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Which is better? Buying a house with cash or with loan
Decoding a financial math scenario...
Hi 👋 Prado here
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Every Wednesday, I publish one essay & 10 interesting things that will help you become healthy, wealthy and wise 👇
Essay of the week
Most of us want to live in our own house or at least buy one for ourselves. But what’s the better way to buy one.
Last week I read an interesting post on Reddit and wanted to share it on Twitter to check if the math checks outright.
Here’s the simplified version👇
(Note: Most of my readers are from India, so the scenario is based on India. But you can convert the scenario as per your need)
Mr.X have 25 Lakhs in cash and he wants to buy a house.
Scenario 1: Buy with cash and have a house from Day 1
Scenario 2: Buy with a loan.
Mr.X gets a loan with a 20% down payment (5 Lakhs already paid) and takes a 20L home loan at 6.5% for 20 years. EMI = 15k per month.
Now Mr.X take the 20L cash and put it in the Nifty Index and withdraw 15k per month from it.
If Nifty performs badly for 20 years then let's say it gives 8% CAGR, and Mr.X withdraw 15k per month from it for EMI will be left with 7L in my portfolio after 20 years of paying the EMI.
If the market performs as per past and gives 13% CAGR and I withdraw 15k per month. Mr.X will be left with 78L in my portfolio after paying all the EMI.
But this seems too good to be true. Is Mr.X missing something?
Here are a few things that Mr.X is missing:
1. The above math is right but it doesn’t involve risk.
2. Housing loans are given on the basis of floating-rate loans. The current rates are low due to Covid, they may go up in the future.
3. Some years the markets are up and some years the markets are down. Unless Mr.X is timing the market and withdrawing lump sum money every year. It’s hard to time the market.
Stock market returns are not periodic and/or consistent.
Some months the market can be -30%, withdrawing those months would be a bad decision but Mr.X has to pay the EMI.
4. read this reply from u/brooklynnineeight
5. Things like Inflation, taxes on withdrawals, the possibility of depression are ignored.
If you are reading this to find a concrete answer, then I apologize. I know I added a clickbaity thumbnail. But that was not the goal. The goal was to help you learn something new. Something in the financial world that we would eventually experience.
This whole thing reminds me of a joke.
“From afar it looked like two guys are aggressively fighting with swords. Only you when closer, you realised that they were fighting with wooden swords”
It was just like this when I read this whole thing. At the start, it looked like this is amazing. 20 years later, I got a house and 70+ Lakhs saved.
Only when I took a closer look, did I realise that so many pieces are missing.
This is not investment advice. Please hire a financial advisor before making any decision.
Also, feel free to leave your views below. Learning is a process and I’m trying to learn as much as possible.
If you bought a house, how’s your experience been till now? Did you buy it with cash or a loan? what do you recommend?
10 Interesting things for you 🙌
1. I’ve been spending more time studying Web3 and NFTs. Here’s a good read (Web3 playbook for brands)
2. Something from my LinkedIn (For a change)👇
3. There’s a man standing in the Moscow train station, handing out leaflets to everyone who passes by. Eventually, of course, the KGB arrests him—but they discover to their surprise that the leaflets are just blank pieces of paper. “What’s the meaning of this?” they demand. “What is there to write?” replies the man. “It’s so obvious!” (Tweet this quote)
This is happening in Russia right now 👆 (Watch here)
Read this in the blog written by Paras Chora (Speaking your mind is a public service)
4. Interesting Human of the week:- 🤯
5. Found this amazing website - Magic Eraser (Remove things from images in seconds)
6. Question of the week:- I’m working on something, please answer this question
What is something you'd like to be more disciplined on? Something that can help you if you are just a bit more disciplined towards it?
7. Picture of the week:- These benches are reversible, so you can choose to look at people or boats.
8. Current read: Started reading How will you measure your life by Clayton M Christensen and 2 others.
9. Meme of the week:- Only Elon can tweet something like this.
10. Quotes of the week:
"A great man is hard on himself, a small man is hard on others." - Confucius
(Tweet this quote)
The only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. -Steve Jobs
(Tweet this quote)
The best people possess a feeling for beauty, the courage to take risks, the discipline to tell the truth, the capacity for sacrifice. Ironically, their virtues make them vulnerable; they are often wounded, sometimes destroyed - Ernest Hemingway
Check out some previous newsletters:
Diderot Effect (Read)
Life’s lines of Closeness (Read)
Cathedral Thinkers (Read)
Join in if you want me to trigger your curiosity every week👇
Personal Announcement 🚨
After the launch of Twift last week, I’m taking a week off and going to do some deep work and work on a new project. Might not be much active online.
Also, Twift got the #2 product of the day on Product Hunt. Yay ❤️ Check it out
In This Together,
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