Sunday, November 23, 2014

FINANCE SPECIAL ...................Should you buy or rent a house? Some factors to consider

FINANCE SPECIAL Should you buy or rent a house? Some factors to consider



Everyone wants a house of his own. However, considering that it involves big money, the choice is often between buying a house and taking one on rent. It is never an easy decision to arrive at. Some may argue that staying on rent is like throwing your money down the drain, when the same amount could be used to service a home loan and build your life's biggest asset. Others may see reason in the convenience and flexibility that renting offers in terms of the choice of location, proximity to workplace or, simply, your requirement for a bigger accommodation— things that you may not be able to afford otherwise.
There are compelling arguments in favour of both buying and renting a house, but your decision will depend on your personal circumstances. Our cover story for this issue will try to provide the answers to the baffling questions that you may face and offer a data-driven approach to help you take a decision on whether you should rent or buy.
Why rent

Take the case of Sushmita Sinha, 48, an insurance agent, who lives in a rented apartment in Sector 50, Noida. She pays a rent of Rs 29,000 for her 3-BHK flat. "An EMI of this amount would not buy me an apartment in such a good locality," says Sinha. However, lately, she has been toying with the idea of investing in a house in a more remote part of the National Capital Region (NCR), where she could move once she stops working and doesn't have to travel. Moreover, she wants a property that she will be able to bequeath to her children.

The biggest advantage of renting a house is flexibility. As you pass through the different stages of your life, your housing needs change. For instance, once you get married, have children and your old parents move in with you, your need for space grows. Also, when they were young, your parents would have climbed to the apartment on third floor with ease, but with age catching up, it might be a challenge they can ill afford. Therefore, moving to a flat on the ground floor or into an apartment complex with elevators could become a necessity. Then, once your children move out to settle in other cities, maintaining a huge house may seem like an uncalled for expense. 

Another thing working in favour of renting is if you have a transferable job or if you take up responsibilities with a new employer Your office may shift from, say, Noida to Gurgaon in the NCR. If you live on rent, you can easily vacate the house in Noida and shift to a location closer to your new office in Gurgaon to cut down on commuting time. People who live in their own houses are much less likely to exercise this option. 

Today, in most metros, capital values have soared while rental yields remain low. If you can allocate Rs 20,000 from your monthly budget to meet your housing needs, you are likely to get a bigger apartment in a more centrally located area—one that offers better social infrastructure—if you rent. If you paid this much as EMI, you would get an apartment in a distant locality. "Your lifestyle needs are better served if you live on rent rather than buy," says Nitin Vyakaranam, CEO, Arthayantra, a financial planning firm.

Living on rent also means you don't incur a long-term liability in the form of an EMI that could last 15-20 years. Hence, you have more money in your pocket which you could spend on travelling or purchasing items of conspicuous consumption. "Many people lead a very cramped lifestyle because they are left with little money for their regular expenses after paying 40-50% of their income on EMIs," says Vyakaranam.

Why buy
The most important reason why as a nation we prefer to buy our own house instead of living in rented accommodation is that within a span of 10-15 years we create an asset that is ours and which we can bequeath to our children. Debasree Goswami, professor of statistics at Hindu College, Delhi University, captures tenants' sentiments well when he says, "For me, paying rent to a landlord seemed like throwing my hard-earned money down the drain." 


Buying your own house also imparts a sense of stability. "When you live on rent, you have to move house every 2-3 years as landlords are reluctant to offer long-term leases. Hunting for a new house and shifting with all your belongings is a painful experience," says Goswami.
Another big advantage of purchasing a house is that its capital value appreciates as the years go by. Says Aditya Verma, CEO, Makaan.com: "Among all asset classes, property has given the highest return over the past 15 years." However, one should temper one's expectations on this count. There are no guarantees that what has happened in the past will be repeated in the future. "The sort of appreciation that we witnessed between 2002 and 2007 was a once-in-a-lifetime occurrence," says Vyakaranam of Arthayantra. However, there is also no doubting the fact that in a nation with a young population that is urbanising rapidly housing will continue to offer reasonably attractive returns over the long term.

Financial planners are of the view that buying your own house makes you better prepared for retirement. "You won't want the liability of a monthly rent once you are retired," says Rattan Chugh, founder and director, Cornerstone Portfolio Services. "Owning your own house also appears like a boon if you lose your job," he adds. Chugh says you should buy a house at the earliest— as soon as your pocket allows you to do so. "If you leave it till very late, banks won't give you a long-tenure loan. If the tenure is short, your EMI will be very high," says Chugh.
Your call
Real estate experts advise you to rent a house under three circumstances. The first is if your stay in a city is going to be short— less than 48 months. Second, it is also advisable to stay on rent if you are not sure about your future cash flow. For example, if you work in a sector which is highly cyclical and where lay-offs are common, you can't afford the risk of taking on a 15-year liability like a home loan. The third, and most important factor, is affordability. You should stick to a rented accommodation if the sum total of your EMIs exceeds 25% of your take-home salary. If your conditions are exactly the opposite, you should opt to buy a house.

The buy vs rent decision
For the very rich with deep pockets, the decision may perhaps be an unambiguous 'buy'. But what about the middle class that lives on rent and can't decide whether this is the right time to take the plunge and purchase a house, or continue paying rent? Says Vyakaranam: "From a purely financial perspective, when property valuations are very high and rental yields are low, and interest rates are also on the higher side, as is the case today, you should stay on rent."

You may also look at the break-even point between your rental cost and EMI. If it is on the lower side, say, around 12 years, as in Hyderabad, you may buy. In most metros, notably Mumbai, it has risen above the 15-year mark 

For the undecided, portals like Makaan. com and Arthayantra have created a buyversus-rent index, which they publish quarterly. Makaan.com's index factors in the following five variables: average capital price in the locality; average rent; historic growth in capital value and rental rate; and interest rate on home loan. The index is to be interpreted thus: when the index value for a city ranges between 1 and 20, it indicates that it would be less expensive to buy a house rather than rent one in that city.

If the index value is between 21 and 25, it indicates that the city falls in the neutral zone. While it is more expensive to buy a house in such a city, buyers may take the plunge provided they have the requisite purchasing power. An index value of above 25 signals that you should stick to renting a house and not purchase. Says Verma: "This index is for people who live on rent and can't decide whether buying or renting is the more expensive option in a city. Using this index, you can make the decision based on data, rather on gut feel, or on the advice of friends and relatives."

A buy versus rent index is meant to act only as a guide from the financial standpoint. The other important factor would be affordability. In the end, the decision to buy a house is an emotional one. In India, we are culturally disposed towards buying a house rather than living in a rented one. There is immense peer and family pressure to buy a house as soon as one can afford to. As one financial planner said: "In India we are willing to pay a huge emotional premium for the satisfaction of living in our own homes." So listen to both your mind and heart while making what is perhaps the most important financial decision of your life. All that we are trying to do is to assist you in arriving at a well-informed one.

All that we are trying to do is to assist you in arriving at a well-informed one.
By Sanjay Kumar Singh, ET 17 Nov, 2014,



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