INTRODUCTION
Indians love their homes and their shiny metal; it should come as no surprise that an average Indian has nearly 88% of his wealth invested in real estate and gold as per the findings of an RBI committee.
Buying a home is a very emotional topic but emotions often get into the way of logical reasoning, Indian parents pester their children to buy a house because they believe it to be a sign of success and stability but keep in mind that their emotions are thinking and not their brain.
The real estate market saw its best years in the bull run from 2003-2013 in which prices of various properties grew multiple folds but it also caused prices to reach bubble territory and over the recent years the prices have rather stayed flat, even though there has been no crash, the prices of properties are expected to be stagnant for years to come.
In this blog, we will discuss the various reasons outlining the benefits of renting a house rather than buying one.
WHY BUY WHEN YOU CAN RENT
- Rental Yields in India are one of the lowest in the world-
Put simply, Rental Yield is nothing but the annual rent that a property can generate in comparison to the market value of the property. Rental Yield is always denoted in percentage terms. For Instance, If you are a tenant paying a monthly rent of Rs 20,000 (Rs 2.40 lakhs annually) and the property is worth Rs 1cr then your rental yield works out to a mere 2.4%
Rental Yield = Annual Rent (2.4 Lakhs) X 100 = 2.4%
Property Value (1Cr)
In layman terms, the tenant is paying a mere 2.4% of the property value as annual rent, which means if the property value and annual rent grew at the same pace year on year then it would take nearly 42 years (100/2.4) for the tenant to have paid the same amount of money as to own the place.
Rental Yields in India are one of the lowest in the world and have been stagnant for years now; it generally hovers in the range of 1-3% and it is estimated to be the same for the foreseeable future.
- Illiquid Asset-
A house, at best is an illiquid asset i.e. it cannot be converted into cash quickly because it takes at least a couple of months to find a good deal, in case the house has to be sold immediately then it will have to be sold at a heavily discounted price.
Liquid assets come in handy during hard times like a pandemic or recession, an investment into real estate makes you “Asset Rich Cash Poor”
All in all, Liquidity is King!
- Flexibility-
Globalization has made the world extremely inter-connected due to which employees of companies have to continuously re-locate, renting certainly makes more sense because as a tenant you can move in and out whenever you want
On the other hand, buying a house is a heavy commitment because you are now bound to a particular location and the EMIs.
It is often said “Take a home loan and you will start loving your job”
Buying and selling real estate also attracts other incidental costs such as stamp duty, registration cost etc, ultimately pulling down the returns.
Thus, if you do not intend to live at a particular location for a long period then do not buy a house, rent one.
- Opportunity Cost-
The residential real estate market in India is amongst the most expensive real estate markets in the world. The demonstration below shows us the price of one square meter as a multiple of GDP per capita.
To say the least the levels are astronomical in comparison to other countries and not sustainable in the long run unless the GDP grows at a very high rate.
We have also attached an excel file at the end of the blog which helps us to calculate the difference between renting and buying a house in financial terms. The benefit of renting a house can be as high as 2.5-3x over buying a house. Download the file and play around with the numbers.
CONCLUSION
Financially, renting a house and investing the difference into equity mutual funds is a much better option compared to buying one because of all the reasons we discussed above.
Traditionally, the real estate sector has not been well regulated due to which there have been numerous instances of fraud and cheating, so one should tread very carefully in this space and perform a thorough due diligence
To conclude, Even if you decide to buy a house now after considering all the points then go ahead at least you will know the potential risks and you will have made a well-informed decision
Feel free to drop a comment and let us know your thoughts.
Disclaimer: Above published information is for education purpose only and the views expressed by the author is bases on his personal experience and knowledge. Please consult your Certified Financial Planner before taking any financial decision.