It is often assumed that renting a house seems like the more affordable decision. Let’s find out some facts about this hotly debated topic.
Buying your first house is a loaded decision isn’t it?
We’re all aware that the decision to buy a house comes with the fact that the next few years you’re going to be living a very calculative life.
That could be exactly why the idea of paying a nominal rent, compared to the lump sum down payment & massive EMIs seem like a good idea. These decisions are sometimes also influenced by geographical boundaries like metropolitan cities & the property rates in the vicinity.
Property rates in cities like Mumbai are sky high, especially since the prices spiked by 11.59% over the past year. To buy a 2bhk-3bhk house, one has to shell out at least INR 1CR. Adding on the same, is the down payment of a minimum of 10% to 20%, which comes around INR 10-20 Lakh. And, it’s definitely not a small amount. Instead a rent of INR 20,000 seems like a breeze when you think of it like that.
But what we’re here to discuss is, in the long run, what is the better decision & why.
Maybe a flowchart can help us understand this better.
Now, let’s understand the calculations around this.
Elaborating on the flowchart, if someone is looking to rent or buy a property of INR 1 Cr. They’ll pay INR 20-25k to rent it, while EMI would run them INR 40k per month, not to mention the down payment of INR 10-20 Lakhs.
Say you have a budget to buy a 3-BHK flat. Add costs like registration charges, property taxes, society charges, facilities charges and stamp duties on the base price. On an average, that comes out to be an increase of about 7%-10% in the actual price of the property. When you buy that house, you also need to add the probable expenditure on the interiors of your flat.
We can probably understand this better through an example. Let’s say 2 men; 28 years of age are living in Mumbai. And they’re both living on rent in a house whose market price is INR 1 CR & their rent is INR 30,000.
One of them, say Sanjay, decides to buy a house of his own while Sahil decides to live on rent to save his earnings. Sanjay takes a loan for INR 1 CR at 8.6% p.a., for 20 years.
EMIs vs. Rent costs comparison
Taking the reference form the above comparison chart, Sanjay will experience an appreciation in his property’s value by 10% while Sahil’s savings will experience a depreciation because the rent increases at 8% p.a.
Metro cities like Mumbai & Bangalore may have a rental yield of around 3%; the monthly rent comes to ₹ 25,000-30,000 for a property worth ₹ 1 crore. In metros, the owners usually take care of maintenance and structural repair costs. The amount of money one saves by not buying a house can be invested in other investment methods. Given an estimated annualised return of 12% (in about 10-20 years), at the end of 10 years you will have around ₹ 3 crore. No taxes to pay, no interest repayment, no monthly maintenance. You get the drift.
In case of a loan, consider this: for a 20-year home loan for a ₹ 1 crore principal at 8.5% per annum, you pay interest of around INR 1.06 CR, more than the value of your loan. Plus, the additional costs and taxes.
Why rent for Short term & Buy for the long term
So far it seems that buying is the only rational option. But, on the flip side, for a large subset of people, renting makes the most sense.
This subset of people can be distinguished by their ages, their career options, psychographics & geographic locations. Someone who is 48 Years old, with a wife 2 daughters & a son, would prefer owning a house & not moving around the city after every 3-year renting contract. On the other hand, someone who has migrated from another city, in search for a job at 25, is hardly left with a choice but to do just that.
Some pros & cons of your decision
The most known myth regarding renting is that people who rent are ‘throwing away their money’. But don’t you think this is debatable? I mean with a monthly salary of about INR 35k, would you comfortably be able to buy a house? Would you be able to spend INR 40k on fixing your roof?
To be realistic, there is a list of advantages that renting comes with.
- No property taxes
- No maintenance
- No gardening
- No Home Loan EMI’s
At an age when you’re not ready to settle down, when you’re not sure what you’re currently doing is going to lead you to your ultimate goal, spending humongous amounts of money is a bad idea.
Apart from the money, there’s a lot that goes into making a house, a home that you own, responsibilities that come along with owning a house, which a large subset of people are still striving to get prepped for.
At the same time, owning a house comes with a sense of accomplishment. A sense of achievement post the years of hard work you’ve put into reaching here. And it pays-off doesn’t it? 20 years from making the payment, the value of your property can shoot up to numbers you probably would’ve never dreamed of. Of course, there’s a chance of some irregularities. And there’s also the fact that Real Estate counts as an illiquid asset, which means, it falls under the category of assets that is often difficult to sell.
Buying improves the home’s investment value over the years of ownership, thus making expenses like maintenance an investment rather than a burden. So, what should you do?
Where you are in life and your personal needs will decide which of the two options works best for you. Your needs along with those of your family’s are unique, and understanding those needs will help you make the right decision.