In the hopscotch of life from one year to another, excitable discussions evolve into intense financial analysis, even in the most unassuming of spaces. It is the very discussion about the spaces, which get defined as residences. That conversation pendulously oscillates between, oftentimes, to rent or to buy? What is the best answer?
One of the measures of the stature which lies embedded in our traditional DNA is the esteem bequeathed upon a homeowner. Home-buying has traditionally been a significant aspiration for the working segment. Generations of Indian employees may have sacrificed much, seeking the security one’s own home. Home-buying is not so important for modern professionals anymore. The present generation, adept at financial scrutiny, has realized that home-buying may not be as financially-rewarding as advised by their elders.
Dive into the calculations. Post a hunt-spot buying routine, you hold the keys of your first 2 BHK flat. For the cost of your flat add-up the charges incurred in the registration process. It inflates the overall total of 8-10%. Then there’s the cost of refining the interiors, either frugally or lavishly. Should this be a crust of a residential complex, there will be recurring monthly payments. The longer the list of facilities, the deeper it drills into your pockets. Alternatively, should you construct your own house there are the knock-knocks of upkeep that will keep revisiting?
Whilst you surf the waves of home-buying, cast a glance on the waves of renting. Looks glitzy? Maybe here’s why:
Imagine it’s you, now in the guise of a tenant. You are paying a monthly rent of Rs. 18,000-20,000 for a property valued at Rs. 60 lakh. In most cases, the owner aka the landlord foots the bill for repair and maintenance. The savings you obtain from a rental arrangement can be channelized as investments into diverse financial portfolios.
Say you opt for mutual funds. At a 12% p.a. for 10-20 year tenure, once you complete 10 years, post calculating annual rental deductions (annually increased at 8%) and, maybe, with an initial deposit of a few lakh you would be looking at a higher surplus in returns. In all this, you have had to pay zero taxes, upkeep or EMIs. Do you see where this is headed?
Now, let’s say you would take a home-loan, do take the following into account – you would be looking at a tenure of around 20-years for principal calculated at 8.65% interest per annum. You’d be re-paying with an amount exceeding the principle, which would be more than the original home loan amount. Club this together with property-related taxes and charges.
Indian cities generate lower rental yields in comparison to home-loan interest rates. This makes renting economically more attractive. Additionally, the astronomical increase in land prices has created a disparity in per square-feet costs in varying locations. As an outright buyer, you’d be looking to gain from the capital value. Though, if you are a homeowner, you’d be unlikely to sell it. As a real estate asset, a house doesn’t provide liquidity.
The booming of real estate since the mid-90s has led to over a 10-times increase in property value. That’s 17-18% in annualised returns. This advises that you’d make 20-21% average annualised tax-exempt return with an equity diversified fund during a similar period. 20-year average annualised returns calculated at 17%. This is excluding lifestyle aspects, where one withholds expenditures or is shackled to a job only to pay interest. There will be possibly long hours of travel time due to taking up affordable housing only in a specific locality.
Listed below are 5 indicators evidencing the above-stated points:
- Cost: Home-buying in India is four times the cost compared to renting. Comparatively showcased -Home loans have 8.5% interest vis-a-vis rental yields of 2%. Compared to most major economies, India’s differential is the highest. In several Western nations, the rental yield exceeds home loan rates. True, a house is an asset, however, as an investment, it offers reduced long-term returns compared to other financial investment products. Better returns can be expected from money saved via renting.
- Workforce mobility: The changing dynamics of jobs today, requires the workforce ready to relocate to different regions for relatively long durations. Working individuals who are fond of travelling often seek-out working from different places. For them, an illiquid asset which clamps their savings is not practical.
- Options of Flexibility: Renting provides tremendous flexibility over home-buying, which often creates a large debt. A self-owned house doesn’t change, whereas the requirements of people do. Transacting a house is an unenviable task, as market valuations are vague and often unmatched. Current tech-enabled renting platforms make rental home-seeking a breeze, with many attractive properties accessible on a smart-phone, customizable to the home-seekers requirements.
- Income-stability & rewards: With prevalent job insecurities today, a high and stable income to furnish home-loan instalments prove tedious, especially while transitioning jobs. Financial clogging is common. Alternately, renting allows an individual the option to move into a lower-cost space. There’s also a loss of the HRA tax benefits for homeowners, insufficiently compensated by rebates on the interest rate.
- Home-loan and Financial Discipline: Homeownership inculcates a financial discipline. It also offers relief from the stress of investments into funds with higher short-term fluctuations.
What we observe here is that requirements can be optimized quite well. Instead of living in a big house which will get empty, or being weighed down by the burden of nostalgia associated with a dilapidated house, one can rent a small apartment as one age.
Lastly, everything boiled down to a matter of personal and financial choice. If you are happy in a rented house or own one for your family, one should choose accordingly.