While owning a home is everyone’s dream, do your calculation and analyse what would be beneficial to you in the long-term
Buying a home is not an easy task and not many are able to afford their dream home within their budget, and hence, many prefer to live on rent. Renting gives you the luxury of living in your preferred home. On the other hand, investing in a home means owning an asset that provides you with stability and financial security for the long run.
The things you should look into before you buy or rent.
- The inflation rate and how to stay ahead of it.
- Would my investment appreciate by at least ten per cent every year?
- In case you are renting, would you save enough money to invest in other instruments that give better returns?
Understanding the perks of living on rent
Considering the high property prices in most cities, buying a house is still a huge financial undertaking, which could impact the funding resources of an individual. On the other hand, renting a home in the city is still quite affordable, as annual rentals are just one-three per cent of the value of the property. In this regard, one of the most attractive advantages of renting instead of buying a home is that an individual gets a wide choice of locations and the flexibility to relocate if needed.
This could also translate to staying close to your work, better work-life balance, spending less on commute and having enough time on hand to indulge in a side venture or a hobby.
To make renting financially lucrative in the long run, An individual can invest the funds, which would have gone into paying equated monthly installments (EMIs) or down-payment, into a financial product that gives better returns while staying in a rented accommodation.
Ideally, as a thumb rule, a tenant should not spend more than 25-30 per cent of the household income on rent. If you have money for the down payment, a part of it could be invested in instruments that give good returns.
Understanding the perks of buying a house
Buying a home is an asset that gives you financial independence only after you have completely owned it, and are no longer paying EMIs.
Home has several expenditures, which eat into your returns. Maintenance of the property, which can be recurring in nature, is a cost factor. Others include property tax, regular repairs, and society maintenance charges among others.
Renting a home also comes with additional charges, “Apart from the monthly rental amount, one needs to pay water and electricity bills, often times some top-up charges and a hefty one-time deposit as well. If one has used the services of an agent to find the rental property, a month’s rent also needs to be paid as brokerage fee.
The cost consideration is simply based on the functional utility of the property.
- When comparing the rent yield and house mortgage rate, renting turns out to be cheaper compared to purchase of the property. The renting cost identified as rent yield of a property ranges between two and three per cent per annum in major Indian cities and compares favourably to the cost of a house mortgage (at seven-eight per cent per annum). The differential is generally expected to be compensated by property price appreciation, which has its associated uncertainty;
- Renters potentially save the recurring cost associated with owning a property. The cost of ownership in terms of recurring costs like common area maintenance, property taxes, intermediate repair/upgradation collectively range between 0.5 and 1.5 per cent (per annum) of the market value of property. This can potentially be saved by a renter;
- In the long run, outperformance of other asset classes including equity would look promising compared to the property. Thus, a renter could potentially accumulate a larger monetary corpus when investing the differential of a home loan EMI and monthly rent in other asset classes.