Rent vs. buying a house
It’s natural to have our own unique set of dreams which ultimately gets reflected in our wish list. Finally ticking them off one by one during the journey of life, makes us feel happy and proud. Owning a car, buying a house, visiting different countries etc, could be on one’s list of things to do. While we are young, we definitely try to fulfill one or more of these dreams. Owning a house is one of the top priorities for many. However, that is a big decision affecting the overall financial goals in the long run.
To get your own house is a matter of pride, it surely changes your lifestyle. It brings a few very obvious benefits like tax deductions and also serves as a sound investment decision at the same time. As against this, renting too has its own advantages like flexibility to move any time and no responsibility to maintain the property etc.
We are always made to believe that owning a house adds to one’s own happiness and contentment. Real estate business revolves a lot around such ideas. It is important to note that owning a house or getting a rented one-neither of them could be better than the other, without understanding the pros and cons arising out of each of these two situations.
This article is meant to cover all the important aspects to resolve this one big question: A Rented house or an Owned house, which one is better?
Let’s understand both the options one by one. Later they are explained with detailed calculations via tabular charts.
Buying a house-
Along with giving you tax and long term investment benefits, buying a house offers a sense of stability, pride of ownership, social security and belonging to a community. The popular belief is, when an individual gets a job or gets married, he/she should buy a house. That should not be the case, the decision depends upon a lot of factors. It is not just about financial considerations, it involves emotional aspects too.
All prospective buyers should also consider a few underlying facts-
- The people who do not have a fixed place to work, or they just do not want to stay at one place due to their nomadic nature, should not buy a house.
- It is not always easy to sell a house whenever you want. Especially when the real estate markets are down, it will be even more difficult to sell your house property. House property is an illiquid asset. It takes a lot of time to sell a property. When the real estate markets are not good it becomes even tougher to get rid of it. When buyers have many choices, they tend to buy a newly built house instead of an old one. Even in the same locality, a newly built house or flat, though at a slightly higher rate, gets preference over an old house.
- You should be firm about your decision to buy a house. If you want to live in a particular place for a longer period of time, then only the act of buying is justified. Living away from home town for many years puts one into a dilemma. The idea of buying a house in your hometown and paying rent to live in another city, might keep you away from making a sound decision.
- The overall cost of owning a house is comparatively higher plus it becomes your responsibility to maintain it, in order to keep it in a good condition. Once you own a house, ancillary costs like repairs and maintenance, insurance, property taxes, costs incurred to keep it safe from robbery, pesticides, etc. become inevitable.
- On top of everything, you have to pay monthly instalments including partial payment towards the principal amount of loan and a heavy sum of interest. During the early years of a home loan, the interest component is usually very high.(Interest amount is dependent upon many other criteria like the outstanding amount and tenure of the loan, prevalent rates of interest on home loans and prepayment of loans). Cost of renovation too involves a lot of money, sometimes resulting in furtherance of the loan burden.
- When residential construction sees a boom, prices of the properties will be down. Investing in a house may not be beneficial when the selling price does not fetch you gains at the end of one or two decades. The sale proceeds might not be sufficient even to cover the cost of inflation. The idea of buying a house as an investment largely fails in that case.
- To get a tax advantage, level of income plays a crucial role. Certain benefits can be availed of better when you hit a particular tax slab.
Paying an instalment towards a home loan gives you property rights in the end. This is not the case with a rented house. Paying rent is just like paying for any other expenses. But when you choose a rented house over buying one, you end up paying rent for occupying the place. It should not be considered as a useless outflow. You pay for using the house you occupy. And it allows the flexibility to move out whenever you want to.
When a job demands vacating one’s place from time to time, say every few years, buying a house might not seem to be a great option.
A rented house still is the responsibility of its owner. So the tenant is not required to incur any costs towards its repairs, maintenance or other taxes and compliances. This relieves a tenant from responsibilities of maintaining it and allows enjoying the same which otherwise would have required ownership rights to use it.
Comparing the rent with the amount of housing loan instalment gives an impression that the latter is higher,and by paying rent a substantial amount can be saved. This difference amount can be invested in equity or any other instruments to generate income or eventually can be used to lessen your rental obligation in the coming months.
While opting for a housing loan, deductions under the Income Tax Act look beneficial. For example, the maximum amount of deduction in case of a housing loan is limited to Rs.3,50,000. To get this benefit, the total amount paid annually by way of housing loan instalments could be in lakhs of rupees. However, it is explained later in this article how one can also claim HRA in case of a rented house and get a deduction from his/her taxable income.
A rented house too has its own disadvantages.
- Shifting from one place to another involves transporting of furniture, valuable electronic equipment and other household stuff etc. Logistics and resettling costs also rise just like any other expenditure. Moving after every two to three years’ gap involves higher movers and packers’ charges each time. Even if it is a 10% increase, it is high only.
- While searching for a new house, one may end up paying brokerage and a rental deposit etc to find another property.
- Depending upon the area where you choose to live, the cost of living also differs and so does rent. While buying a house, the instalment can be adjusted depending upon repayment capacity of the borrower. But in the case of rent, it keeps on increasing every year at a constant rate. Moving to a posh area means more rent.
- Sometimes it is like a constant torture to keep moving when landlords/owners ask you to vacate the house on a shortnotice. The kind of house that you need might not match with the one you end up getting even after an extensive search. This adds to the disadvantages associated with renting.
- Renting looks cheaper but it could be costlier in the long run. After paying rent for months and years, there is nothing that you can show as your own place of residence. Rented houses never give the sense of possession and stability. A few rights come only if you are buying a house, like those in favour of a house owners’ association etc. Tenants are kept devoid of such rights. This means you have to pay more to get a few services or totally manage on your own to utilise them.
If a salaried individual chooses to get their own house, dependence on home loans is inevitable. Repaying a home loan is quite a big decision as it involves a regular monthly payout for years. A comparative study is represented in the tables below:
Assuming the monthly income to be Rs.1,20,000.
|Rent (Rs.)||Buy (Rs.)|
|Expenses (excluding rent/EMI)||40,000||40,000|
|Purchase Value of the House||–||75,00,000|
|Amount of loan taken||–||60,00,000|
|Term of loan and Investment||–||20 years|
|Cost of maintaining the property||–||3000|
|Monthly SIP after paying rent/EMI||65,000||28,664|
|Estimated rate of growth in investment and Property prices||10%||6%|
|Lump sum invested in case of rental property||15,00,000||–|
|(a)Appreciation in lump investment/ property value||100,91,250||2,40,53,516|
|(b)- (i)Appreciation in SIP value @10% -(ii)Appreciation in SIP value @ 8%||4,97,70,299 3,85,41,569||2,19,47,936|
|Total Value of assets after 20 years (a+b) (i) (ii)|| 5,83,61,549 |
|Total outgo on property (rent increases by 5% every year/ down payment+EMIs)||59,51,976||1,31,00,640|
|Cost of movers and packers every three years in case of rented house.*(total of 20 years)||7,71,561||–|
|Cost of brokerage and rental deposits||3,11,000||–|
|Net outflow (i) (ii)||5,13,27012 4,15,98,282|
In the above table,
- The rate of interest on a home loan is assumed to be constant at 7.5%.
- The amount of loan is inclusive of all the other costs to avail it like stamp duty etc.
- The surplus amount left after paying rent is invested into a diversified mutual fund portfolio.
- The initial cost of moving from one house to another is assumed to be at Rs.100,000. Every three years an additional 10% is paid due to inflation. Relocation takes place in the 3rd year, sixth year and so on.
- Brokerage is also paid in case of rented properties. It could be a lump sum amount or equivalent to a month’s rent etc. Rents also rise every year and so the costs directly proportional to rent will also rise.
- In the above table the rent for the first year is Rs.15000 which increases by 5% every year. Hence brokerage is paid in all the years of relocation i.e the amount shown in the table depicts a sum total of one month’s rent in the first year, third year, sixth year and so on.(Brokerage is taken as Rs.1,63,000 in total)
- Amount of rental deposit taken by the owner is presumed to be equivalent to 4 months’ rent. In cities like Bengaluru, it is equivalent to 11 months’ rent. A majority part of the same is returned, when the house is vacated. Assuming there is a loss of one month’s rent when the tenant moves out as the landlord cuts that much amount to carry out repairs, painting work etc, it is added to the initial deposit each time. ( Thus, taking the initial deposit = Rs.60,000 or Rs.15,000*4, the total amount by way of deposit is taken as Rs.1,48,000)
- It has been assumed that the appreciation in investments takes place at a rate of 10%. But when it goes down to 8% then the scenario will change. The SIP value of investments will see a dip.
HRA affects the taxable income. So does the loan instalment. Considering this point, the effect on tax is shown in the following table. The amount of HRA and Rent differ from place to place. This example is meant to highlight how the calculation of exemptions is made in both the cases.
Annual income of an individual is Rs.12 lakhs.
Monthly income=Rs.1,00,000 ( Basic and D.A both Rs.50,000 each)
Out of the Basic monthly income of Rs.50,000 HRA is Rs.30,000.
The amount of rent=Rs.20,000
The amount of tax deduction that can be claimed is the least of the following:
- Actual rent paid – 10% of the basic salary = Rs.20,000- 10% of Rs. 50,000= Rs.20,000-Rs.5000=Rs.15,000
- Actual amount of HRA = Rs.30,000
- 50% of the basic salary = 50% of Rs.50,000 = Rs. 25,000 ( assuming that the taxpayer lives in a metro city. For other than the metro cities it is 40% of the basic salary)
The least of the above is Rs.15000. So the tax exemption is restricted to this amount.
But when the same person chooses to take a housing loan of Rs. 60,00,000 and pays an instalment of Rs.30,000,the total exemption is available up to Rs.3.50lakhs. Under section 24-Rs.2 lakh on the interest amount payable and Rs. 1.50 lakh under section 80C.
|Yearly amount||Rent||Housing Loan|
|Exemption under HRA||1,80,000||–|
|Housing loan exemption||–||3,50,000|
In this case the amount of exemption is more in case of the housing loan by Rs.1,70,000 (Rs.3,50,000-Rs.1,80,000).
Note that if you have your own house in a city, you cannot claim any rental allowance etc. for any other property in the same place. However you can claim the rent that you pay for a house located elsewhere.
By studying the figures above, we can say that the cost of buying a house is more than a rented house. As the EMIs are paid on the housing loan, the amount paid by finally at the end of 20 years will be Rs.1,16,00,640. That means the borrower will end up paying Rs. 41,00,640 as the amount of interest.
You can use the above tables by putting the values relevant in your case and get an idea how it will work in your case. The way you invest money may differ, but overall this will help you in arriving at a decision.
Instead of investing in a house property, if the same amount is invested in diversified mutual funds,one can earn more. It is possible that instead of investing in mutual funds, a person chooses to invest in equities or a mixture of the two along with a certain contribution towards fixed deposits. In that case the return will vary according to the market value of shares. If the market is good, the returns shall be more and vice versa.
Again, getting a housing loan depends upon many factors. One of them being your credit score. Any Bank or Housing Finance Company will give you a loan after considering a few factors like stable income and repaying capacity etc. Do a thorough research to know the amount of loan that you can finally get and on what conditions. Once you do that, you can compare the data.
In the case of a rented property, the overall cost when taken together, is definitely low, but the constant change becomes part of life. However there is no ownership,even after spending a substantial amount of money.
Looking at the taxation part, it all depends upon the salary of an individual and other factors like HRA and actual rent. In the long run one may claim more deductions by way of exemption from a housing loan. Real-estate investing is a safe investment backed by a tangible asset with the potential for capital growth and tax advantages. Rent does not result in creation of any physical estate. EMIs increase the proportional ownership every month.
If you plan to stay at one place for a long time, buying your own house would be the best option. Take a look at your current life situation and think whether it will change within the next few years. But if you are not decisive as to what will happen next, it is better to put the buying plans on hold and wait for some more time before entering into a long term financial deal. Even when you decide to pay rent for a number of years, the cost is lesser than the amount incurred to buy your own house.
All of us like to spend less travelling time in order to reach school/college/work place early. But the rates of properties are not always in our favour. It sometimes proves costly to get a rented house in a busy area as compared to getting an own house a little far away.
It is not at all an easy task to choose between the two. A good income surely prompts one to go for a housing loan and think about the long term benefits attached with it. Perhaps this is an age-old dilemma that keeps families thinking about it over and over again before buying a house or continuing with a rented house.
“There is a magic in that little world,home; it is a mystic circle that surrounds comforts and virtues never known beyond its hollowed limits.”-Robert Southey
Just a little better understanding or knowledge pertaining to the matters affecting the decision will help you choose between the two, and make your place of living a place worthy to pay a price for.