If you live in a rented home, you’ll often get suggestions for buying a property. And why not? Home loan interest rates are at their lowest in many years. There’s a slowdown in the real estate market, implying lower property prices. It seems like a good time to buy property. But buying property is rarely simple. It requires tonnes of research and analysis, and an understanding of one’s own financial priorities.
It is important to assess how long you intend to live in the property you wish to buy. If you are settled in a city and looking to live there for the long term, it may be a good option to buy your own property than to rent one.
Let’s take a look at some of the points to consider while deciding to buy or rent property.
The Cons of Renting
Renting a house for the long term can be bad for your finances. Rent, like inflation, increases every year. Over a long period, renting creates an irrecoverable cash out-go of several lakh rupees—or tens of lakhs of rupees if you rent a large property in an upscale locality. You also have to deal with your uncertain hold over the property, since its owner could serve you notice at any point. Home owners also show reluctance in keeping the same tenant for long for the fear of tenants capturing the property. So the home owner counters this threat by increasing the rent in a manner that the tenant can no longer afford to stay there. These are some of the cons of renting a home.
The Pros of Renting
People who are constantly on the move from one city to another would benefit from renting homes. This allows them the flexibility to avail a home close to where they work, and leave quickly in case their work takes them elsewhere. Renting homes also allows you to upgrade your lifestyle by moving to a better locality without having to incur the high costs of buying property in those localities.
The Cons of Owning
Buying property requires massive funds—often several multiples of your annual income. Though home loans are available at attractive interest rates, the buyer has to raise the down-payment or the margin money on his own, and this is also a big requirement. Typically, lenders would fund up to 80% of the property cost, implying the home buyers need to raise the 20% along with additional funds for the added costs of registration, furnishing repairs, etc. Other risks of buying property include delays from builders which may increase your interest outgo on the home loan, putting you in a position where you may have to pay loan EMIs without getting possession of the property. Also, with rampant criminality in the real estate sector, you may get a property that may have violated local municipal laws, in which case, the property could get razed.
The Pros of Owning
The ideal state. The dream. Owning a home is the ambition of many people, for it satisfies the primal need for a roof over your head. Real estate is an appreciating asset. All factors considered, the value of a home or land can only grow, leading to good returns in the long run. Also, if you buy one through a loan, your EMIs will remain more or less the same while your income would grow every year. This implies massive savings and safety from inflation in the long run.
It is important to have a sufficient and sustained income to service your home loan EMIs for the long term. If you are buying an under-construction property, you may need to pay both rent and EMIs till you get possession. You should also factor in the future cash flow and contingencies before you take the buying decision. If you are unsure about the stability of your income, always stick to a rented home.
Deciding to live in a home or a locality for the long term is especially a good reason to buy property. If you’re sure of staying put in a place for 5-10 years, it makes sense to buy. But if you are on the move, and may find yourself having to sell your property at short notice, it may be advisable to rent. Selling property in the short term could mean that you suffer losses due to inadequate appreciation of the property and the payment of capital gains tax. Selling in the short term would also lead to the reversal of tax benefits you would have claimed under Section 80C of the Income Tax Act.
If you’re living in cities such as Delhi and Mumbai where the property rates are exorbitant, it may be that renting is not only your best option, but also your only option. To buy a home in cities such as these requires massive amounts of money. If you find yourself falling short of these funds or having to indebt yourself beyond your repaying capacity, it may be wise to stick to a rented accommodation till such time as you’re financially ready to buy something.
People often look for a property close to their work place, children’s school and nearby relatives or friends. Rented properties are easy to get this way; buying, however, is tougher. Tax benefit is another major aspect that buyers must consider while renting property. You can claim up to Rs. 150,000 in tax deductions on principal repayments on your home loan, and a further Rs. 200,000 on interest payments on the same loan. These benefits may outweigh the ones from renting a property.
The author is CEO, BankBazaar.com