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Is it better to rent or buy?

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Is it better to rent or buy?

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Buying a house is no joke. It involves a massive upfront investment and taking on a big loan. It can provide a sense of security, not to mention the joy of decorating it as you wish and making it a place you can call your own. 

If you’re here, you’re probably thinking of buying a house as well. And banks seem to be offering attractive housing loan rates. So by all means, go for it if you feel it’s the right choice for you. But ensure you evaluate all your options before making a decision. Is it better to rent or buy a house? Here’s a few things you should consider before you decide.

Let’s evaluate using two parameters

  • Emotional 
  • Objective/financial 

The emotional parameter

It’s really easy to get emotional when it comes to buying a house. Or if you’re someone who’s thinking really long term and is keen on creating a legacy for your future generations, then buying a house is a good option.

The financial parameter

There's so much that goes behind buying a house, and before you begin you need to know if it's the right time for the same. So, let’s objectively look at how this works. First, let’s understand the costs of buying vs renting a house in India.

Here's what you'll need to consider to buy a house:

Down payment

An upfront amount paid initially, giving partial ownership of the house. So if you’re buying a house and the down payment is 10%, you will have proportionate ownership of the house.

Interest on loan

Next, you’re probably going to take a loan to pay the remaining 90% of the cost. This is basically the cost of taking a loan. If you look at it, this is also a form of rent that you pay as EMIs to a bank instead of a landlord.

Maintenance cost

Since you’re the owner of the house, it becomes your responsibility to take care of it. This includes a monthly maintenance charge that you can’t avoid.

Now, let’s evaluate the costs of living in a rented house:

Rent

The amount you pay to the landlord. In many metro cities, you also need to pay an upfront deposit when you move in. This can be 2 to12 months of your monthly rent, depending on the location (and landlord). This amount is refundable when you move out of the house.

Maintenance cost

These are monthly expenses to keep the house in good condition, especially if you’re living in an apartment.FYI - costs like electricity bills, water bills etc., are common expenses in both cases, so we’re excluding them here. Before diving in further, let’s look at a super important concept you shouldn’t sleep on when you rent or buy a house.

Rental yield

This is the return on property achieved through rent.

Suppose you own a property of a certain value. The rental yield is the percentage of the value of the property that you can earn with one year’s rent. In India, this rental yield hovers between 2% and 3%. 

Let’s understand this with an example. Say, you’re staying in a 4BHK plush apartment in Koramangala with every amenity you can think of. The value of that apartment is ₹5 crore. And the rent is ₹65,000, which looks a lot but let's do the maths here.

In a year, you pay ₹65,000 x 12 = ₹7,80,000. Dividing ₹7.8 lakhs with ₹5 crore gives a rental yield of 1.56%. From a house owner’s perspective, you get only 1.56% of the total value of your house, and from a tenant's perspective, you pay only 1.56% of the total value of the house as rent. 

Assuming that the growth rate of rent and the house's value grow at the same rate, then it will take close to 65 years to pay for the house's actual value through rent!

How risky is it to buy a home?

If you’re still considering buying a home as an investment, then there are risks associated with them, just like any other investment. 

Being in financial debt for a long period

Owning a home provides security but involves huge costs. You most definitely will take out a loan to buy one, which puts you under debt spanning decades. A major chunk of your income will go into paying EMIs.

Risk of defaulting

If you’ve taken a loan, then there’s a lot riding on you to pay EMIs every month. And if you fail to make the payments, then the repercussions are severe. The bank will take back the house, and your credit score will take a beating. You may also not be able to purchase a house in the future, and even if you can, the rates and terms will be unfavourable.

Getting obsolete

Owning a house becomes your responsibility to upgrade it as per the market standards constantly; otherwise, you may lose out on the value when you give it for rent or decide to sell.

Is it better to rent or buy? Crunching the numbers

Here’s an example to make the comparison easier. Let's walk through the numbers to see who wins in rent vs buy.

Assuming the period is for 20 years when taking a loan to buy a house for a value of ₹60 lakh

Similarly, looking at the case of renting a house for ₹20,000

So the numbers suggest that it’s better to rent rather than buy since the net benefit from renting is ₹1.73 crore as compared to ₹1.61 crore from buying a house. While there are debates on whether buying a house is an investment, the current status favours renting one out.

But things may change. For instance, if the property's value increases to 12%, then it may be beneficial to buy a house in such a situation. So there is no absolute answer to whether to rent or buy a house as it all depends on your location, rates and market conditions at the time. But if numbers make you dizzy, then check out Fi’s Rent vs Buy calculator, where you just need to plug in a few numbers, and the calculations will be done for you. Now that’s neat, isn’t it?

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