talking about those parents who have enough investible surplus for their child’s goals like college education, marriage and now house down-payment. If there is a need to prioritize between these goals, here is an easy framework to use:
highest priority: college education goal since it enhances the human capital of the child, i.e. their ability to earn lifelong income
medium priority: house downpayment goal since it creates an asset
lowest priority: child’s marriage since it is a pure expense without any future return
Of course, you can take loans for all of these goals, but then again, ultimately, someone like the child, parent, or both will be paying the EMI of those loans.
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This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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This post titled Why parents should invest for the downpayment of their child's first home? first appeared on 05 Mar 2023 at https://arthgyaan.com
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