Renting vs owning a property: What should you opt for in 2019?

Here is the most comprehensive article about the pros and cons of buying or renting a home in 2019

Should you rent a house or buy a house in 2019?

Thanks to skyrocketing property prices, most of us who are looking for a new residence would be contemplating about whether it makes sense to rent a house or buy one. Let us look at some of the pros and cons of both buying as well as renting a house in 2019.

Pros of buying a house

A real asset

According to a pan-India survey conducted by real estate trend tracker Track2Realty, 88% of Indians feel that real estate is the best asset class to invest in. Importantly, only 28% of the respondents to this survey felt that investing in real estate is risky. The property makes up almost 91% of an Indian household’s assets. Real estate has usually appreciated steadily over a period of time. Owning a home can ensure that one has a real asset which appreciates over a period of time and could also be a potential source of rental income.

Buyer-friendly policies

The implementation of RERA has created standard norms for home buyers across the country. The RERA Act seeks to protect the rights of the common home buyer who is likely to invest almost all of his life savings in purchasing a house. A few benefits of this Act include standardisation in the calculation of carpet area by builders, the entitlement of a full refund to the buyer in case of false promises made by builder and a cap on the advance payment that a builder can take. Although there still seem to be drawbacks in the implementation of RERA Act, at least buyers are significantly empowered than earlier.

Demonetisation also seems to have had an effect. Across the top eight property markets, housing sales for the quarter ended December 2018 have risen by 28% from a year ago to 51,701 apartments. 

New buildings have several facilities

There are also those families who have been living in a comparatively smaller house for several years or even decades. They have sacrificed quite a few opportunities to spend money on leisure activities such as international travel or purchasing a club membership etc. However, they would have saved up since all these years and would be possessing a significant corpus to buy a new house.

The older houses where such families live might be in societies which have not kept themselves in line with the times. Some of the buildings may also require a lot of repairs. These families would be happy to buy a new house as they may hardly need to take a loan. They would not only own a decent corpus but could also sell the old house to arrange for remaining money, if needed.

The new house that would be bought may be in a complex with several amenities which would be in line with the lifestyle needs of these families.

Related: Should you buy a weekend home

Cons of buying a home

Takes time to save up for a down payment

Assuming that one earns a pre-tax income of Rs 8 lakh per year, saves 25% of the income and earns 10% return on savings, it takes anywhere between 3.6 years and 12 years to arrange for a down payment to purchase a house in a Metro city. The down payment could be an amount equivalent to 15% and 20% of the total cost of the house.  

Related: 4 Situations Every Home Owner Fears 

Cannot take a break

An ET Wealth survey discovered that one out of every three Indian home buyers is sinking 50% of his savings into the down payment of the house. Keep in mind, that we haven’t even discussed the impact of EMIs yet. Almost 28% of Indians are willing to allocate upwards of 40% of their household income into the home loan EMI and close to 10% of Indians are willing to allocate 50% of their household income into the home loan EMI. Apart from these costs, the cost of maintenance cannot be discounted. Most new housing complexes which are being built have several facilities such as swimming pool, gymnasium, double-decker parking platforms and play areas. The residents of such complexes would easily end up paying anywhere between Rs 8,000 and Rs 10,000 per month as maintenance fee.

Due to these costs, one cannot even imagine taking a sabbatical or a break from work to pursue other interests.

Related: Living in home versus living in a retirement home in India

Pros of renting a home

Can save over a longer term

It is often justified that buying a home is equivalent to creating an asset. Let us check out what happens when one wishes to purchase a house worth Rs 2 crore. In such a case, we can assume 20% of the cost would be paid as down payment and for the remaining Rs 1.6 crore, one ends up taking a home loan at a rate of 8.7% for a tenure of 25 years.

The monthly EMI this person pays turns out to be Rs 1,31,000. The total amount paid over 25 years turns out to be Rs 3,92,99,968. Although historically, annual returns on real estate in India between 1991 and 2014 was around 20%, property rates in India have grown by around 8.1% from March 2011 to March 2018 and may continue to do so.

If one assumes that property rates could grow by 9% over the next 25 years, one can conclude that for the house which was bought for Rs 2 crores in 2019, would be worth Rs 17.2 crores. A maintenance cost of Rs 8000 per month, without even considering inflation, would end up creating a hole of Rs 24 lakh in the pocket of the buyer. Over these 25 years, one has spent close to Rs 9.3 lakhs every year as interest. One can claim a tax benefit of Rs 2 lakh on this interest outgo. Over 25 years, this becomes Rs 50 lakh. This means that the individual has therefore spent Rs 3.6 crore to create an asset worth Rs 17.2 crore.

But if one decides to rent a house of Rs 2 crore, one would have to pay a rent of about Rs 60,000 assuming a rental yield of 3%. It is important to note that in many cities, rental yield in prime areas is even lower – around 2.5%. This leaves the individual with a surplus of Rs 70,000 to invest in an alternative asset class such as equities through SIP. Equities are expected to offer an average return of 15% over the next 25 years. Even if rent increases by 10% year on year, one’s income growth can be expected to cancel this out and even contribute to the SIP investment. The corpus which one would earn by investing Rs 70,000 per month and stepping up by even 5% year on year, turns out to be an eye-popping Rs 17.63 crore. This means the individual has spent Rs 3.36 crore in creating a corpus of Rs 17.63 crore.

Hence, even without considering Housing Rent Allowance, renting a home might offer better ROI than buying a house over a longer run. After 25 years, one could end up buying that house without taking a loan thanks to the corpus one has created.

However, one has to account for accurate calculations and forecast metrics before deciding to take the rental approach to save costs over the long run.

Related: Should you buy a weekend home

Enjoy a higher standard of living for a lower cost

If one wishes to live in a massive 3BHK in a popular central suburb in Mumbai, the same might cost around Rs 3.5 crore. Assuming, one has been able to make a down payment of Rs 70 lakh (20% of the value of the flat), one would have to pay[S9] a monthly EMI of Rs 2,46,903 for taking a loan of Rs 2.8 crore which could be serviced over the next twenty years. One isn’t even considering the cost of maintenance.

For an individual who has just started a career or is a few years into it, taking on such a huge commitment is immensely challenging. Tying oneself to such a massive commitment if one isn’t sure is also not desirable.

The solution to both these issues is renting a massive house for the first few years. Rental yields in suburban Mumbai is between 2.5% and 3%. Therefore, one would be able to enjoy the experience of living in this house and availing all facilities at just around a lakh or so.

It would also enable an individual to figure out whether this is the life he wishes to lead and as the years pass, he may end up settling in his career. This could turn out to be a better platform to make the decision of taking over a huge loan.

Related: Confused in Real Estate Investment ? Here are 6 myths you can stop worrying about

Cons of renting a home

Will have to keep moving around

This is possibly the biggest disadvantage of renting a home. One has to keep moving around every few years. This takes a toll on one’s way of living. One may be forced to look for new homes in the same locality as moving away could have a huge impact on one’s lifestyle. The worry of moving is always at one’s back of mind every time the rental agreement is about to expire.

Related: How to successfully rent out your home?

Difficult as one gets older

As one gets older, one gets set in one’s way of living. It is physically difficult to move as well. Therefore for older couples or for families which have a larger number of older members, the practice of moving around every few years is troublesome.

It is important to note that buying a house to live is an emotional decision for most Indian families and hence they don’t mind breaking the bank to sweep off most of their savings and also take a substantial loan for purchasing their dream home. However, young professionals who are keen on living a fulfilling life without being tied up to a home loan are open to staying on rent. If you are planning to invest in real estate? Here are few things you must know.

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