Renting vs Buying

Most people would prefer to own a house one day. Eventually, if not immediately. This preference is sort of built into our psyche. But there are a few who feel it’s better to rent given the low rental yields on properties in India.

I met a few friends this festive season and among other things, the discussion went in the direction of the rent versus buy decision.

No doubt, these are good days for those who are sitting on fence as of now. House affordability has definitely increased. And it depends on 3 factors: property prices, home loan rates and ofcourse income levels. The prices (in most places) have remained stagnant. The home loan rates are at historical lows. And income has been steadily increasing over the years.

So has a drop in prices along with low loan rates made buying more lucrative than renting? To an extent yes. But I am of the view that one should not go too overboard while buying properties/houses. Having just one house that you use for residence is fine.

Every now and then, you come across a lot of online noise on why investing in a house is not a great idea. A see a lot of people glorifying that renting forever is the way to go. I don’t really subscribe to that view. I am not a fan of real estate in general but my view is that one should aim to have one house to live in. A rented property will never give the same permanence as that of an owned property. We, humans, have this evolutionary need to mark territories and a rented property doesn’t come good on that need. It is important to establish what you are working for beyond just plain money, and this could mean a nice apartment or house to live in for many of you. But everyone’s requirements are different.

For many, renting is a waste of money. But for many others, it can work beautifully well and offers some advantages as well. You may want to live in a good luxury house but can’t afford to buy it. Renting it can be an option. After all, there is no end to luxury apartments that you could choose to rent. They often come with a range of amenities and different add-ons like onsite gyms and parking. The units themselves are also often done out to the highest of specifications. If you are searching for a high-end place to live, you will definitely be able to find it on the rental market.

Right or wrong, I don’t know, but one of my friends lives in luxury apartments that he has rented and the reason is that he wants to give a good lifestyle to his ageing parents who could not afford the luxuries earlier on. Not a bad idea to give a good life to your parents, isn’t it?

Though a small point in India, this is a factor considered by many who reside outside India. Homeowner’s insurance can be costlier than renters’ insurance. Even when you are renting, you ideally would need to make sure that your belongings are properly insured to protect them against theft or damage. Some estimates suggest that the average renters insurance cost 14.9 per month (dollars) which is a much more affordable option compared to some homeowners insurance. Managing these important payments correctly then means that you will be able to have better control of your income, potentially meaning that you will have more to invest too.

But as I highlighted earlier, house affordability has increased during the last few years in India. So you may be planning to buy a house yourself.

You might decide that the time is right to take a step onto the property ladder. Even if you are an incredibly savvy investor, it can be difficult to buy a house with cash unless you manage to pick up a true bargain that is in need of a lot of work. Therefore, it is quite likely that you will need to get a mortgage or home loan to help you get the property of your dreams.

To do so, you are going to need a downpayment and a good credit score, amongst many other things. Buying a property can be a long process, and a lot of that can simply be trying to get your home loan approved. However, you might find that buying a house is a more affordable investment overall, despite having to make a large initial downpayment to be able to afford it.

Someone recently asked me. I really need to buy a house now but should I wait more for the rates to fall. My answer is No. Don’t wait. It seems that the home loan rates have bottomed out as they are already at multi-decade lows. If you want and need to buy a house and can afford the downpayment and future EMIs, then go ahead and buy it.

And what if you already have a residential house and are planning to buy for investment?

I am not a fan of real estate as an investment. But you can do so if you know what you are getting into. You might have a place of your own that you already own – meaning that this investment property would be a second in the beginnings of a portfolio, or you could buy the first property but with a mind to rent it out rather than live there yourself.

Buying with a mortgage can be preferable in both instances. However, putting a tenant in there can often mean that the loan essentially pays for itself to some extent if not fully. Of course, with buying for investment, you can also consider having a look into commercial property. These tend to be a lot higher than what you might typically pay for a property but can also come with a much higher rental yield. It might be an ideal choice for those who wish to diversify their investment profile a little.

So that was about buying vs renting.

I leave you with a tweet I sent out recently (link) –

Tweet real estate home loan

If someone was waiting on the sidelines to purchase a house (as an actual need), this might be a good time to do so in certain real estate micromarkets. Even the loan rates make a case for it to some extent. Though all this is not applicable to those who want to rent forever.

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