BUY your OWN House or Live in a RENTED House?

Most of the people these days are perplexed that whether they should buy a house or live in a rented house. The word ‘rent’ scares them and they think that paying monthly EMI for their own house is anyway better than paying the monthly rent to someone else. Why should we fill other’s pockets by paying rent? Let’s empty our own pockets and purchase a property. This is the mindset of most of the people who cannot decide whether they should pay for their own house or live on rent.

People have an obsession of purchasing their own house, it seems that the whole purpose of their life is centered around this only. The reason behind this can be an emotional attachment that we have with ‘khud ka ghar’ or another reason can be that people get tired of changing their accommodation after every year or 2 years or the time period mentioned in the contract.

Keeping all the emotional factors aside, have we ever thought financially whether paying for our own property is the right decision or not? 

People who have just started earning, those who are in their 20s, when they see that there is a stability in their income, all they can think of is to buy a house. This article will help you to think financially and it will help you to make a decision that whether it is the correct time to buy or live on rent, it is for ‘salaried’ people who save and invest a portion of their salary every month and who plan everything first and then take action.

Cost of Buying a House.

Let us understand the costs of buying a house.

The cost of buying a house is not just the cost of the house, there are other costs that are attached to that house.

1. Down payment- It is an initial non-refundable payment that is paid upfront for the purchase of a high-priced item such as a car or a house, and the remaining payment is made by obtaining a loan from a bank or a financial institution.

2. Interest on Loan- It is the money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. It is like paying ‘rent’ to the bank for the loan taken.

3. Maintenance Cost- It refers to any cost incurred by an individual or business to keep their assets in good working condition.

Cost of Living on Rent.

Let us now understand the cost of living in a rented house.

1. Rent- a tenant's regular payment to a landlord for the use of property or land.

The Concept of Rental Yield.

Rental yield- It is defined as the rate or the percentage of returns from the rental income of an investment property.

For example- Kumar lives in a rented house in Delhi, the total cost of the house is ? 3 crore. He pays a rent of ?42,000 every month. This means that in a year he pays a total rent of ?504,000 (?42,000 x 12).

Now, to calculate the rental yield percentage we have to find out what percent of the total cost of the house, Kumar pays as rent every year.

Rental yield= ?504,000/3 crore which is equal to 1.68%

This means that Kumar pays just 1.68% of 3 crore every year as rent to live in that house. Which means that the landlord gets only 1.68% of 3 crore as rental income.

From the perspective of the landlord, let us now calculate the number of years that will take to cover the cost of the house by receiving rent.

? 30,000,000/ ?504,000= 59.5 years

? 504,000 x 59.5= ?29,999,592 (approximately ? 3 crore)

The above calculation explains that it will take approximately 60 years to cover the cost of the house by receiving rent, which is indeed, a long time!

The Benefit of Living in a Rented House.

Let’s say you want to buy a house worth ? 9,000,000.

The Down payment of this house is 15% which is equal to ? 1,350,000 (?9,000,000 x 15%)

For the payment of the remaining amount, you’ll have to take a loan from a bank. The remaining amount will be ? 7,650,000 (?9,000,000 - ?1,350,000)

The effective EMI for a span of 20 years would be ? 50,065 per month.

The effective rent for the same property is ?21,000 per month.

The difference between the effective EMI and effective rent will be ? 29,065 (? 50,065 - ? 21,000)

This means that you’ll save ? 29,065 per month if you choose to live on rent. Which means that you can invest this money somewhere which can generate returns for you.

Take a look at this dynamic spreadsheet where the above calculations are done in detail. You can open the spreadsheet by clicking on the image below.

Assumptions:

1. Tax benefit= 30%
2. Average Annual Increment in Rent= 7%
3. Increase in property value= 7%
4. Maintenance cost= 0.35%
5. Annual Increase in Maintenance= 5%
6. Rate of return on Investment= 10%
7. Interest on loan= 7%

When should you Buy a House?

Buying a house is one of the best investments an individual can make. But it should be done at the right time. When people are in their 20s, they have just started earning, there are many uncertainties then, like they don’t know in which city, state or country they’ll be after 3-4 years, whether they want to quit their job and open a start-up or if they’ll get married after a few years, then they’ll require a bigger house etc.

Suppose you’ve bought a house, now if these uncertainties arise, you can’t leave the trap of the EMI that you have to pay every month. Whereas, if you are living in a rented house, you have the flexibility and freedom to leave the house whenever you want to by giving a prior notice to the landlord.

You should only purchase a house when you are planning for long term, like you will stay there, in that accommodation for the rest of your life. Don’t take any decision without thinking financially or else later, you will regret that decision. Don’t stress yourself because of a loan. Enjoy your freedom!