Buying A House

Buying a house is one of the major 3 spending of young couples – the first being the wedding ceremony, the second being buying a house and thirdly, having children.

We have explored the topic of spending lavishly on weddings previously. Today we will talk about buying a house.

Housing prices differs from country to country, state to state. In New Zealand for example, an apartment in Auckland (the financial centre) cost way more than a whole house on a piece of land in some other more remote place, for example Dannevirke, a small town in New Zealand. It is the same for places in China and in US. In Singapore, the small country is also divided into many different housing estates with differing prices.

While the Western society generally prefers to rent than to buy a house, the Asian population prefers to own a roof over his head. Today’s topic will focus on the decision to buy a house.

For some people who travelled to work in a more expensive city, for example Beijing or New York, they would choose to rent a house first. Work as hard as they could, then save enough and move back to a more laid back place with more affordable living expenses.

For most, the decision to stay in the big cities are more compelling. A higher salary, more opportunities for themselves and the next generation, the desire to move up the social ladder. But be it staying in the big cities or in a more laid back place, the financial logic when it comes to purchasing a house can be commonly used.

In Tokyo, there are cheaper houses in certain pockets of the cities. In Beijing, the outskirts provide a more affordable housing price. The same applies generally everywhere. Of course, in exchange for a cheaper price, the house usually is either old, small, in an inconvenient location or a combination of all 3. But the difference in prices can be very significant.

For example, house A is a 15 to 20 minute train ride to the city centre, and is near to the local train station. The district where house A is at also contains many facilities and amenities such as a sports facilities, fanciful shopping area, beautiful parks etc. It is a place where only the slightly well to do will be able to afford it. No, you do not need to be rich to stay there. Both husband and wife earning a decent salary and taking up a 25 year loan will be able to cover it. Perhaps the house cost $800,000.

House B is not so fanciful. At least 1 hour from the city centre by train, with another 20 minutes bus or bicycle ride to the local train station. In short, you need to take about 1.5 hours to reach the city centre. There are no facilities which appeals to you, people there may not be too well-off (note that this does not equate to higher crime). Perhaps there is only a market there for you to buy your daily necessities. But the house is much cheaper at $300,000.

You may think this example is not common. But no, whether in New Zealand’s Wellington, or in China’s Beijing, or Japan’s Tokyo, the above examples could be found with some reasonable variations in certain figures.

Now we consider 2 pairs of young couples working, everyone earning a salary of $4000. Now take note for young couples, a combined salary of $8000 is considered a very decent salary. We also consider that both couples has a sizeable combined savings of $100,000. With house A, a loan of $700,000 is needed. For house B, a loan of $200,000 is needed.

For house A, with a 25 year loan, the monthly repayment rate is $3300. At the end you will pay $295,000 more for your house, bringing it to a total of over 1 million for a $700,000 loan. Add $100,000 initial downpayment and you get the total cost of your house at $1.1 million.

Assuming couple B spends the same amount of money on monthly instalment for their housing debt as couple A, they would have finished the loan within 6 years, paying only an extra $19,000 on interests. Now, if couple B then buy a second house after their debt is fully paid for, they would be able to rent the house out. If the couple buys another $300,000 house and rents it out at $1500 per month, they could actually cover their monthly instalment and essentially get the second house for free.

Now there is no need to stop there. Once the second house is obtained, it is easier to obtain the third, fourth, fifth house and so on.

You may think that is only easy on theory but almost impossible in practical. But no, this can be done. I know a person who bought a house in a better location for $650,000. On the other hand, I bought 2 houses, 1 for $300,000 and another for $350,000. Although we paid the same amount of money, I have an additional house which can be rented out for extra income. The rented house is an asset to me, bringing me passive income.

Of course, hard work to earn the money and the discipline to save is still needed for the initial deposit, but you get the idea. It is not impossible to get this done. Of course, as mentioned earlier, you will have to sacrifice something for it – be it a smaller house, an older house, a house in an inconvenient location or a combination of the above.

Delayed gratification will lead to better rewards. For kids, the delayed gratification may be a few minutes. But as we grow older, the delayed gratification is usually measured in years.

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