The economics of “settling down”, a case for the rental economy

For most of us millenials born between 1980 and 2000, settling down has come to actually staying in a good place/ marrying / both. A decade back, settling down used to be buying a house/marrying/ both. By good place, I mean a home with decent furnishings, a place you can call yours, though rented. Most of the times, that is a place which connects with us after having slowly moved from sharing the beds with friends, when you are right out of college and in your first job to actually staying independently in a house. In between we take smaller steps of creating the first kitchen by pooling resources from the housemates, to having a housekeeper, to having individual rooms. Then one good day, we get bored and want constancy in life with things around us and that’s when we start thinking that may be it’s time to start buying some furniture and furnishings. And that period generally coincides with “marriageable” age and there’s a huge societal pressure to “settle” down. We give in to that and start thinking that eventually I will need all these things when married. Now that is where we lose out to emotions and turn blind to economics.

This article is not even getting in to the economics of owning a home, but just an attempt to share some thoughts on owning “furnishings”.

Let us assume only the basic furnishings required for single person or a couple.

Cot – 10 to 15K

Mattress – 5 to 10K

Fridge – 10 to 20K

Washing Machine – 10 to 20K

Dining Table – 10 to 15K

TV – 15 to 25K

Work Table – 5 to 10K

Sofa – 10 to 20K

Stove + Oven + Mixer + Utensils + Miscellaneous – 20 to 30K

Transportation (Assuming you are buying all this for the first time) – 10 to 15K

To setup a basic home we need approximately 100 to 180K. Let us take a mean 140K. I am going to tabulate the economics over a period of 3 years. I am assuming the following:

Fans and wardrobes are available and need not be rented.

Annual depreciation on furnishings – 20% 

(Refer - https://www.wikihow.com/Price-Used-Furniture)

Annual interest on deposits – 7%

(Refer - https://www.hdfcbank.com/personal/fixed-deposit-calculator)

Annual maintenance on furnishings – 2K

Additional monthly rent for renting the furnishings – 3.5K pm

(Refer - www.furlenco.com, www.rentongo.com. The rent will come to 4K, assuming a long term rental contract for 3 years, we can get a discount and bring the monthly rent to 3.5K on furnishings from the rental provider or if the landlord herself is providing, it will be cheaper than market price and hence 3.5K additional rent for the furnishings mentioned above.)

We are going to borrow the money from bank on interest, if the money is not available with us.

Case 1:

Amount available on hand for purchase - Rs. 140K

Amount to be loaned - 0K

Result after 3 years - Almost same NPV at the end of 3 years.

Opinion: We can't really judge whether to buy or to rent.

Case 2:

Amount available on hand to purchase - Rs. 40K

Amount to be loaned - 100K

Result after 3 years - When we loan an amount of 100K and purchase furnishings, we have a negative on NPV compared to renting by 13K

Opinion: Never buy depreciating assets such as furnishings on loan!

Case 3:

Amount available on hand to purchase - Rs. 140000K

Amount to be loaned - 0K

Rate of returns - 10% (assuming we invest in other instruments than FD)

Result after 3 years - We are positive on NPV by 10000

Opinion: We are positive on NPV by 14K when we rent rather than buy. Even a reasonably better investment than FD at a return rate of 10% makes a strong case for renting rather than actually buying things and investing the available money in appreciating asset classes.

This is an extremely simplistic model, annualising all data and assuming general data. This is just to give an overall sense of owning vs renting. And not to mention the time and effort involved in purchasing various things and when we shift, the existing furniture may not fit in to the new space physically/aesthetically. And if the shift to a new house is inter-city, which is a normal occurrence in current economic scenarios, the whole math tilts all the more in favour of renting even when one wants to "settle down", than actually buying and owning, unless you own the home and are going to stay for a very long time. Again, one doesn't own a home until the home loan is over. Till then she is not a house owner, rather the bank is. All that she is, is a debtor to the bank!

Buying home on loan is a not a great choice. And buying depreciating assets like furnishings on loan is suicidal, unless you are business generating revenue out if it. 

As more people rent furnishings rather than buy, the companies renting out will achieve the economies of scale and the rentals/maintenance are going to come down further while increasing the choice of offerings.

If you need the working sheet you can drop me a message.