Nikhil Kamath on the great housing debate: Why he opted to buy over rent

In the latest episode of "WTF is with Nikhil Kamath", Nikhil Kamath, co-founder of Zerodha, gathered industry titans to discuss one of the most debated topics in personal finance: buying a home versus renting. Kamath was joined by Irfan Razack, Chairman & MD of Prestige Group, Nirupa Shankar, Executive Director at Brigade Group, and Karan Virwani, CEO of WeWork India. The discussion revealed key insights into the advantages and challenges of each option.

Kamath, who has long favored renting, shed light on the uncertainty that often comes with renting. “The thing with renting, of all the advantages of renting, there is one disadvantage: you don’t have foresight as to when you can move out of the house. I had to move out of this house, whereas I might have liked to stay longer in this house,” he said. Kamath explained that the inconvenience of having to move often sways people toward buying their own homes.

Financial Security and Ownership: A Question of Balance
Nirupa Shankar took the opportunity to question whether owning a home doesn’t inherently add to a person’s financial strength. She posed the question to Kamath and the other guests: “Don’t you think buying a home adds to the financial strength, security, and balance sheet of an individual?”

Kamath, in his response, expressed his preference for other investment avenues like gold, which he believed could offer similar financial security without the illiquidity tied to real estate. “I feel like something like gold can give that to me. I hate the illiquid nature of real estate,” he said.

Real Estate’s Liquidity Problem
The illiquidity of real estate was a central theme of the discussion. Razack, speaking from his experience in the property sector, acknowledged that selling real estate is a slower process compared to other investments. “Real estate is illiquid at times. At times, it can just disappear immediately. But it is an illiquid asset,” Razack explained, adding, “You must get the right buyer, right price, and there is a time period—it doesn’t happen overnight.” He highlighted the challenges of finding a buyer and receiving payments promptly, which differentiates real estate from stocks that can be sold quickly with the assistance of a broker.

Kamath supported this view, comparing real estate transactions to the ease of stock market trades. “If I have X amount of stocks, I want the money tomorrow, I can just dial up my stockbroker, and he will sell it and give me the money in three days’ time. That can’t happen in real estate,” Kamath said. He also pointed out another financial downside: the high stamp duty required in real estate transactions. “In the stock market, one can also buy and sell without paying a stamp duty of 5-6 percent. It is very inefficient in real estate,” he remarked.

Personal Choices and Real Estate Investment
While much of the debate centered on financial factors, Kamath and the other speakers also acknowledged that personal reasons often influence the decision to buy or rent. Kamath admitted that his recent decision to purchase a house contradicted his previous stance against home ownership. “For most people, buying or selling boils down to a binary decision. If I buy an apartment, I am stuck,” he noted, acknowledging that most people, unlike himself, cannot afford to buy multiple homes across cities.

Karan Virwani, CEO of WeWork India, humorously commented that Kamath’s change of heart should be made public, so people would have more faith in real estate investments. Nirupa Shankar, also joking, suggested Kamath should be the “poster boy for real estate.

Expert Opinions: Real Estate vs Other Investments
Adding depth to the debate, wealth advisors also weighed in on the viability of real estate as an investment. Ravi Saraogi, Co-founder of Samasthiti Advisors, pointed out that while real estate offers some returns, it isn’t the high-yield investment many assume it to be. “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,” said Saraogi.

Similarly, Sridharan S., a Sebi-registered investment advisor and founder of Wealth Ladder Direct, advised against taking loans to buy property, emphasizing that the net returns are often underwhelming. “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,” Sridharan explained, adding that investing in markets could yield up to 12 percent returns without the associated risks of real estate.

The Personal Element: More Than Just Numbers
Despite the financial challenges, Saraogi noted that for many, buying a home is not just about investment returns. “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,” Saraogi said, acknowledging that personal aspirations often drive home purchases. He added, “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.”

Saraogi also highlighted that some property owners find peace of mind in owning a home, especially those who use it to generate rental income.