Why renting is a better deal than owning?

Kavita Kakani

If you’re ticked off seeing another vastushanti card of your friend and are feeling sad to look at your rented house, lighten up. Unless you did not miss an opportunity to buy during the income tax authorities auctioneering of assets at a pathetically low price, you’re in all probability in for a good advantage over others.

Due to multiple factors, driven especially by recession in real estate prices due to overcapacity and consequent build-up, it doesn’t take much appreciation for housing to work as a poor investment. Gone are the 1980s, when an investment in housing worth Rs 2.50 lakh used to grow five- to 10-fold in a span of 10 years, and one used to dream of housing being the safest and best investment avenue. Also, historically it has been seen that the cost of renting is typically in the range of 3-4 per cent p.a of the current value of the house. The figure holds, even if you are looking at an apartment in a city or a house in a village.

Consider the following: Instead of buying/constructing a flat/house worth Rs 15 lakh in 1997, you opt for renting an equally big flat/house worth the same price, by paying a rent of around 3 per cent p.a on its market value i.e., on an average Rs 4,000 per month.
By doing so, you save Rs 15 lakh, which could be invested in a five-year fixed deposit instrument of a reputed bank, where the rate of interest is around 12 per cent (considering that interest rates for fixed deposits were around 13 per cent in 1997 and at present around 10-11 per cent). Here goes the calculation:

You would earn Rs 1.80 lakh as interest income every year. If we take this as the only source of income you have and calculate further, you pay Rs 4,000 per month i.e., Rs 48,000 p.a, and after deduction under 80L of Rs 12,000 each year (till 2000-01 it was Rs 12,000, at present it is Rs 9,000) for five years—so you will pay an average income tax of around @ Rs 30,000 p.a i.e., Rs 1.50 lakh you would have shelled out towards tax in that five-year period. So, by renting one would have earned Rs 1.80 lakh x 5 = Rs 9 lakh as interest. As post-tax income, this would have been a little over Rs 7 lakh.

Now, the second alternative of investing Rs 15 lakh in 1997 for buying a house, either at Bhatinda in Punjab or Borivilli in Mumbai—no doubt, here you will enjoy the sense of possession, but you will more often than not, find that, at the end of five years i.e., 2001, if you decide to sell the house (considering the trends in real estate prices and also the cost inflation index), you would have fetched around Rs 19 lakh i.e., a gain of just Rs 4 lakh. The figure above gives just an annualised gain of below 5 per cent, a miserably low figure, compared to return of around 12 per cent in a fixed deposit.

Please note, that in the second alternative, we have not considered multiple recurring costs, like capital gains tax, property tax, maintenance and house upgradation charges and, above all, the opportunity cost for the time and money spent in buying and maintaining the same. Now don’t you think you will win the race by renting handily. The above analysis and renting advantage holds, irrespective of the case whether your income is from businesses or service, and also irrespective of tax bracket.

The clear message is—in these days of recession and excess numbers of constructed yet vacant real estate, it is better to rent a house than buying one . Hence, hold your investments as near risk-free fixed deposits in banks, and use a little to celebrate your financial acuity.

The writer is a practicing chartered accountant and visiting faculty at XLRI Jamshedpur. The views are personal.