Over a cup of coffee, an interesting conversation was brewing between a bunch of friends. What started with office jokes, ended in a heated discussion on the dynamics of real estate. Based in Bangalore, they spoke about everything from soaring land prices to lucrative offers from several builders on properties. At the end, all of them seemed to be confused about a classic question – should one rent or buy a home? What is economically logical? What promises better yields?
Let’s name the logical guy in the group as Mr.L. who always goes by practicality of a situation. He is an excellent problem solver and a pro with numbers. He wants us to do a little bit of calculation when we are planning to buy a home, so that we see the tactical side.
|Requirement||Budget||Additional Expenses||If loan is taken:|
|3 BHK||Budget + 10-12% of the total cost (stamp duty, registration taxes, municipal fees and so on)||Interiors, monthly maintenance, setting up charges||For a Rs. 1 crore loan, an interest of 8.5% per annum for a duration of 20 years will cost you almost another crore of interest|
While Mr.L draws up this math, Mr.E who’s the emotional one in the bunch expresses that a home is an investment forever and it’s always a matter of pride to own a home.He also feels that we cannot customise our private space if we were to rent it. Mr.L is back with his numbers on rental yields to draw the comparison for Mr.E.
Bangalore has a rental yield of around 2-3% and your monthly rental yield comes anywhere between to ₹40,000-60,000 for a property worth ₹1 crore. In metros, it’s usually the maintenance and miscellaneous repair costs are borne by the owner. You end up saving a large portion of money that can be invested elsewhere, mutual funds or shares and so on. Imagine there are no taxes, no interest to pay, or monthly repair costs to be paid. Your other investments will multiply and be there as an additional back up in a duration of 10-12years!
While Mr. L and Mr. E are fictional characters, the figures represented here tell a true story of the rent vs. buy dilemma. Let’s take a look at some of the factors that should help you make the decision.
|1||Cost||Your first payment is low and you don’t have to shell out a large amount for accommodation, placing you in a more comfortable spot to afford extra amenities.||A large amount has to be paid as lump sum initially, besides additional expenses on taxes and other charges for finishing up the purchase process.|
|2||Personalization||In a rental property, there is not much liberty to customize your home in accordance with your taste and preferences. You will also have to consult with your landlord prior to making changes structurally.||It’s your home, your abode with total freedom to design a space for yourself. But, the costs related to maintenance and repair will have to be borne by you.|
|3||Returns||Home rent is always bound to increase in the future, because in general there is high demand for rental properties in India.||Property prices are always vulnerable to price fluctuations, and only the market dynamics can determine these ups and downs. There is always a risk factor present.|
|4||Flexibility||If your career requires you to jump cities, a rented property might be a better option. There is ample flexibility to relocate, anytime.||You might not have much flexibility if you own a home, in terms of relocating. However, you can increase your yields by renting out your property and moving out, as you build on your personal wealth. There is always an asset for you to fall back on.|
Like every choice we make, there are two sides to every coin. Your decision to rent or buy must be based on your priorities and preferences in the short and long term. While owning a home can give you a great sense of achievement, renting it might free up your finances for other investments. Whatever you choose, make sure you are not obsessing about home buying and that you make your choices through informed decision-making.