Buying Vs Renting House : Making the Right Choice
The age-old dilemma of selecting between renting or purchasing a home continues to haunt buyers in India. Does renting a home make more financial sense as compared to buying? This post gives an objective perspective.
For many Indians, purchasing a home is one of the most important investment decisions a salaried individual would make in their life. The ones who do move ahead with the purchase decision mostly take a Home Loan, which they repay over a period of 15-20 years or more. So, what is a better option? Homes for rent or purchase a home? It all depends on what you want. Let us have a look at three critical factors for more clarity and judgement.
Current Financial Condition
One of the most important considerations is your current financial condition. With Home Loans, you are generally required to at least pay about 10% of the value of the property as the down payment. So, if the value of the property is Rs 1 crore, you will need to pay at least Rs 10 lakh upfront. With rent, you are required to pay a security deposit, which generally depends on the size of the property and its location. Typically, the deposit amount should be large enough to accommodate at least 3-5 months’ rent. With this regard, a house on rent can prove to be a cheaper option.
Nature of Work
It is not uncommon for salaried individuals to keep moving between different cities for professional reasons. Many times, their stays in different cities could last for several months or maybe years. For such people, renting a home is a more practical solution.
However, if you have been living in rented apartments for some time, you might know how landlords love to interfere in your day-to-day life. You can eliminate such interferences by purchasing a home of your own.
Moreover, if you also have a family, moving between different homes for rent at the end of every rental agreement might not be very convenient and practical. This again makes buying a home a far better option. Once purchased, the house will be yours forever as long as you like.
Last but not the least, you must decide what makes for economic sense for you. To understand this let's consider two scenarios. In Scenario 1, you rent a 2-3 BHK property at Rs 30,000 per month and stay on lease for 30 years with an annual increment in rents calculated at 5%. In Scenario 2, you buy a home worth Rs 75,00,000 and avail of a Home Loan of Rs 65,00,000 for 30 years at 9% per annum. Also, let's assume the property you buy, increases its value by 10% each year.
|Case 1 – Rent a home for 30 years|
|Details||Calculation (in INR)|
|Rent increment every year||5%|
|Total outflow (Rent of 20 years with increment)||1,84,00,000 (1.84 crore)|
|Case 2 – Buy a home with a loan and pay in 30 years|
|Details||Calculation (in INR)|
|Cost of buying a home||75,00,000|
|Tenure of the loan||30 years|
|EMI during the tenure||52,300|
|Total amount paid to the bank after 30 years||1,88,00,000 (1.88 crore)|
|Total outflow (Total amount to bank + down payment)||1,98,00,000 (1.98 crore)|
|Asset value after 30 years at 10% appreciation per annum||13,00,00,000 (13 crore)|
What should you select?
In the long run, it is purchasing a property that proves more beneficial. However, when selecting between own house versus renting a house, you should decide based on your current financial condition.
If you already have a stable job with stable income and can afford the down payment and Equated Monthly Instalments (EMIs), you should definitely go ahead with purchasing a property. However, if you have just started working or are planning to move to a different city in the future, renting a house can be a smart temporary solution.
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