Today, in the midst of a global health and economic crisis, there is one thing that I (VD) and R are thankful about every single day – the fact that we do not have the burden of a home loan. Amidst huge pay cuts and running our own cafe, we shudder at the thought of what would have happened if we had bought the flat we are staying in today, instead of renting it.
It is etched in our tradition and possibly in many others to own a property. Generations of Indian jobbers have utilized their hard earned life savings to invest in a house, burying many dreams and desires just to secure a roof over one’s head. But is buying a house really that important? My whole life I have stayed in the same house bought by my family. Therefore, till I started earning I was all in for owning a home. Only after that, when I started looking into buying property and doing some basic calculations, I realised that taking a huge home loan to buy a property in a city like Mumbai is not a good choice at all economically. The millennial generation is now realizing that buying a house may not be as beneficial or important as it is made out to be by the elders.
Why buy, when you can rent the same house for 25% of the cost every month?
Here are the 4 reasons why in 2020 renting a home is better than buying. These will help you to decide wisely on a choice that often has irreversible implications.
Mumbai has a rental yield of 2.0 – 2.5%; your monthly rental comes to ₹ 20,000-25,000 for a property worth ₹ 1 crore, EMI for which will be around ₹ 80,000 – 1,00,000 . In Mumbai, the owner usually takes care of maintenance and structural repair costs.
This is a summary showing the actual difference between monthly expenditures and wealth gained at the end of 20 years for a 2BHK large flat in Mulund, Mumbai. This flat is in a newly constructed high rise complex with a clubhouse, swimming pool etc.
I am also sharing the excel calculator sheet I used to derive these numbers.
After I had done these calculations, there was no doubt in my mind that in 2020, renting a home is better than buying one.
PS – There are many variables in this sheet and certain assumptions have been made while making this sheet. For eg: The interest rate, property tax costs, maintenance costs, tax breaks, investment growth rates etc. which will differ in different situations. I have taken very conservative assumptions about the investment growth rate. Put in the numbers based on your situation and take a decision accordingly.
One of the biggest benefits of ‘renting vs buying’ is the flexibility and freedom that comes with it. In today’s fast paced global society, we are all seeking change, new and exciting experiences or the ability to take that new job or give up your desk job and follow your passion. But it is hard to be spontaneous when you are tied down to something like a property and a 20 year long EMI. Owning a house forces you to set roots whereas renting makes it easy to relocate in the near future for work, for school/college, for family, or just because.
Also, renters can live virtually anywhere while homeowners are restricted to areas they can afford to buy. A home in the city might be out of reach for most home buyers, but it might be doable for renters. Although rents can be high in areas where home values are also high, renters can more readily find an affordable monthly payment than homebuyers.
In today’s economy, sometimes situations change so drastically that one day you might suddenly lose your high paying job and for a few months might struggle to make ends meet. By renting, you have the option to downgrade into a more affordable living space. But if you’re a homeowner with an EMI, it’s much more difficult to break free of an expensive house because of the fees involved with buying and selling a home.
And I am sure many of you are experiencing this thing right now, as we speak. We are in the middle of a global health and economical crisis. Banks are giving moratoriums but they are not interest free. Roughly with every EMI you miss, 3 of those get added effectively. So, by taking a 6 month moratorium, you have effectively added a year and half to your home loan term. Also, if you, as a homeowner have invested a significant amount of money in renovations, the selling price might not cover these costs.
Better quality of life
Owing to the fact that today even in big cities like Mumbai your monthly rent will be only 25% of your monthly EMI+maintenance + property tax expenditure, if you are renting, every month you will have a lot of extra cash. Of course, you should save and invest this extra cash but it also gives you the freedom to spend a part of it on daily comforts, better education for your kids or other luxuries like travelling and exploring the world.
Room to grow
The house you can afford to buy today won’t suffice you down the line once your family grows. This leads to a compromised lifestyle wherein either kids have to share rooms or they get no room of their own at all. On the other hand, if you are renting, your house can grow with your family, with a very small increase in your monthly expenditure.
What do you invest in, if not property?
So what do you do with all the extra cash with you by not paying an EMI? There are several ways to invest and multiply your money, with different amount of risk and reward associated with it.
But the most important concept to understand is ‘Always keep your savings separate from your investments.’ Confused?
Lock in a part of your money in safe investments like fixed deposits (FD’s), recurring deposits (RD’s), public provident fund (PPF), national pension scheme(NPS), LIC etc. These funds will give you a fixed return(which might not be very high), but no matter what you can be sure of those returns and rely on them, irrespective of the market volatility.
For the rest, have you ever heard of the proverb – ‘Don’t put all your eggs in one basket?”
Meaning, build yourself a diversified portfolio. You could invest in –
- Stocks – This is a high risk high reward option where in both short term and long term investment options are available
- Mutual funds – If you are in it for a long term, investing in mutual funds is a good medium risk option which can typically give you returns around 12%-18%.
- Gold – I personally find physical gold a burden to take care of. But now, you can buy paper gold or gold bonds which get linked with your demat account at a click of a button. It is a good option to have as a part of your portfolio, as many a times when markets are crashing the rates of gold and silver are rising.
- Rentvest – Rentvesting is when you purchase a property as an investment while living in a rental property yourself. As you’re buying an investment and not a first home, you can buy it in a more affordable location and put it out on rent. The income from the rent can be used to pay a part of the EMI for that property. This asset equity can be used later, as bank security to buy a home in your preferred area, or to purchase another investment. You could also rentvest in a retail or commercial property which has a better rental yield (around 6%) and typically lower maintenance costs.
If you have money lying around you and you are in it for a long haul, go for it!
If you have an existing property which covers at least 60%-70% of the cost of your new property, it might still not be that bad to take a small short term loan commitment and invest in the new house.
But before planning to buy a property mainly on an EMI, chart down your dreams, think logically not emotionally and do your math accurately.
Don’t forget I am an architect by profession who works at a real estate development firm. Designing and building homes is my bread and butter. So even if after reading all this you all still decide to buy a home, good for me!