Published Article Details

Should you juggle paying rent for present home and EMI for old one?

Posted by: Arti Bhargava on Mar 26, 2018, 06.30 AM IST

A recent promotion is taking Deven from Pune to Mumbai, and he is planning to move with his family in tow. Though they will be renting initially, Deven intends to buy a house when he finds a suitable one that fits hisbudget. In Pune, he lived in the house he had bought when he moved there 10 years ago. He had taken ahome loanto buy it, for which he is still paying theEMI.

Now he has to decide what he will do with the house. He is uncomfortable with the idea of selling it off, but he knows that it won’t be easy to simultaneously manage the existing EMI therentfor the house in Mumbai, or the new EMI when he buys a house there. How should Deven decide what to do?

When Deven and his family lived in the house in Pune, its suitability as an investment was secondary to the convenience it offered. But now that they are moving out, Deven's decision about whether to retain it or not will have to be made by evaluating it purely as an investment option, and the effect it will have on both his current and future financial situations and needs.

Since Deven has an EMI obligation on the house, an important consideration is affordability. He needs to figure out whether the rental income from the house is enough to cover the EMI. If it is not, his income should be adequate for him to be able to pay the remainder, as well as the rent or EMI for the house in which he is going to live.

If the property has a scope for appreciation and earns a good rental income, it qualifies as an asset that provides inflation-protected returns, as well as allows portfolio growth. If Deven intends to move back to Pune and live in the house in the future, the house will become an asset for which there is a specific purpose, and retaining it might be a good idea. But if he believes that he can invest the money in another suitable instrument and earn an equivalent, if not better,yield, he should consider it because managing a property long-distance can be a challenge.

If holding on to this property means a higher allocation to an illiquid asset like real estate, particularly once Deven buys a house in Mumbai, he must consider exiting this investment when he gets a good price. Deven needs to carefully consider the impact of holding on to this asset on his current financial situation, as well as on his future, before making a decision about the property.

This article appeared in Economic Times dated Mar 26, 2018, 06.30 AM IST

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