For years now, owning a house is a measure of financial success. Even when it’s not one of the smart decision they have taken, buying a house was more of a reputation issue than anything else. Even if the social standing is kept aside, buying a home is more of an emotional decision than a rational one. People get attached to the idea of their own house. Keeping the emotional aspects aside, this article weighs the owning vs renting decision against each other and also gives you a gist of the real estate market in the top cities.
When to buy a house?
1. Duration of stay
When you are planning to stay for long in the house its better you buy it. And by long-term, I mean 10-15 years or more. If your stay is anywhere less than this, then renting out will be a better option.
2. Tax benefits
If a loan is availed to buy a home, a claim up to Rs 2 lakhs on home loan interest is available. Also, when an exemption of Rs 1,50,000 on principal repayment is available under section 80C. If you are the first-time homebuyer then you can claim an additional Rs 50,000 a year under section 80EE on the loan taken until the loan is repaid. You certainly have the tax benefits if you are planning to buy a home.
3. The opportunity cost of down payment
The down payment made to buy a house is certainly huge. What is the opportunity cost of this payment if the same money is invested elsewhere? Stock markets and mutual funds have given annualized returns of 15% in the past. The interest on the home loan you pay is lesser than the interest you earn on mutual funds. So instead of blocking out on the funds now, maybe your decision to buy a house now can be postponed. Instead invest in the market right now to earn the amount for the down payment. So you can buy your home a few years down the line.
4. Cost of similar houses in that area
It’s obvious that people choose to live close to their place of work. If renting a house in an area close to work is getting costly, then buying a house is better. You can buy a house when the interest on the home loan you pay is less than the rent you pay to stay in that locality.
When you are buying a house to stay in it is certainly an expense. But that shouldn’t stop you from looking at the appreciation value in that area. You may never want to sell your home but the resale value of the house is surely important to know your net worth. Buy a home only if you know that the value of it will appreciate in the future.
When to rent a house?
1. Duration of stay
If your duration of the stay is anytime below 7 years then you are better off renting out a house or apartment. Well, it takes you a minimum of 10 years to pay off your home loan so you might as well save yourself from debt.
2. Tax benefits
If you are a working employee then you must have been already aware of HRA that can be claimed while filing taxes. The least of the following amount is available for deduction:
- Actual HRA received;
- 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
- Actual rent paid less 10% of basic salary + DA
If the pay you receive is not allowing you to take a home loan and pay interests then you are better off renting. You can instead start investing in smaller amounts in mutual funds and earn the amount needed for the down payment.
4. Changing financial situations
If you are a person whose income isn’t regular or you are about to quit a job to start a business of your own then you are better off renting as you are not sure of your income regularity.
5. Rents of similar houses in that area
If you are a person who likes to live in luxury houses and the cost of the down payment and the interests that follow are higher than the rent you pay, then renting out is a better decision for you.
Owning vs Renting
Now let’s look at the market. Clearly, it is owning vs renting in the major cities and you can see that in the research done below. After a research on the rents and prices in the different areas of the top cities for the affordable, budget and luxury home categories the following can be concluded.
The rent and the EMI you would be paying for an affordable home (850 sft) in Delhi is the same. So it is recommended that you own an affordable house in Delhi. It is recommended to rent out a budget (2000sft) and a luxury home (4500 sft) in Delhi as the EMI is higher than the rent.
The rent and the EMI you would be paying for an affordable home (500 sft) in Mumbai is the same. So it is recommended that you own an affordable house in Mumbai. 10 years from now, you would be paying the same rent and EMI in Mumbai for a budget home (1000sft). 16 years from now, you would be paying the same rent and EMI in Mumbai for a luxury home (1500 sft).
The rent and the EMI you would be paying for an affordable home (750 sft) in Chennai is the same. So it is recommended that you own an affordable house in Chennai than renting it out. Owning a budget home (1500 sft) and luxury home (2500 sft) can prove that you took a right decision 25 years down the line. But any time before that renting out can prove better for you.
Kolkata seems to be a better place for owning an affordable home (800 sft) than renting it out. Budget home (1800 sft) and luxury home (2400 sft) will take a little longer (25 years) to break even.
The Silicon Valley of India is better for owning an affordable home (850 sft). Budget (1600 sft) and the luxury (2700 sft) category have a breakeven of 16 and 20 years respectively.
If you were to own a home in the world capital of biryani then an affordable home (900 sft) will prove to be a better choice now than a budget (1650 sft) and luxury (2650 sft) with 17 and 18 years of breakeven respectively.
In Ahmedabad Affordable (800 sft) home can be owned now that renting it out. The budget (1550 sft) and luxury (2550 sft) home have a higher EMI than the rent of 21 years. So if you are deciding to buy a home in Ahmedabad, it will be beneficial in the long term.
Pune, even though being a younger city than any of the major metros, has a higher breakeven for the budget and luxury home categories than the others. A budget home (1600 sft) and luxury home (2400 sft) has 25 years each before one is paying an EMI similar to the rent. An affordable home (800sft) can be owned right away in Pune as the Emi you will be paying is less than the rent.
Renting or owning a house can depend on many factors. One has to know and analyze each of these to know which decision suits them best. Remember to take your decisions rationally and not under the influence of social factors.