KARACHI: I would like to start off by stating that I am not a real estate expert. I can only advise on the personal finance aspect of buying real estate. Having said that at the outset, I will now lay out the reasons why all young professionals should consider buying real estate as their first major expense.
Most yuppies in Pakistan seem to want to buy a car as their first major expense. This seems legitimate considering the fact that most of them are too uppity to use the public transportation network in their cities. But the logic of buying a depreciating asset versus one that appreciates over time should be self-evident to anyone who is not a git. If you must buy a car first, make it the cheapest second-hand heap of metal you can find and make do with it till you have earned better.
Now on to more important things, like buying the place you will be living in. It is important to have a realistic expectation of what type of home one can afford. It is also important to remember that the first property you buy is not necessarily the one where you will be spending your retirement years. No, the first home is both an investment and a back-up. It is where you will end up if you mess up big time during the rest of your life. It does not have to be fancy, just liveable.
Having determined the range of property you want to buy, the next stage is to start saving for the down-payment. This can be hard given the perennially high rate of inflation. But that is what money market funds were invented for.
As stated in last week’s column, put away 25 per cent of your post tax income into a money market fund and keep doing so until the savings specifically designated towards your real estate account (as opposed to your retirement account which should remain untouched) reaches at least 20 per cent of the total value of the property you plan on buying. Some banks can require up to 30 per cent, so make sure to check before house shopping.
The next phase is applying for a mortgage. Different banks have different procedures. Some require you to conclude a contract before you apply for a mortgage. Others are comfortable with both processes running simultaneously. But make sure you know what the bank’s process is before you start shopping for a property. It is probably a good idea to get the mortgage from a bank with which you regularly do business.
I would now like to debunk the myth that debt is bad.
Yes, being heavily indebted is bad and that is what got the US in the mess they are in now, but a carefully managed debt load can be a healthy route to purchasing otherwise unaffordable assets. What killed the American real estate market was that people forgot the basic rules and gave out loans to people with no income. So long as mortgage payments do not exceed 25% of a person’s monthly post-tax income, the debt load should remain manageable.
Bank Alfalah has a useful mortgage payment calculator on their website that I would encourage everybody to use when making the calculations for how much their monthly installments will work out to be. If you have the down-payment amount and can afford the monthly payments, there is no reason for you to not buy your first piece of property.
Published in The Express Tribune, August 23rd, 2010.
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