Owning a property makes a person financially secure. Let us consider the rent that is paid every month. It increases annually or biannual. However, any money that is deposited in banks or in government securities does not increase as regularly. Rental increases are compounded, i.e., the 10 percent increase in rental of this year would be added to the previous year’s rental charges to arrive at the new principal amount for the next year.
Therefore, if the monthly rent paid this year were $100, then next year it might be $110, and the year after that, it would be $121.00 and not $120. Unlike this, interest on government securities, corporate deposits, and bank deposits are not compounded. Over a period, this gap becomes insurmountable. This gap can eat away retirement savings very rapidly. It is not easy to generate income that matches with rental increases, especially at retirement.
Rent paid is an amount that is lost forever because it is an expense that leaves nothing in the hands of the person paying the amount even if the individual has been paying rent for several years. Unlike it, if the person buys property using loans, the installment paid leaves a property in the hands of the owner at the end of the loan term. Installments do not increase at regular intervals like the rents. Therefore, over a period, the ratio of such installment to the income of the person becomes negligible. In other words, the property owner does not feel the strain of paying the loan at later stages. Property owner can withdraw any built up equity, i.e., the value of the property that is free from loan, for any emergencies such as medical expenses, or education expenses, by mortgaging the property.
If the property owner is a tax payer, then taking loans for purchasing properties makes more sense. This is because the interest amount out of equated monthly installments applicable for the loan can be written off against income for the year, effectively bringing down the income on which tax is computed. Another tax advantage is related to capital gains. Capital gains are periodic increases in the value of the property. This amount is not taxed each year.
If, however, the amount invested in property were invested instead in government securities, the individual would have to pay tax on income from such investments, in each year. Therefore, capital gains to compound almost annually.
Unlike traditional valuables such as gold, and diamond, it is not easy to steal properties. There are specific procedures that are necessary for transferring any property. In addition, there are government authorities that can be approached for required assistance in case of any encroachment or for obtaining any details. The possibility of too many witnesses in the registration offices also prevents property thefts by stealing.
Do you like houses like this?
Owning any property is also a good way of estate planning. Since the actual value of the property can only be determined based on demand and supply at the time of sale, any taxes related to the property are paid based on estimates, which are always lower than actual value of the property.