Rent or Buy a House?
- December 10, 2021
- Posted by: MvM Team
- Category: Personal Finance
Confused between Renting and Buying?
Are you planning to shift to a new house anytime soon? The question that must be troubling you is:
Should I Rent or Buy?
In India, a lot of people prefer buying a house over renting, but if done appropriately, renting a house can be quite effective in the long run. The decision to buy or rent depends on many things like property prices, rental amount, funds for down payment, future goals, job security, and so on.
So, let’s analyse if you should buy or rent a house:
Point of Consideration | Renting | Buying |
Initial Outflow | - Low | - High |
Monthly Outflow | - Just the Rent (Low) | - Equated Monthly Instalments-EMIs (High) |
Tax Benefit | HRA Benefits | - Up to ₹1.5 Lakhs on the principal - Up to ₹2 lac on interest, additional ₹50,000 for first time home buyers |
Registration charges | Nominal registration charges and stamp duty | Up to 8% of property value as Stamp Duty and registrations charges |
Ownership | No | Yes |
Why should you rent a house?
1. Rental Yield: The primary reason for renting in India is low rental yield (yearly rental/ property price). The rental yield is low for a big country like India and, when you compare it to the existing home loan rate or bank fixed deposit, it makes all the sense to rent an apartment/house.
Let’s take an example to understand this:
If the monthly rent of a house worth ₹1 Cr in Gurugram is ₹40,000, the annual rental yield comes out to be 4.8% (4,80,000/1,00,00,000), which is very low. The average home loan rate in India is above 6.5%.
So, rentals in India are quite attractive when compared to property prices and, it makes perfect sense to rent a house.
2. Irreversible Decision: Buying a house is an irreversible decision. Going back on the decision after buying can be a very costly one, due to large penalties levied by the bank and due to an illiquid secondary market.
3. No Registration Expense: Renting a house helps to save expenses like registration tax, property tax, home insurance etc.
4. Flexibility:You can have a lot of flexibility with regards to your rental location. One can relocate and rent a new place depending upon the workplace or change the place due to any other reason. But when you buy, you have a long-term commitment and throw flexibility out of the window.
5. Big Monthly Outgo (EMI’s): Home mortgage involves a big outgo in regular EMI payments. It is a big burden on an individual. Also, real estate being an illiquid asset cannot be monetized in a short period. But, if you are renting the place then your risk is automatically reduced as you can scale up or scale down as opposed to fixed monthly mortgage payments.
6. Tax Benefit: You can claim HRA exemption on the rent paid during a year and reduce your tax outflow as per the provisions of the Income Tax Act.
Why should you own a house?
1. Owning an Asset: The key advantage of buying a house is the security and comfort of owning an asset. The peace of mind of owning an asset is incomparable.
2. Stability: One of the benefits of owning a house is stability, unlike in renting where the tenant must be ready to frequently relocate depending on the landlord which involves a lot of hassle.
3. Customization: When you own a house, you have all the rights to alter and design according to your needs, whereas renting a house has several restrictions imposed by the landlord.
4. Tax Benefit**: The principal portion of the EMI paid for the year is allowed as deduction up to ₹1.5 lakh under Section 80C. The interest portion of the EMI paid for the year can be claimed as a deduction from your total income up to a maximum of ₹2 lakh under Section 24. An additional deduction of ₹50,000 can be claimed under Section 80EE.
**Please note, tax benefits differ on case-to-case basis, and all the terms and conditions should be read properly.
Cost Benefit Analysis of Renting vs Buying: House in Gurugram
The table shows the cost benefit analysis of buying and renting a house in Gurugram with market value of ₹1 Crore and a monthly rental of ₹30,000.
Particulars | Renting | Buying | Remarks |
Initial Outflow | ₹60,000 | ₹20,00,000 | Renting: 2 Months’ rent as initial security deposit |
Monthly Outflow | ₹30,000 | ₹61,784 | Loan amount of 80 lakhs for 20 years @ 6.95% interest rate |
Total Outflow over 20 Year | ₹72,60,000 | ₹1,68,28,170 |
MvM View:
In the end, it boils down to one’s personal choice, as apart from the financial considerations there are a lot of emotional & psychological factors like satisfaction of owning a house, which play a key role in taking the big decision. You should carefully evaluate all the options before taking the final call as this will probably be one of the biggest financial decisions of your life.
- If you stay in a city where rental yield is very low, and where the past trend of property prices has been flat, you should opt for a rented accommodation as the math is favourable toward renting. It makes even more sense to rent if you are in a transferrable job.
- One should buy if you live in a city where rental yields are high, or you want to diversify and include real estate in your portfolio and where other non-financial factors play an equal role along with the financial factors.
