Why we can not make money from buying that dream house

From my last posts on RE(Real Estate) investment in India, you can assume I am biased towards not buying a house as an investment and views are personal not to influence anyone for their RE investment decision. In continuation of the same, here is my observation on why you can not make profit on buying a house in current scenario.

Let us consider the scenario the process of how a flat is built and sold to an end customer like us(salaried people buying a house with 80% home loan).

First the Land: Most of the land in city outskirt or even prime locality(where the flats are constructed) belong to people who are either inherited agricultural/ancestral land or bought years back at very cheap price. Now the land cost is as good as a piece of gold so the owner sells only in case of urgent need of money or they do joint development. In either case the owners are either too reach to hunt for a buyer or not so smart to find one. Identifying the real owner of such land in a growing city and exploiting their needy situation is the handy job of a local land broker. So very rarely they make a deal with 1-2 % brokerage, usually they make an agreement with the real owner at a much lower price than market price(distress selling) and find a buyer(usually a builder who are always hunting for land). So within few weeks or months they make a killing ranging as much as 20-30% of land value.

Then the builder: They make a project plan with good number of flats with a very good margin on their selling price. Reputed builders even give sub contract for construction of part or full building. So you can imagine they are doing their business and having their real good margin at every level. Even for construction its not handled by a single contractor, there are different persons who supply different raw materials like one person sand, brick another steel and iron another cement and another electrical fittings another bathroom fittings for the project execution. They all have margins on top of the market price and bribe for all approvals.

Now house is ready, but the builder doesn't sell directly, its out sourced to a marketing agency who actually makes the deal with us. They have their margin priced in the rate we are quoted. That is the price we pay. Again we don't pay with our own money, we take a loan and we pay interest. So the interest cost is also added to the cost of house. If that is not enough we have to bribe to register our own house in our own name with our own hard earned accounted(white) money even if you ready to pay the full government guidance value.

Now where is the margin for us to make a profit after every body has taken their share - we have to find another bakra(scape goat) to off load the used flat at an appreciation in future which is easier said than done. In current scenario, RE has become one of the biggest industry and a big cartel of builders, black money holders, politicians, banks etc who want us to buy that dream house. The demand is artificially created to trap us. We will see the real demand when we try to sell the flat.

The full page ads are coming for the last few flats at that incredibly lowest price for the lucky few for last few weeks in every festive season. So you can imagine the real demand. You can go for site visit in free cab, Pre-Launch offer at half the rate, No PRE-EMI, Free modular kitchen, Booking by just paying Rs 10K or even online booking of flats in eCommerce sites. The builders and marketing agencies are sitting with huge inventory of unsold incomplete flats with a good amount of debt burden so we are the only people left to rescue them with money more than we need without any clue about how to make best use of them :).  

Are you(financially) literate?

I know, you(anyone reading this blog) is not only literate but educated(or may be highly educated) as well. How ever very few of us are financially literate, we hardly understand the basics of finance or money market instruments for which we become the easy target of financial product mis-selling. It's not just one off a case, I have so many friends and relatives who have been sold rather I would say I have hardly found anyone who has not been a victim.

Do you want to check whether you are financially literate or not, answer below questions( even though it looks like a subjective matter, I have tried my best to make it as objective as possible). All the answers are Yes/No type and you can consider yourself literate only If you can answer all of them correctly.

1. Do you know the difference between saving and investing?

2. Do you understand how equity mutual fund works?

3. Do you believe your money is safe in fixed deposit?

4. Do you consider investing in stock market is risky?

5. Do you think real estate is the best investment?

6. Do you know what is a term insurance?

7. Do you consider insurance as an investment?

8. Do you believe in instant stock tips received through SMS(from unknown numbers) or business news channels?

9. Do you understand the difference between simple interest and compound interest?

10. Do you know how much interest your savings bank account is giving?

The above questions are my own and as per my own assessment of people's knowledge or perception. Below are the answers(Yes/No) but with little more explanation to help you understand why these are so crucial for your financial literacy. You can consider your self literate only If you are correct for all 10 questions( and your answers are aligned with the explanation). AS I told I am trying to make it as objective as possible so result would be either you are literate(know all the answers correctly) or illiterate( you are not correct for any one or more questions), but there is no in between or you are 60% or 90% literate.


1. Yes ( Savings to preserve the capital i.e. fixed deposit but investing means appreciating with time beating inflation i.e. equity or sometimes real estate or gold)

2. Yes ( Money from all investors or unit holders are pulled together and managed, i.e. invested in equity market, by experts called fund manager)

3. No ( After tax return is less than current rate of inflation, i.e. the money you are left with after a year in an FD won't have the same buying power of today)

4. No (Its risky If you invest without knowledge or just speculate, else in long term,more than 5 years, historically it has given the best return among all asset classes)

5. No (It may beat the inflation in long term, in some special situation in short term you may make good return but its not sustainable)

6. Yes ( Pure insurance, very low premium and with very high assured value, no investment component - No return If the insurer is alive after the term but very high value in case of demise)

7. No ( A large portion of the premium goes for mortality, administration, commission etc. absolute return will be less than or equal to FD)

8. No ( None gives free advice, there are vested interests behind those tips)

9. Yes ( Simple interest is just interest on the capital every year, in compound interest the interest earned is added to the capital and interest is calculated on the total capital periodically)

10. Yes (Typically 3-4% PA with a couple of banks offering 5-7% PA)

Next time you buy an insurance or any such investment product do some research, understand the features and your requirements then buy. Verify each word of the agent keeping in mind that he is going to get very good commission out of your investment. 

Why should you run?

Can you run a km or for 15 minutes?
What If a bunch of street dogs chase you on your way to home, assuming you are walking?

Running for life - Not to save your life from hounding street dogs but this basic activity can lead to a healthier lifestyle. Running is the most basic skill human has since ages. You will need very minimal training rather guidance to start, no equipment needed. By default we have been taught to run. Anyone can run. You don't have to take lessons or spend lots of time learning how to run -- everyone knows how to do it!!!

However as we have grown up we have forgotten to run.

Can you imagine a small kid in an open ground or park?

Do you remember your child hood days? 

But now even If you run for a minute to catch a running bus, you will be gasping for your breathe.
You don't need any special equipment.  Beyond a pair of shoes and some running clothes, you don't need anything.  Don't have a park nearby?  That's okay!

Just wake up early morning tomorrow and run on the road near by your house.You may find many known faces on the road.

We live in busy cities, what we see during the day: roads full of vehicles, streets full of shops, people running around to reach their destinations and the usual background noise of all these. Go for an early morning jog to the busiest places of your city, you will see a different scene. You can feel the tranquility of our habitats without the chaos and will wonder how they transform during the day – a very good chance that you may not be able to recognize – Is it the same signal we pass through every day?

Running gets you into nature.  One of the best things about running is that you can go for a run in the morning and find the same street dog that barks at you in night, staring at you, watching you pass by. You can be by yourself without distractions.

Well that is not all.

It’s a fact that a strong heart and strong lungs will make you healthier and live longer. You may live for many days without food or water but not even few minutes without your heart beating and pumping blood into your body and not without your lungs taking the air through your nose and separating what you need, i.e. Oxygen and releasing What you don’t, i.e. pollution and carbon dioxide. A strong heart and strong lungs are the right ingredient of a healthy and longer life.

Running is the most amazing cardiovascular exercise you can practice without much preparation. Cardio is heart and vascular is lungs and its attached parts. You run, your heart and lungs get exercised and they become stronger day by day. Our body is a machine, so all the parts have a limited life time. Our heart can pump blood for a fixed number of times so as our lungs can process our breathing. A strong heart will pump more blood each time; our body’s requirement is also constant per day. Hence our heart will actually work less so can stay stronger and work longer. Similarly, strong lungs can supply the most essential oxygen to the heart for longer.

We are now young, so able to roam around and do our daily work comfortably. But our body, even hands and legs have also limited life. Unless we exercise and keep them strong you may lose this activeness sooner than later. Running also makes your muscles stronger. They can withstand pain and exhaustion better. Do you feel the difference between, how active you were when you were kid and now? You can extrapolate the same to 20 yrs. later. Our sedentary life style itself is the cause of many diseases.

Exercise makes people happy.  Hard to believe, but it's true. Exercise is a great outlet for relieving stress.  After a hard day at work, going to the gym for a workout will make you forget all about your evil boss and nagging colleague.

It’s a great way to exercise your will power: you are not going to lose your legs or any body parts with the pain (but be careful and listen to your body before running too hard or too much) but you can push little more defying that pain remember - Pain is temporary but pride is for ever. Its more mental than physical.

A rigorous exercise can give you a high even much better than any drugs or alcohol - the so called runners high. Pituitary Gland spinal cord and various other parts of the brain and central nervous system produces neurotransmitters called endorphins – A kind of chemicals transfers through neurons in our nervous system. It interacts with the part of brain called hypothalamus which contains the pain receptors of our body which actually suppresses the pain. It becomes cyclical process once you cross that threshold, i.e. when you run more you produce endorphins which reduces your pain hence you can run even more for long time. That is the secret behind the marathon runners.

If this is not enough take inspiration from Fauja Singh – world’s oldest marathon runner – running a full marathon of 42.195 KM or 26.2 Miles is the ultimate goal of all runners but few go to the different level - Ultra marathons(scroll till the end) .

I had delivered a speech on this topic in my Project 2 of Toastmasters Club. - See more at: http://www.prasannasabat.com/2012/03/failure-is-not-opposite-of-success.html#sthash.sXZoMwCi.dpuf
 I have delivered this in Toastmasters Club prepared speech for Project 7 - Research your topic

I had delivered a speech on this topic in my Project 2 of Toastmasters Club. - See more at: http://www.prasannasabat.com/2012/03/failure-is-not-opposite-of-success.html#sthash.sXZoMwCi.dpuf
I had delivered a speech on this topic in my Project 2 of Toastmasters Club. - See more at: http://www.prasannasabat.com/2012/03/failure-is-not-opposite-of-success.html#sthash.sXZoMwCi.dpuf

Eight Most common Money Myths

In no particular order or priority the 8 common myths I have come across among friends or acquaintances on money:

1. Money is safe in savings account or fixed deposit : The most common and dangerous myth I have ever heard from anyone,  savings account gives you interest of 3-4%( except 3 banks give up to 5-7% ), fixed deposit give you around 9%, post tax it will be 6-7% depending on your tax bracket. If your money is not giving better return than inflation, actually you are losing your money every day. Better you spend that money today than keeping in such instruments resulting lower buying power in future.

2. Investing in stock market is risky : Unfortunately very few people have made money from stock market in last five years, so every one is convinced its not possible to earn money. But in long term this is the only instrument which can beat inflation with highest margin( may be gold or real estate can also beat inflation but very less chance for FD or RD). Its risky If you invest in stock market with your limited knowledge, the next best option available is mutual fund where your money is managed by professionals.

3. You can never go wrong with investing in real estate( or gold for some people): Only in special cases you may get a bumper profit in real estate(or gold) investment, otherwise the annualized return on investment from real estate(or gold) won't be more than 10-12% PA. If you consider yourself to be lucky to catch the special situation, check the top 5 weekly or monthly gainer list published in any financial site or news paper :  you can find many (penny)stocks giving more than 100% return weekly/monthly, you have better chance of catching them.

4. Buy a house to stay and save tax : The tax savings(interest up to Rs 1.5 Lakhs per year currently) on your first house is almost same as the HRA exemption you would be claiming which you can not claim anymore (at least legally) once you occupy your own house. You get more tax benefit If both husband and wife own the house and contribute for the loan equally or when you buy your 2nd house as mentioned in my previous post.
5. Money in SBI( read the nationalized banks) are the safest: All the private or nationalized banks have to follow RBI guidelines(same for both) to operate in India. So all are same and equally regulated just the difference is : The nationalized bank has sovereign guarantee(Government of India) and private banks have their owners or share holders.

6. I'll start saving when I have higher salary and more surplus income : Here you are missing the most amazing concept of investing - The power of compounding. Check this below:

For same investment for minimum 8% ROI(return on investment) annualized for saving Rs 1000 per month your total capital can multiply more than 8 times higher If you start early(investing for 30 years) than starting late say for 10 years and two and half times If you start mid way like invest for 20 years. So start as early as possible and increase the savings as you earn high. Investing Rs 1000 every month with total investment of (1000 X 12 X 30) Rs 3.6 Lakhs in 30 years with just 8% ROI can become 15 Lakhs.

7. Taking loan is not good: It depends on how you are using the loan and repaying. Taking loan for buying an appreciating asset like land or house or education is not bad. But loan to buy any consumer product like mobile phone or even car or to invest in stock market(even though its appreciating) is definitely a bad idea.

8. Using Credit card is not good: Again it depends on how you are using and repaying. It gives you around 50 days of interest free money instantly. You get numerous offers for cash back, free movie tickets and discounts. But If you don't pay on time the charges and interest is very high, If you use it carefully you can definitely benefit but careless usage will be very costly, just like any financial instrument discipline is the key. 

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