Million Rupee question “Should I buy or rent a house?” because in most of metro cities you can’t buy a decent flat which is under Rs 50 Lakh. In Real Estate series we have already covered “Indian Real Estate Bubble” & “Real Estate Affordability”. Today we are touching yet another sensitive issue or “Oh My God!” thing. If you have not seen movie OMG – let me share that people don’t appreciate & even stand against person who give different views than normal belief. Buying house is as sacred as praying to God in India & there must be lot of pressure if you don’t own one.
Disclaimer: I own a decent house & I am biased towards buying a house before retirement – 100% of my clients who don’t own a house are having this as a goal. But few questions are buying today or after few years – buying in heart of city or suburbs – buying in city where you are currently working or buying at native place or the place where finally you would like to live after retirement.
When buying a house is no brainer
- When house price are low
- Expected appreciation in property is high
- When interest rate is less
- When rents are high
We can’t quantify the numbers for above points but still most of the indicators are not in favor of home buyers. So it’s not a cake walk & you have to be much more prudent and do your calculation than people who bought properties in last 5-6 years.
House is a liability – Robert Kiyosaki
Robert Kiyosaki is a big fan of property investment but surprisingly he calls House a liability. Why – check this Video. You may not agree with his definition of asset & liabilities in this specific case but we can add another angle which will draw a line between house is an Asset or Liability or Need. Check this image & tell me who is wealthy.
The House which looks like a house from a fairy tale was owned by Michael Jackson, the second one which looks like an average house belongs to Warren Buffet.
- Michael Jackson was bankrupt as he bought a house which was a ranch and then made a zoo and an amusement park inside. His house was his biggest liability due to EMI &maintenance cost.
- While, Warren Buffet is still one of the wealthiest person in the world.
So you should know your limits – you should not overspend in buying house. House is not a show off thing. Make it comfortable to stay and not unaffordable to maintain.
Buying Vs Renting House
Coming back to our core agenda of today – let’s evaluate which makes more sense right now. Answer can be different for everyone so do your calculation or talk to your financial planner before taking final call.
I did some calculation using MSN Calculator – you can find calculator link after the screen shots. (ignore $ signs)
I have assumed rate of flat price increase at 5% – because I thought let’s not take it negative and scare the readers who are reading this. 🙂 You can take your own assumptions but if its higher than 8-10% – go & check HDFC chart here 1995 to 2012 (rate less than 5%). But if price double by next year don’t come running to me.
I have assumed both husband & wife are working and will be able to get maximum benefit by paying interest on home loan (section 24) – which is Rs 150000 each or Rs 300000 combined. (In US 100% interest is allowed to be reduced from income for tax calculation purpose)
Above calculation show that I am having marginal benefit in renting a house rather than buying. You can share your views in comment section.
Buying Vs Renting Calculators
You can do your own calculations with MSN Calculator (ignore dollar sign) – You can also try The Wealth Wishers calculator – its excel based & Indianised – click here (make sure to add ZERO in total amount of deduction for principal payment as we have n number of options for availing 80C benefit).
Views from Other People
Khan Academy who are pioneer in Online Education are having 2 videos on Rent Vs Buying
Economic Times wrote
The case against buying becomes even more compelling if you are an investor, not an end user. The rental yield, which is the annual rent of a property as a percentage of its market price, has steadily dipped in urban areas. In overheated markets, it works out to merely 1-1.25%. In other words, a Rs 1 crore property will fetch a monthly rent of only Rs 8,000-10,000. Experts say that if the rental yield is below 4%, the investment is not worthwhile. This is especially true if the cost of capital is high. What you pay as interest on the loan will neutralize any gain from the property.
Srivatsan who added “Fools buy houses… Wise men live in them” comment on last post shared these calculations:
If house price is over 25 times the current annual rent you are paying, postpone buying the house!!!
For example, let rent paid = 9000 pm = 1.08lacsp.a
If cost of house = 30lacs, ratio = 30/1.08 > 25!!!
If buying a house for 30lacs @11% home loan rate and letting it for rent, then minimum rent should be 12500 pm!
Max 2.5 times your income should be overall debt to buy a home. If you are taking 30 lakh loan, your annual income must be atleast 12 lakhs!
Your total housing payment should not exceed 30% of your net income. To afford EMI of 30k pm, your net income should be atleast 100k pm!
Next Post: In last 3 posts we talked mostly about buying first house – what about if we are talking about investment in real estate. It’s human nature to play safe and not to indulge in risky matters & people thing buying property is the safest thing. Investment in real estate sector has different parameters to consider but basic concepts of return and risk apply in this domain also. I will cover this in next post.
I believe you must be having some idea after reading this post & using calculators. Anyways, last suggestion “take cool headed decision”. Buying a property is a huge decision where you invest what you have; you build liability and pay a part of your future earnings to claim the clear title. So your decision has to be well thought and well believed.