Housing Vs. Renting
To learn how to decide whether to buy or rent a house
1. Buying Vs. Renting a House?
For example:
i. Buying a House
If you want to buy a 2-3 bedroom house in any metro city like Delhi or Bangalore, the cost involved will be:
- Basic cost (of the house) – Rs. 50 lakh (approximately)
- Stamp duty – Rs. 3 lakh (6% of house cost)
- Builder charges – Rs. 3 lakh (which includes maintenance charges, car parking, etc.)
- Miscellaneous expenses – Rs. 1.5 lakh (approximately)
ii. Buying an Under-Construction House
If you buy an under-construction house, you have to pay 5% GST i.e. Rs. 2.5 lakh.
It means you have to spend about Rs. 60 lakh to buy the house. The transaction cost to buy the house is 20%, which means on the very first day, the total cost of the house has increased by 20%.
iii. Buying a House on Home Loan
If you take a bank loan of Rs. 60 lakh, you have to pay a monthly EMI of Rs. 48,000 for 20 years. After 20 years, you will be able to completely own the house.
For 20 years, you will be trapped in EMI’s net and you have to pay EMI whether you are earning or not.
iv. Taking a House on Rent
If you rent the same house, you have to pay only Rs. 10,000 to live in the house, which costs you Rs. 60 lakh (in the above assumption).
Now, if you buy the house, you have to pay Rs. 48,000 (as EMI) while you have to pay Rs. 10,000 to rent the same house. In this case, you will save Rs. 38,000 per month.
If you invest Rs. 38,000 monthly in mutual funds/index funds for 20 years, you can have a surplus money of about Rs. 4 crores after 20 years.
Let us assume that the cost of the house, you have bought for Rs. 60 lakh, also becomes Rs. 4 crores after 20 years (given the inflation rate of real estate). After 20 years a house-Owner requires money let us say Rs. 20 lakh, he has to sell the entire house.
On the other hand, if you have Rs. 4 crore worth of mutual funds, you can easily withdraw Rs. 20 lakh any time.
Also, liquidity risk is associated with any physical asset. The number of buyers of physical assets is comparatively less.
2. House Buying - Disadvantages
- Monthly EMI
- Physical attachment (boundation)
- Difficult to sell
- Inability to buy
Your physical assets become your liability. One of the reasons for this is that the bank loan interest rate in India is 6-7%.
3. House Renting - Benefits
Renting a house has the following advantages:
- It provides freedom of movement to any place.
- It increases the opportunity to invest.
- It provides flexibility to decide about your job and education.
- It provides liquidity that helps in making any financial decisions.
- You do not face hassle on rent delay.
If you are an aspirational and freedom seeking youngster, you should never buy a house. You should rent a house and invest the saved money to “maintain liquidity.”
“Liquidity is the best thing. If you have liquidity, you can make any decision.” For example, if you have money in your bank account, you can easily quit your job and follow your passion.
The early you buy a physical asset, earlier you will be entrapped.
Earlier, elder people used to advise to own a house. They were right because, at that time, there was very little opportunity for investments, and also a very less number of houses were constructed.
Today, there are a lot of investment opportunities and houses are being built at a very fast pace. In the real estate sectors, supply has surpassed the demand, so, house prices are not increasing.
Also, the present factors like you have to move to any city as per the job demand, you should not be fixated by buying a house.
Rent is a better option as “rent is available at 2-3% while a home loan is available at 7% of interest rate.”
Financially and emotionally, it is not a great decision to buy a house, it is better that you stay on rent.
Key Outcomes
- Do not buy a house if you want liquidity and flexibility
- Rent a house and invest your money in mutual funds
- Avoid physical attachment by renting a house
- Rent a house to avoid liquidity risk
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