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Real Estate Details

Buying a home wins hands down against renting today. Here's why

Harsh Roongta / 15 Jun 17 | 11:36 AM

Harsh Roongta

I have this running debate with my youngest client and perhaps, the most financially savvy. This client has spent a few years already as a marketing professional in a software company in Bangalore and got married recently. 

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Unlike many fellow professionals, he had sought out my services almost as soon as he started his working career. The family has all the required insurance policies and even save a tidy sum every month in a portfolio of mutual funds balanced between their near term and long-term goals. We agree on everything except this: whether they should buy a house or should they rent it? He used to stay in a rented apartment before marriage and since he really liked the area, even after marriage, they continue to stay there. However, despite lucrative several offers to buy an apartment in the same area, he refuses to do so. 

His argument is based on an excel sheets in which he has analysed the rent versus buy decision fully. On rent, he has taken into account reasonable assumptions on increases in rent over the years, including the rise due to increase in the market value of the property, the cost of security deposits, the brokerage and other transaction costs that he will have to pay every time he renews a lease and above all, even moving expenses every few years. 

On the buy side, he has taken into account the fact that he will be able to get a home loan and get tax benefits on the loan repayments, besides accounting for maintenance and society charges.

He has worked out both the numbers and has concluded that for the next 30 years, the property would have to appreciate at around 15 per cent a year to break even with renting. Otherwise, he would be much better off just renting till he retires in 30 years and use the invested money to buy a senior citizen friendly home when he retires. 

My argument with him has always been that any financial model completely ignores the softer and emotional aspects that too have a financial impact. He had major problems convincing his future wife’s parents that he wasn’t willing to buy a property despite having the means to do so. They did not believe him and thought he was fibbing about his income. The cost of defying a widely-held social convention is a recurring cost.

In my view, here is an argument that should settle the issue. Earlier, they were getting the flat at a price that was really good. Their incomes were just below the limit of Rs 18 lakh per annum that would still make them eligible for the subsidy of Rs 2.35 lakh under the Pradhan Mantri Awas Yojana (PMAY). That is a good 4 per cent discount on an already-excellent price.

Both of them are eligible to pay a part of the down payment requirements by withdrawing from their low-yielding employee provident fund accounts, thus reducing the need to sell of higher yielding investments to meet the down payment requirements. There is really no excuse now for not purchasing their own home. Also, the couple should remember that if their incomes increase next year, they will not be eligible for the PMAY. 

Thought not applicable here, the introduction of Real Estate Regulations Act is another positive. In my mind, there should be no debate on buying versus renting. Buying should win hands down. What do you think? 

The author is a Sebi-registered investment advisor 

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