Monday, February 10, 2020

Rent vs Buying a house? What should I look for?

Author: Sachin Gupta | Find me on Twitter

This piece of the blog is primarily meant for residential end users/occupiers who will either end up owning or renting a house. Now, owning or renting is a dilemma which most of us face sooner or later in our careers. As easy as it may sound, but the decision is never without its fare share of glitches. Sumit Sharma, 29 years old, got recently married. He moved to Gurgaon 3 years ago and is currently working in a reputed company with decent salary and like most people of his age group he was stuck with this dilemma of owning vs. renting. On one hand there is easy access to home loans and plentiful of home supply with most builders screaming aloud from the rooftop to sell their real estate projects across India (oops...Houses) but on another hand there are some worries such as monthly installments, maintenance issues, locality, property valuations, and so on.

So, what are the factors that encourages owning as compared to renting and vice versa. Let’s Break It Down (L BID) to smaller elements. The core elements in this dilemma are:

- Down Payment element
First thing first, the most important element of making a decision to own a house boils down to down payment issue. In most cases, 15-20% of house value is paid towards down payment while the remainder is provided by the bank loan if credit worthiness of the person in consideration is good. Now, minimum price for a ready to move apartment in low rise or high rise building in Delhi NCR region (check the prices for other regions) ranges from 35 lacs to 40 lacs (prices vary for different locations). So, one has to have a minimum of 6-8 lacs in his/her pocket before even thinking of owning a house.

- Cash Flow element
Now, having passed through the first element with flying colors one has to do some cash flow calculations before going to the builder. Minimum rent for a similar apartment in Delhi NCR region (check rentals for other regions) ranges from 12 to 18 thousands with no overheads of property taxes, maintenance, insurance etc, whereas cost of owning will include loan installments + property taxes + insurance + maintenance charges. Monthly loan installment for the remaining 29 to 32 lacs will dent one’s pocket by at least 25 to 30 thousands depending upon the interest rate and tenure of the loan. Globally, housing is considered affordable if it is accessible at 25 to 40 percent of gross monthly household income for either rent or loan installments.

- Bubbles in House Price/Future Value
Bubbles normally lead to exorbitant prices when considered in relation to the underlying fundamentals. In Delhi NCR region, one would have noticed that residential property prices have appreciated sharply compared to the rentals. In most areas of NCR, the prices have appreciated by about 3-4 times in last 5 years whereas rental appreciation had been rather weak. What does this suggest; I guess you guessed it right, the price appreciation in property is not indicative of the actual demand & supply elements. Rather it’s the result of expectations that investors, builders are placing on the region due to forecasted economic growth. Now, when expectations are multiplied by expectations year after year, it leads to bubbles and you & I can only be the victims of the bubbles positively or negatively (in case the bubble bursts).

- Flexibility element
Flexibility element is crucial for those who tend to relocate because of employment, family, or other reasons. It doesn’t make any sense for a person to buy a house for 2-3 years and then again have to sell it because of relocation unless the house is purchased with an investment perspective.

- Credit Quality element
Those who are just starting their career with limited salary and no previous bank record will find it difficult to get the loan unless one has sufficient equity at his/her disposal and hence renting is the most likely choice for them.

- Ease of transportation
In metros and especially in Delhi NCR region, home-office-home travel is getting longer by the day. Buying a house nearer to the office is being considered a vital element. However, that comes with a heavy price tag. However, renting a house close to the office could be a serious consideration if one’s primary focus is the proximity to the office.

- Recreational activities
With changing lifestyle, recreational activities play an important role in one’s decision to own or rent a house. Other facilities such as shopping malls, schools, local connectivity also adds to decision making process of buying/renting the house. However, all these facilities come with a price tag especially in case of buying.

So friends, having considered all the above elements, a certain weightage can be given to each element and final result should be evaluated in favor of owning vs. renting. The analysis can yield different results for different individuals depending upon how much weightage they assign to each element.



 
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