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Buying Vs Renting:

Choosing to rent or buy a home is a major decision that not only affects your lifestyle, but also your financial health.

Real estate ownership is touted as an investment that is likely to build equity and is also a source of tax deduction. Renting also has its advantages, including little to no responsibility and flexibility. However, people often believe that buying a home, rather than renting, is the more a financially sound decision.

In India, many people lean towards ownership. This is partly because owning a home has been an integral part of the traditional benchmark of family stability. It is a part of our cultural mindset and economy. Owning a home is also largely believed to be a critical lifetime investment. However, there are several factors which you should consider when deciding whether to buy or rent, including transferability of your job, cost of rent vs EMI for a similar property, if the property size will be sufficient to accommodate a growing family for at least 5 - 10 years, impact on the savings, given the high overhead costs not funded by banks etc.

In short, evaluated in the current economy, with real estate prices, cost of funding through bank loans and the high level of savings required to purchase a home, it's important to remember that owning a home isn’t always better than renting, and renting is not always as simple as it seems.

Consider the pros and cons of each, to figure out whether renting or owning, is best for you.

Key takeaways:

  • Renting offers flexibility, predictable monthly expenses and an owner who handles repairs and maintenance

  • Home-ownership brings intangible benefits. They include a sense of stability, belonging to a community, and pride of ownership, along with the tangible ones of tax deductions and asset ownership

  • Contrary to popular belief, renting doesn't mean you’re throwing away money every month and owning doesn't always build wealth in the long run.

Renting a House

Renting means you can move without penalty, each time your lease ends. However, it also means you would have to move suddenly if your landlord decides to sell the property or turn your apartment complex into condos. Less dramatically, they could just bump up the rent, to more than what you can afford.

The biggest myth about renting is that you're throwing away money, every month. This is not true. You need a place to live and that always costs money, in one way or another. While it's true that you aren't building an equity with monthly rent payments, not all of the costs of home ownership will go towards building an equity.

When you rent, you know exactly how much you’re going to spend on housing, each month. When you own, you might pay nothing more than your EMI and regular bills in one month. Then, the next month, you might need to spend an additional Rs 10,000 on a damaged drainage. Your monthly home-related expenses, as a renter, tend to be more predictable and significantly cheaper.

As a renter, you face unpredictable rent increases, each time your lease is up for renewal. If you live in a desirable part of town, the rent increase can be steep. In contrast, if you get a fixed-rate mortgage, your monthly house payments will never increase.

While home ownership is often touted as a way to build wealth, your home can lose value overtime. The acceptable neighborhood you moved into could deteriorate, or there could be a residential construction boom, with surplus supply of new flats, which could also keep prices down. You might buy a house for Rs 60 lakh tomorrow and in 15 years find that it's still worth Rs 60 lakh, meaning you've lost money after inflation.

Do you like to spend your evenings and weekends as per your convenience? Do you work long hours or travel frequently? If so, then the time commitment that comes with homeownership might be more than you want to take on. There are always projects around a house that you will need or want to take care of, from finding a plumber to replacing a rusted pipe and repainting the bedroom to kitchen repairs.

If you rent, your landlord will take care of all the repair and maintenance costs, though of course they may not be done as quickly or as well as you would like.

Buying a House

Homeownership brings intangible benefits, such as a sense of stability, belonging to a community, and pride of ownership. However, it is not good for the restless or nomadic types. Real estate is the original illiquid asset. You might not be able to sell when you want, if the housing market is down. Even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.

The overall cost of home ownership tends to be higher than the overall cost of renting. That is true even if the monthly mortgage payment is similar to (or lower than), the monthly rent.

Special considerations:

Which option is best for you isn't just about the money. It is also about your comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, or that renting is throwing away money. Also, disregard those who say that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. Housing markets and life circumstances are too varied to make blanket statements like these.

Many people are also under the false impression that they should be married before buying a home. The truth is that your ability to make payments is the only factor that mortgage lenders will consider.

All prospective homeowners also need to weigh in the risks involved. Getting a mortgage often requires using a large amount of financial leverage. If housing prices go up, people with mortgages can make extraordinary gains.

On the other hand, they can also lose everything and more if the prices fall. If the prices seem too high, it makes sense to keep renting for a few years.

Still, despite the risks of added expenses and extra chores associated with owning a home, many people choose it over renting. It provides a more permanent place for you and your family Ultimately, the decision to rent or to own is not just financial, it is also based on your needs and priorities.

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