I would like to welcome you all to my blog on whether to buy or rent a property from the perspective of 2022. Making this choice between purchasing or renting a house is challenging. Therefore, what we will do is talk about many viewpoints, with the emotional aspect of purchasing a home serving as our initial viewpoint. The financial viewpoint, which will be like a practical angle before you make this decision, is the second angle we're going to take.
We have been taught from an early age that to maintain a lifestyle, we need to have access to food, clothing, and shelter. Now, all that remains of the shelter is a house, a place to call home. However, you know how our Indian mentality is: that property shouldn't be a rental; that house should be mine, giving me complete luxury and comfort while I'm there.
Emotional aspects of home buying
The third factor that I believe one should take into account when purchasing a home is a change or an improvement in lifestyle. I'll now tell you about my own situation, which, as I previously stated, involved a stand-alone structure. We had a watchman for our society, which was the only amenity we had, and that was the biggest luxury and amenity we had. So now, at one point, we reasoned, "Why not move into a better place to live, which has my own parking, I don't have to search for parking, I have good security the moment I go back home, and if I have some additional amenities like a swimming pool, a gym, and a kids area for my child to play, why not." So, someone who thinks I should slightly upgrade my lifestyle will undoubtedly take this into account from an emotional standpoint when determining whether to buy or rent a house.
I think we've covered all the emotional aspects of home buying. The issue with buying a property is that the problem gets worse the closer you go to it, much like when you drink water from a mirage. Therefore, the important choice of whether or not to take the risk, advance one step further, and purchase it now demands a financial angle that requires a logical viewpoint, rather than an emotional aspect. So that's what the following section of the article will be about.
The first choice- Renting a house
So let's imagine that you're planning to stay in a particular city or neighborhood for the next 15 years. So, you must decide whether I should continue to live in a rented home for the ensuing 15 years. Should I instead stay in my own home? Therefore, assuming that the normal monthly rent for the home you're considering is 20,000, enter "above average locality" for a one- to two-bedroom home. This is comparable to a very low rent of $20,000. Assuming that you are in the 30% tax bracket, the benefit for this benefit will be that we will receive an HRA benefit, which stands for a house rent allowance benefit, for any rent that you pay. Therefore, your actual rent payment will be after taxes. Therefore, the effective rent after taxes will be 14,000 dollars. Therefore, 20,000 less 30% of 20,000 will equal 14,000 instead. Now, if I multiply it by 12 and use 14,000 on an annual basis. You will therefore pay $1,68,000 in rent on average for the full year. Let's assume for the moment that the annual rental growth rate is 7%. Therefore, every lot owner will normally inform you that the rent will go up by 5%, 10%, or 7% the next year. According to the region, we have taken 7% As an illustration, if such were the case, you would have to pay 42,21,676 rupees in total rent throughout the 15 years.
Second choice- purchasing a home
Let's go on to the second choice, which is purchasing a home; in this case, we are thinking about the same home. Okay, the same home is either offered for purchase or for rent. Imagine that the property costs 75 lakhs and if you were to purchase it, assume that you don't have that much money. As a result, assume that you would need to take out a loan, for which you would generally receive an 85 to 90% loan from the bank. As a result, you must make a down payment of 10%-15%, or a little bit more or less. Due to the 15% down payment amount we chose. What we have done is take the interest rate at 7%. Now, how much will the loan amount obviously 75 lakh minus 11,25,000 will be your loan amount right now. Okay, let's assume that the loan term is also 15 years because that should be the same if I'm comparing 15-year leases to 15-year loans, making them equivalent. Your EMI will now total 57,300.
How is that possible given that PMT is an Excel formula? The tax bracket is the next thing we'll take into account. For the rent option, we have 30%, the same year 30%, and we'll maintain it the same. With this now, let's understand that the effective rate of interest for a loan is going to be 4.9%. Now how on earth is 4.9% because 7% was your interest rate, you're going to get a 30% tax benefit for that and that's where the wire effective rate of the loan is going to be 4.9%, And with this, your effective EMI will turn out to 50,082 Again the PMT formula from Excel right now, we have to understand that how much total interest has you paid over the period how much will that be your total interest is going to be nothing but your entire EMI amount okay EMI amount multiplied by 12 that will be the year and my yearly amount I mean multiplied by 15 so, that gives you the total EMI paid minus the loan amount okay totally amount, which will include principal plus interest minus the principal amount which is the loan amount what remains is the total net interest paid for this period okay. So, I hope this point is also clear. Now, going to the next one assume that you will have to pay some maintenance and I've taken it as a 0.35% again can depend can vary from locality to locality, with 0.35% Your amount of maintenance comes up to 2188 rupees. Now, of course, every single society will also keep on increasing the maintenance, we have taken the increase in maintenance at 5%, Okay, and with this, your total maintenance over 15 years will come to 5,84,695 Now, pay attention. So, what is your effective total cost of buying the house number one, it was the total cost of your property which was 75 lakh number two, the interest on the loan effective interest on a loan that you paid and number three is the maintenance cost that you paid for 15 years? Renting the house and buying the house basics are done.
Decision-making
Now, here comes the most crucial part, which is related to the decision-making part. So, focus. Now, if I decide to go ahead with the renting option, what will happen will I save on the down payment obviously as my down payment amount was 11,25,000. If I decide to go on a rental basis what happened to the monthly EMI that I was paying the effective EMI I was paying to remember this 50,082 was the effective EMI I was paying I will say one but wait because you have taken the rental option you will also pay the rent. So what has happened happening 50,000 EMI is saved, but 14,000 effective rent is also what I'm giving. So what is the effective monthly saving for me is 50,000 - 14,000 which is coming up to 36,000 Okay, so lumpsum 11 lakh 45,000 saved and monthly salvation is 36,082. Now assume that this amount and investing and I'm able to generate on an average a 10% CAGR for the next 15 years, what will happen, the value of the downpayment saved with a 10% CAGR will go up to 50,10,659 After 15 years at the end of 15 years. And this monthly EMI is here because every month it is going to get added a plus it will one generating returns, this value of monthly 36,082 will go up to 1,49,54,007 66 This is nothing but a normal future Your value formula is okay. So, what will be your net benefit of renting a house let us understand the net benefit is going to be nothing but, number one, the value of the downpayment saved number two the value of EMI saved, but minus one minus the total rent paid. So, that is what we have done value of the downpayment saved plus the value of FEMA EMI savings minus the total rent for the period.
Decision
Now, that you have understood the basics of renting the house versus buying the house here comes the grand finale. Let's understand this point very carefully. Now, assume that you had bought we have already assumed that we had bought the house at 75 lakhs right assume that you will get an appreciation on the house property the appreciation on the property will be 6% Okay. Is that my assumption? Yes. Can your assumption be different? Yes Okay. As you remember my assumption for return on investment was 10%. Similarly, the assumption is that the property value will appreciate by 6% Okay. If this happens then over 15 years again this is a normal FV formula future value formula with this my property of 75 lakhs with the 6% rise in the property value after 15 years will be 1,79,74,186. Now, what will be the net benefit of buying the house there will be nothing but future property price minus the original cost of buying its original cost is the total cost of buying it which included your original cost of buying it plus the interest amount plus maintenance amount right so, 1.79 crores minus 1.07 crores that come to a net benefit of 72,49,000 But what was the net benefit while we took the renting option it was 1.57 crore worth of net benefit okay. So, is this a very easy decision for you? Yes, the net benefit for renting houses is 1.57 crores net benefit of buying a house is only 72 lakhs. So, our final decision comes up here Tara which decision is better renting the house? Well, we also have a formula here of if and then for you to make a very easy decision. I'll show you quickly how the decision changes if you feel that the property rights in the area where you are staying will not be at a 6% increase. Do you believe that property value might rise at 9% Okay? Now, with this, if you just change it to 9% Which decision is better buying the house we have given everything to you.
In this blog post, I will try to cover the topic- Whether you should buy a home or rent a house, which is a better choice. If you find it helpful kindly share it with your friends and family to help them. I will share an excel sheet to understand in a better way.
Here I have shared an excel sheet with an explanation--
Approach
1) When we rent a house we pay monthly rent - which is an expense
2) However, when we buy a house we pay an upfront downpayment plus interest amount on the loan amount, which is like rent (to the bank)
3. So the right way to evaluate is - if I could invest that down payment plus interest amount (above the rent I pay), what would happen?
4. When we buy a house, we have to maintain the place, which costs money
5. However, the house increases in value.
So the way to decide whether to buy or to rent is to compare
Rent: How much am I paying as rent and how much do I earn by investing the down payment amount and the additional monthly interest that I pay to the bank
Buy: How much am I paying as the cost of the house and how much do I get if I sell the house later on
