To Buy a House or To Rent a House?

There is an old saying in Indian villages, ‘Even a rat’s hole should be its own hole’. It is true that own house has its own advantages. A well-built house lasts for several decades and can be utilized by successive generations. Further, a house is among the safest and most secure investments possible. Property values may fluctuate in short-term but there is always considerable and definite appreciation of the land and property value over the years. As such, investing in a home, irrespective of the timing, is never a bad decision.

It is possible that the prices were lower when you made the decision to buy a home but suddenly rose sharply by the time you actually implemented the plan. This would have resulted in your purchasing the house at a premium to the market prices. Even then, you will get a sizable profit after a few years due to the certain appreciation of the property value. As such, home buying is always a win-win situation.

Reality about Rented Houses

Does this mean that all those who are living in rented houses are not smart? Definitely not but in fact, financial analysis may be in their favor. Let us consider a simple calculation. The average investment for a 2-bedroom apartment in any metro is around Rs. 40 lakhs at present. Let us assume that you invest Rs. 10 lakhs as upfront money and obtain a housing loan for Rs. 30 lakhs to be repaid in 30 years at an interest rate of 15% per annum. The monthly EMI is Rs. 37,933.00. The interest that you are losing every month on your upfront money payment of Rs. 10 lakhs at 10% per annum interest rate for 30 years at compound interest is Rs. 52,326.00. The total of these two is Rs. 90,259.00 every month. If you invest the entire Rs. 40 lakhs at an interest rate of 10% per annum, the amount you will be getting every month is Rs. 2,09,304.00.

How much is the rent for a 2-bedroom apartment in any metro at present? Around Rs. 20,000 to Rs. 30,000, depending on the quality of construction, the area and the extra fittings and amenities in the apartment and its block, like garden, swimming pool, generator, lifts, shopping complex, etc., is it not? If you pay a rent of Rs. 29,000 out of the interest amount of Rs. 2,09,304 you earn from Rs. 40 lakhs, you are still left with Rs. 1,80,000. Your average monthly expenses will come around to Rs. 30,000. You have around Rs. 1.5 lakhs every month extra, which you can save and invest for a happy future. You decide for yourself whether buying a house for Rs. 40 lakhs or investing it even in a low-yield avenue is more profitable.

Other Reasons that Justify Rented House

These days, career opportunities had completely different from old times. About 30-40 years ago, an employee will start a career in one city or town and will continue in the same place and in the same office until retirement. Buying a house in that city or town is indeed a wise decision. Everything has changed now. Even government departments, let alone private organization, transfer employees to different branches either in the same cadre or on promotion to higher cadre. Individuals also change companies frequently in search of better career prospects and higher income. This simply means that present generation of employees never stay in one place for more than 3 years on an average, though there can be exceptions to this.

Under the above circumstances, if you own a house in one city, you will have to rent it out when you shift to another city and look for a rented house in the new city. If you have been living in a rented house all along, this effort is not required. You just vacate the old rented house in the previous city and take a fresh rented house in the city of latest residence. Further, you need not worry whether the family to which you have rented your house in the previous city is paying rents promptly, whether they are maintaining the house properly and other similar problems. You can shift lock, stock and barrel to any place even at short notices.

There is one more issue that is in favour of rented house against own house. The increase in rental value is always much lower than the increase in the housing value over any period of time. According to Global Property Guide article, ‘India’s stunning house price boom continues!’ released on September 30, 2011, house prices climbed 21.3% in the first quarter of 2011 (http://www.globalpropertyguide.com/Asia/India/Price-History). On the other hand, rental yields continued to remain very poor in all major cities, averaging less than 4%. The increase in rents in metros was in the range of 2% to 7% only. These two vital statistics clearly show that renting a house is definitely a better proposition, compared to buying a house, unless you are looking at long-term appreciation of house value as your individual preferred option.

The third factor is the steady increase in supply side of housing, with more and more housing units being built now and planned for development in the next 10-15 years. This will definitely keep the home prices from spiraling to unreachable levels, though double-digit increase is a reality. On the other hand, the rise in rental values will be at a modest pace and much lower than the ascent in housing values. Hence, in long-term perspective, rental houses are unquestionably  the better choices compared to own houses. The huge difference in investment yields for a fixed amount, the rental amount, the extra amount left and the appreciation of the housing value make rental houses the most attractive proposition from every single point of view. If you need more clarifications on this highly debatable subject, feel free to contact us for further clarifications and we will be happy to provide them to you.