For a lot of people, owning the house they live in is an absolute must as they believe paying rent is a great waste of money. This article is not for them.
For everyone else, here?s an aspect that you might not have looked at. Let?s take a typical example in a large city like Mumbai, Delhi or Bangalore.
If the price of an apartment one wants to buy is Rs 2 crore, and one takes a loan of R1.6 crore and makes a downpayment of R40 lakh, the monthly EMI towards the loan will be approximately R1.6 lakh a month.
On the other hand, if a person wants to live in the same apartment on rent, he would have to pay around Rs 50,000 per month. That works out to be 3% of the apartment value per year.
Investors often believe that at the end of the day buying a house creates an asset whereas renting does not; hence, it is a waste of money.
Let us re-examine that argument and decide what is right for us. Let us take a 10-year period. Your buying math would look like this:
If the property appreciates by 10% per year for 10 years, it would be worth Rs 5.2 crore.
If you considered selling the house at the end of year 10, you get R5.2 crore as its price.
a) Upfront payment for buying the house:
R40 lakh
b) Amount paid in EMIs: Rs 1.92 crore (of which R1.5 crore is the interest paid)
c) Capital tax on gains of approximately Rs 25 lakh
d) Balance loan to be repaid: Rs 1.2 crore
e) Amount left in hand after deducting these payments: Rs 1.4 crore. This is your net gain.
Now, let?s see what would have happened had you rented the apartment.
1) First, you would have earned interest on the downpayment, which you would have saved. At a compounded post-tax return of 7% on Rs 40 lakh over 10 years, it works out to Rs 39 lakh.
2) If you invested the amount you saved by paying the rent (instead of EMIs) through a systematic investment plan (SIP), you would have created a R1.6-crore corpus.
3)Your net gain: Rs 1.99 crore.
Overall, you will save about Rs 60 lakh over the 10- year period (Rs 1.99 crore-1.4 crore). For buying to trump renting, you should be convinced ? as in the example above ? that your property will appreciate well over 10% every year for 10 years. Of course, you might have a longer-term view or you might believe that the property will appreciate well over 10% per year ? there certainly have been times where it has happened.
An interesting finding from our rent versus buy tool is that most people felt they assumed single-digit appreciation every year for their property. So, don?t go with blind faith ? a little math never hurt anyone if one has to decide between owning a house or renting it.
Note:
7% is the annual rent appreciation assumed
7% per annum is the indexation benefit assumed over 10 years for capital gain tax calculation
The writer is a co-founder & CEO, Bigdecisions.in