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Rent or Buy a House? Which is a Wiser Choice?

Looking at the title, you might say buying is the obvious wise choice. You are not wrong. You are not correct either. Looking through the perspective of an Indian, owning a house gives a sense of stability and pride. Whereas, living in a rented house gives the perception of uncertainty. However, renting a house has proven to be a financially reliable option. It gives the freedom to choose a house that is affordable and also accessible. So, let us dig deep and find out which is better, renting vs buying a house.

What if you choose to rent?

Going for a rent house is a viable option in this day and age, keeping the real estate market and prices in mind. You will be having enough money in hand without any burden of EMI, taxes, maintenance, and repairs.

Moreover, you are free to relocate from anywhere to anywhere whether it is close to your work or close to your child’s schooling. However, there are a few drawbacks to choosing to rent.

Even if your monthly expenses are fixed and under control, every year when the owner increases the rent or when your lease is up and needs renewal, your budget comes into questioning.

If your income is consistently low or if you are still awaiting appraisal, the new increase in home rental can be a huge burden on your finance. If you choose to rent a different place, money, time, and energy must be spent every time you want to move. Let us weigh the pros and cons of the cost of renting with more realistic assumptions.

Financial Assumption

Consider you are renting a house that’s worth Rs. 60 lakhs for Rs. 18000 per month with an annual 8% rental increase. Let’s say the annual EMI is at 8.6%, which means you are saving Rs. 25000 every month by paying just the rental. And, you are also saving the 20% down payment amount of Rs. 1200000. At this point, you may not realize the financial flexibility renting is providing you.

The down payment amount of Rs. 12,00,000 is something you can use for investing in mutual funds with at least 12% p.a. returns. Or you can use it to invest in small-scale businesses with respective returns.

You can also use the Rs. 25,000 that you save by not paying the EMI for monthly SIP investments with a minimum of 14% p.a. returns. And, you can stay updated and invest wisely in the stock market and cryptocurrency to see exponential growth for your investments.

Though in the long run, let us say 20 years, these returns are tremendously high, this may not be the case in the real world. You must be extremely disciplined and spend every last rupee investing. Which obviously is not a possible scenario.

What if you choose to buy?

There is no debate on the fact that buying a house is an expensive affair. But still, it gives a sense of security that Indians, especially, cannot forgo. Unlike rental, paying EMIs every month does not go into someone else’s pocket. It continues in giving you shelter and also makes you the owner of the house proportionately.

Moreover, after paying off the EMI, if capital appreciation applies, you might end up with a home that has a property price that is higher than the cost you invested.

On the flip side, capital appreciation is dependent on factors such as the location of the house. If it is located in a bad neighborhood, the profit may not be greater than the amount you have invested.

As a home buyer, you can’t ignore the fact that home buying involves unrecoverable costs like taxes, maintenance, and repairs along with the mortgage payment. In rentals, you get to skip all these costs and let the owner deal with them. From repairs on your roof to the maintenance of sewer, the homeowner needs to spend on them from their pocket.

Financial Assumption

Let us consider the same example we have discussed earlier to understand the cost of buying better. The house that is worth Rs. 60 lakhs, only this time you want to buy it. Now, let’s just say you have paid the 20% down payment with lump sum cash Rs. 12,00,000. And, for the remaining, you applied for a loan amount.

You pay 80% of the property value through a monthly EMI of Rs. 43,000, which is an approximation you can get by using the home loan EMI calculator. Remember, the loan is possible only after proving your home loan eligibility.

If you are approved of the loan, there are a few benefits you can avail of. The government of India allows you to deduct the home loan interest rates from the income tax. Depending on the tax bracket you are in, you can save the amount closer to the down payment you’ve initially invested by the end of your mortgage.

If it is safe to assume that the house is in a growing and attractive neighborhood, then with a decent increase in property value of maybe 10% p.a., you are looking at a house that values way higher at price than what you have bought it for.

On the other hand, with 8.6% interest, you are paying more money to the bank in terms of interest than the value of the house.

Merits of renting a house

Your stress-free life is one way or the other dependent on the time you spend commuting between home and work. By owning a house, you are limiting to one particular area and no matter the distance, you won’t prefer living somewhere else.

The renting also allows you to save more money by avoiding irretrievable expenses and also by claiming House Rent Allowance tax benefits.

Furthermore, if you have money that can buy you a permanent home, you can consider using it for investment property. This way you are spending your money in such a way that it generates income and lets you save more than you already have. One best example of this is buying a property and listing it on Airbnb.

Merits of owning a house

It is not easy to proudly say that you live in a rented home no matter how much you earn. In India, where having your own house is stereotypical merit, you might find it hard to be a part of meet-ups with friends or family members who are homeowners without an inferior feeling.

By buying a house, you are having a stable property of your own which makes you a secure individual. You also learn great lessons in regards to affordability while planning to buy a home with a rate of interest. For example, if the EMI you pay every month is Rs. 43,000, then you should have a high income to keep this monthly payment below 30% of your income. You will have to learn how to shape your finances to avoid financial burdens.

Rent Vs Buy Calculator

You have seen the costs incurred in renting and buying but let us try bringing the costs closer with better numbers. To make it more understandable, let us use a calculator from Upshot in New York Times that would make the math easier. Use the calculator with your own numbers and follow this article to understand the calculations.

Note: The calculator uses US dollars for currency and this article exchanges it to Indian rupees with a close approximation.

Let us consider the price of the home you want to buy is Rs. 60 lakhs and let us assume that you are planning to stay in this home for a longer period. Let us put in 20 years so that you can spread the upfront fee over the long term.

Assuming that the loan tenure is 20 years, an 8.6% mortgage rate is applied. For the down payment, you will be paying Rs. 12,00,000 cash as a lump sum. So, the total equated monthly installment you pay the bank is around Rs. 43,000, which you can estimate using a home loan EMI calculator, as we did earlier.

The rent vs buy calculator we have here automatically suggests an estimated amount and if the monthly home rent is below that figure, then you can go with renting rather than a home purchase. In this case, the amount is Rs. 28,000.

In the next section on the calculator, you can find factors like growth in the home price per annum, rent, investment returns, and the inflation rate. The calculator assumes that the amount you save by not paying home loan interest rates and paying only the rent is used for investing in stocks or mutual funds. Naturally, you can’t invest every rupee, so let us leave the investment return at 4.0%. As it is hard to predict the home price, rent and inflation, let us leave them at default values. Namely, 3.0%, 2.5%, and 2.0%.

Coming to the taxes, property taxes are different for every state. In our case, let us assume that you are paying 1.35% with Rs. 81,000 for the first year. Along with this, the calculator also lets you pick the marginal tax which is the additional tax you pay for every buck you earn. The tax deductions can be high or low depending on the marginal tax. Let us keep the marginal tax rate at 20%.

The calculator also considers the costs involved while buying and selling the house. As these costs can vary, let us keep them to a minimum value of 4%.

As we discussed earlier, owning a home is not just paying the EMI but also taking care of additional costs like maintenance, repairs, homeowner insurance, and utilities. Let us consider that you are spending 1% per year on maintenance and renovations which is Rs. 60,000. And, for utilities, let us assume that you are paying around 4000 per month. To protect yourself from unforeseen expenses due to accidents or damages, you generally pick up homeowners insurance. In our case, let us keep it at 0.46% per year which is around Rs. 28,000.

Finally, the calculator asks for a month’s security deposit. As we are going with the estimate, let us consider the deposit as Rs. 28,000 supported by rental insurance of 1.32% per year which is around 4,500.

Costs involved 20 years stretch

Rent (Approx)

Buy (Approx)

Initial Costs

Rs. 28,000

Rs. 15,00,000

Recurring Costs

Rs. 87,00,000

Rs. 1,42,00,000

Opportunity Costs

Rs. 32,00,000

Rs. 67,00,000

Net Proceeds

-Rs. 28,000

-Rs. 1,04,00,000

Total

Rs. 1,19,00,000

Rs. 1,20,00,000

As you can see, the difference between the rent and buying totals is not drastic in this example. This is because the calculator safely assumed that the monthly rent and expenses are around Rs. 28,000 based on the property value we gave in. That’s why you are advised to stick to renting if your monthly rent is below Rs. 28,000, which is actually low in many cities across the country.

Right from the first value, the calculator tallies all expenses that occur in renting or buying commonly.

For buying, this includes opportunity costs like initial property cost and recurring expenses such as monthly or yearly payments like taxes, maintenance, and home loan interest rates. You can also find the net proceeds which is the profit you might make after selling the house by subtracting closing costs and all types of payments to the bank.

For renting, it calculates the initial costs like security deposit along with recurring costs like monthly rent and insurance. It also calculates opportunity costs and net proceeds which is the security deposit you get back every time the lease is up.

If your net proceeds are negative like shown in the table above, then it means you have made enough profits that would cover the cost of your home as well as recurring costs.

In closing

To rent or buy a house is a heated discussion that cannot be resolved in just one go. There is data supporting both choices strongly with valid reasoning. It all comes down to your affordability and interest. Then you can decide, what is better, renting or buying a house?

If you are an Indian, you can’t give up the thought of owning a home. That too when you have the financial support. However, it is wise to purchase a property after enough savings you make while renting. It is also vital to find an affordable mortgage based on the home loan eligibility that allows you to plan other important things like education for your kids as well as your retirement.

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