I want to move out of my parent’s house! I’m getting married and need a place to live! I’m changing cities because of my job and need my own pad!
The age-old question of whether to buy a house or live in a rented place has always been an important part of personal finance decisions. The shift from being a renter to a house owner is a complex one, both emotionally and financially. But, what are the factors that need to be considered before you make a decision? Well, there are several and we’re going to lay them out for you. We hope it will make the decision easier.
Let’s begin with an example:
Mohit is 30 years old and works with an MNC in Bangalore. He has just got married and needs to move into a new place with his family. Does it make sense for him to buy a house or live on rent?
Let’s consider the scenario below.
- There’s a 2-bedroom apartment which comes at a monthly rent of Rs. 20,000. The annual increase in rent is 5%.
- There’s a 2-bedroom apartment for sale which comes at a purchase price of Rs. 48 lakh.
Now, let’s assume that Mohit’s gross yearly income is 7 lakh. Under what conditions should he buy and when does it make sense to rent?
If Mohit is planning to stay in the city for more than 10 years, then buying the apartment would be the better option. Why? Taking into consideration the EMIs he would be paying and the initial down payment, it is only after the 10th year that he’ll start gaining over renting.
If his stay is short-lived (less than 10 years), then it is better for him to rent the apartment.
Buying a house
Buying a house is a smart choice. But, before you buy one, here are a few factors that you must consider.
- Got cash to spare? – Houses and apartments tend to be expensive and if you don’t have the means to pay for it outright, you’re probably going to have to opt for a Home Loan. But here’s the thing with Home Loans; lending institutions usually loan you around 80-90% of the cost of the property, depending on the lender. The remaining 10-20% must be put up by you, the buyer. So, make sure that you have enough cash to make the down payment.
Tip: Creating savings goals for yourself and investing accordingly early in your career could take care of this.
- Debt-to-income Ratio – Another important factor is your debt-to-income ratio. This is the number of loans you have taken in proportion to your income. If you’re taking a loan, most lenders look at this ratio to make sure that you won’t default on your loan payments and other debts. Ideally, your debt-to-income ratio should be below 50%.
- Other Expenses – When buying a house there are other expenses to think about such as property tax, insurance, annual repairs, maintenance and other costs. Do you have sufficient means to take care of these?
- Mobility – When you buy a house, remember that you give up on mobility. This could be an issue if you shift jobs and your new office is at a distant location from where you live or is in another city. Of course, there are always ways to deal with this but it is something to consider when deciding whether to rent or buy.
- Area Analysis – Check the real estate prices in the location where you wish to purchase the property and the future potential of the property.
Additional Reading: How to Start Planning for Buying a House?
Moreover, here are some questions you should ask yourself before opting to buy a house:
- What is my financial condition like and can I afford to purchase property in my current situation? If so, how much down payment can I make from my savings?
- If I opt for a Home Loan, will I have sufficient money to live on after I make my monthly EMI payments?
- How are my investments positioned in relation to other critical goals?
- What are the current property trends in the city where I want to buy? Is there a location advantage? Will real estate prices move up or down in this city?
- Am I eligible to take a Home Loan? If yes, what would be the loan amount?
- What should be the value of the property if I choose to buy one? Will the EMI be lower than the amount I would pay as rent?
- If I choose to continue staying on rent even after I purchase a property, will I get sufficient rental income from the property to make it worth my while?
- What is my future earning potential and how will my finances change, post this decision of purchasing a house?
Once you answer these questions, you’ll have a clearer idea of whether or not it makes sense for you to buy a house.
Staying on rent
If you wish to live in a rented property, here are a few things you should take into account:
- The security deposit to be paid to the house owner.
- The monthly rent you pay.
- The shifting and brokerage charges you will have to incur every time you shift your house.
- The annual increase in rent and the hassles of shifting frequently.
If you are a salaried employee, you will receive a House Rent Allowance benefit when you pay rent under the Income Tax Act. However, you will not own any asset and therefore will not reap the benefits of appreciation in real estate prices.
As seen above, there are a variety of factors to be considered while making the decision to buy a house or stay on rent. Real estate is a good asset class to own and can act as a hedge against inflation. However, you should not buy a house simply because it is good to have real estate in your investment portfolio. A careful analysis of the underlying personal factors as well as the potential of the investment should determine if you should buy a house or continue to stay on rent.
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