Should you buy or rent the property now?

Should you buy or rent a property now?

Buy or Rent
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While owning a home is typically the nightmare of every person, highly rising property prices, particularly in metro cities, have led people to decide on renting rather than buying. However, for people who can afford to buy a house, the choice between buying and renting is always a difficult one. In the Indian situation, it is observed that people who can afford to buy a house be likely to put more weightage on owning a house and renting is mostly a compromise.

 

Off-course the perspective of each individual is different. Somebody looks as investment purpose, somebody, etc. from security purpose

There are definite benefits and drawbacks of both the options and some of the advantages are summarized as:

Benefits to Own House:

1.        Ownership feeling.

2.      No waste of money as somebody feels that paying rent is a waste of money as it always goes to the owner’s pocket.

3.      Social security

4.      Safety

5.      Long term Investment (As the real estate prices get appreciated in the long term)

6.      Forced savings

7.       Decision maker

8.      Income tax savings as per government guidelines.

Drawbacks to own House

1.       Restriction on lavish life, you have to cut down the expenses to avoid failure of EMI. As if you fail to pay the three EMI then the bank can take legal action.

2.      EMI may get increased as per inflation rates if the loan is not taken on fixed-term this will also tremble your budget.

3.      Mental stress till completion of house loan tenure period

4.      If job is transferable then you cannot utilize the property as you desired

5.      If you lose the job or having business loss it will create  huge mental stress

6.      You cannot change your house even if your surrounding gets changed and it creates disturbances in your life like erection of metro rail  beside your property

7.      Adverse effect by a change in the surroundings of  the property: Suppose you bought the under-construction property and during that period the property surroundings were clear and you would get proper ventilation as well as sunlight but after a few years any construction works like high rise building/hospitals get erected which will affect all the above factors

8.     Health effect: Due to mental stress throughout life ( till completion of a loan tenure period) there may be chances of health issues due to the financial burden

 

Rented House:                                                                         

Benefits of rented accommodation:

1.       Rent a house is a cheaper option of buying a house

2.      More flexibility: You can change your accommodation wherever you suits you.

3.    No long term commitments required.

4.      Interest is also one type of rent, as you are borrowing money and paying interest.

5.    You can rent a property in such a location where you cannot buy the property due to sky-rocketing prices like to purchase a property in a metro city it is highly difficult.

6.      Only rent amount is required to pay as other expenses like maintenance cost/ municipal taxes etc. is the responsibility of a house owner

7.      No need to cut down other expenses as he can save more money than the house owner. And this saved money can be utilized in other options like the stock market or any other product where you can earn more money.

Drawbacks of renting a house:

1.       Renting a house is under the lease agreement, hence it impacts the freedom as you cannot modify, decorate or renovate as per the agreement you have to return the property as it was.

2.      For getting a house on rent you may have to involve third-party like real-estate broker hence it may take a longer period to occupy the property.

3.      Renting the option will not give returns as whatever rent you are paying is not coming back as an investment.

4.      You have relied on the house owner’s will.

5.      Impact of freedom due to society’s regulations, this is more related to bachelors.

6.      Nowadays it is very difficult to get rent accommodation to bachelors due to society’s regulations.

7.      No control on annual rental fluctuations.

8.     There is no guarantee that the lease will be renewed when it expires.

Let us analyze the financial implication while deciding to buy or rent the house if you are considering in investment perspective

Suppose Mr. X is working in a private firm whose salary is such a way that his tax bracket is around 20% and he has  decided to buy a House of 2 BHK @ to 40,00,000/- (Forty lakh) in an area in which the rent of the similar property is around 12000/- (Twelve thousand).

In order to calculate buying and rent valuation following assumptions has been considered for simplification purposes.

1)      HRA benefit considered @ 20% (For simplification process, Maximum HRA benefit is 1,00,000/- only.)

2)     Home loan benefit is considered 100% as maximum tax benefit is 2,00,000/- only and he is under 20% tax bracket.

3)     Loan the period is 20 years.

4)     Loan the amount is considered only 80% of the total value as Bank gives only an 80% loan against the property value. Balance 20% is down payment which is required to be given from the savings or any other source.

5)     In renting valuation the expected return from the savings amount is considered @ 8%.(This amount is not to be paid in renting and it is to be paid as down payment amount in case of buying property) The 8% returns are possible only if Mr X invested wisely. Otherwise, he will get only up to 6% as per inflation.

6)     The property annual appreciation has been considered @ 8%.

 

 Rent Vs Buy property Valuation

Analysis Period	₹ 20	Years				Unit
Renting				Buying
Monthly Rent	₹ 12,000	Rs		property price P	4000000	Rs
HRA Tax benefit	8%	%		Down Payment	800000	Rs
Actual Monthly rent	₹ 9,600	Rs		Loan Amount	3200000	Rs
				Loan Interest Rate	9%	%
				EMI E	₹ 28,791	Rs
Effective Annual rent	₹ 1,15,200	Rs		Tax Bracket	20%	%
Annual rent Increase	8%	%		Effective Interest rate	7.20%	%
Rent (Analysis period) R	₹ 52,71,778	Rs		Effective EMI (E')	₹ 25,195	Rs
Returns on Savings
				Total Interest payment
Down payment	₹ 8,00,000	Rs		(@ interest rate I)	2846843	Rs
Monthly Saving(S)	₹ 16,791	Rs
Actual EMI - Monthly rent
calculation Below
Expected Returns	8%	%		Maintenance Per Month (M)	2000	Rs
				Annual Increase	6%	%
				Total Maintenance during the analysis period	₹ 8,82,854	Rs
FV of Down Payment	₹ 37,28,766	Rs
FV of monthly savings	₹ 98,90,378	Rs
net savings (D+S+R)	₹ 83,47,365	Rs		Total Cost (C=P+I+M)	₹ 77,29,697	Rs
				property sell after analysis period
				annual Appreciation	8%	%
				FV of property (p)	₹ 186,43,829	Rs
				Net Saving P-C	₹ 109,14,132	Rs

 

Above calculations clearly show that the net saving on the property is more beneficial than renting the house provided the annual property appreciation is @ 8%. Which is quite possible in metro cities.( Net savings in Renting= 83,47,365/- and Buying savings is 1,09,14,132/-)

Now if you considered for short term like 5 years. Then the scenario will be different.

Analysis Period	5	Years				Unit
Renting				Buying
Monthly Rent	₹ 12,000	Rs		property price P	4000000	Rs
HRA Tax benefit	8%	%		Down Payment	800000	Rs
Actual Monthly rent	₹ 9,600	Rs		Loan Amount	3200000	Rs
				Loan Interest Rate	9%	%
				EMI E	₹ 66,427	Rs
Effective Annual rent	₹ 1,15,200	Rs		Tax Bracket	20%	%
Annual rent Increase	8%	%		Effective Interest rate	7.20%	%
Rent (Analysis period) R	₹ 6,75,832	Rs		Effective EMI (E')	₹ 63,666	Rs
Returns on Savings
				Total Interest payment
Down payment	₹ 8,00,000	Rs		(@ interest rate I)	619973	Rs
Monthly Saving(S)	₹ 54,427	Rs
Actual EMI - Monthly rent
calculation Below
Expected Returns	8%	%		Maintenance Per Month (M)	1200	Rs
				Annual Increase	6%	%
				Total Maintenance during the analysis period	₹ 81,174	Rs
FV of Down Payment	₹ 11,75,462	Rs
FV of monthly savings	₹ 39,99,106	Rs
net savings (D+S+R)	₹ 44,98,736	Rs		Total Cost (C=P+I+M)	₹ 47,01,148	Rs
				Property sells after  analysis period
				annual Appreciation	8%	%
				FV of property (p)	₹ 58,77,312	Rs
				Net Saving P-C	₹ 11,76,165	Rs

 

The net savings on rent property is 44, 98,736/- however net savings on buying property is on 11, 76,165/-). Here renting is more beneficial.

Conclusion:

The buying or renting the property is solely depends on market conditions as some times real estate annual appreciation goes very high and some timed it will not. However, the present scenario is doubtful for the very high property annual appreciation as earlier in the 2001-02 year.

Following maybe the reason for the low real estate appreciation

·         Implementation of new policy like RERA, GST

·         COVUD-19 a pandemic effect that creates a huge loss of business.

So at least it will take 2-3 years to streamline business, hence it is doubtful that real estate will appreciate for 2-3 years.

But for the individuals who don’t have a single home and who can afford to buy can take advantage of lower home loan rates. This does not form an investment perspective but from a safety and security perspective. The final decision lies with him/her.

Other benefits and drawbacks are already covered above.