Buying vs. Renting: Why did Nikhil Kamath eventually decide to buy a house?

Nikhil Kamath, co-founder of Zerodha, and True Beacon, an asset management company, after repudiating the idea of owning a house for a long time has eventually caved in, and decided to buy one.

He made the revelation recently on his WTF podcast with real estate tycoons Irfan Razack, chairman and MD of Prestige Group, Nirupa Shankar, executive director of Brigade Group and Karan Virwani, CEO of WeWork India. 

On hearing this, Virwani said that Kamath should make this public so that people have some faith... whereas Shankar, in a jest, said that he (Nikhil) should be the poster boy for real estate now.

After listening to their banter, Kamath explained in his characteristic calm demeanour. "The thing with renting has all the advantages -- one disadvantage (is that ) you don't have the foresight as to when you can move out of the house -- maybe I would like to live longer in this house. And that -- not having the nuisance value of having to move - felt like it made sense to buy a house," said the 38-year-old billionaire.

Following this, Nirupa prodded further and asked him, “When you do a stock market analysis, you look at the health of a company, you check how strong a balance sheet is. For an individual as well, we need to have a strong balance sheet. Right? Don't you think buying a home adds to the financial strength, security, and balance sheet of an individual?”

While partially disagreeing with her, Kamath said, "I feel something like gold can give that to me. I hate the illiquid nature of real estate."

Expressing agreement with him, Mr Razack said, "Real estate is illiquid at times. At times, it can just disappear immediately. But it is an illiquid asset." Another downside of investing in a property, opines Kamath, is that one has to pay 5-6 percent stamp duty at the time of buying it.

So, the debate -- whether one shouldbuy a property or not -- continues while these tycoons slug it out. We, too, make an attempt here and try to find a nuanced answer to this.

Buying or renting?

Some wealth advisors reveal that they don't urge their clients to buy a property for the sake of investment.

"We don't recommend investors to buy a house for the purpose of investment. Anecdotally, it gives a good return. However, RBI has been maintaining the home price index since 2010 for 6 to 8 major cities, which clearly shows that real estate gives an average increase of 5 percent. The real estate prices only keep pace with inflation. So, we don't say that one should invest in a property," says Ravi Saraogi, Co-founder, Samasthiti Advisors.

While echoing similar sentiments, Sridharan S., a Sebi-registered investment advisor and founder of Wealth Ladder Direct, says, “Buying a property is fine so long as you allocate only 30 percent of your portfolio. But buying a property on borrowed money does not make sense. This is because one would pay 9 percent interest on loan and even if the property gives a CAGR of 12 percent, the net return is only 3 percent. Instead one can earn upto 12 percent return by investing in the markets.”

There could be non financial reasons

What if you don't plan to own a house at all? Although some would argue that owning the house you live in should not be seen as investment, whereas a house bought for the purpose of investment only may be avoided. On the other extreme are some investors who don't want to block the money even in one property.

So, is this rational not to buy even one house?

"It's perfectly okay not to own a house. There is no universal doctrine which says that it is a good or a bad thing to own a house. What matters is what are your key reasons for buying a house. And there could be non-financial reasons too, such as investing in the stock market makes you uncomfortable, or you want to keep an asset for the next generation or you want to raise a child in the house you plan to buy. After all, everything can't be reduced to an excel sheet. If it's your aspiration to buy a house, then you must go for it," Saraogi adds.

There are also some property owners who are relieved to have bought a house because it helps them earn a rental income, he adds.