In my earlier post (The magic of compounding), there was a very heated as well as healthy discussion with one of my reader regarding "Is it better to buy a house or simply rent it " and invest the entire capital on which power of compounding would would work which might give higher returns with no strings attached. Although every individual might have different view in this regard, I found 1 very useful calculator at http://www.itrust.in/tools-and-calculators/Buy-vs-Rent/Calculator.jsp which gives a rough estimate based on some inputs. Although there are many assumptions, as well as there might be regulatory changes in future which might change the dynamics.
I want to share that in my present scenario for all the inputs I have made, it shows that Buying a house is better if I intend to live for more than 4 years. Please go ahead and do this analysis for yourself.
Please find some points below in favour as well as against this view.
Why Purchasing a house would be better idea
- Property is a real asset and in the past it has always given very high returns. As high as 100% per annum sometimes. Hardly value of property has fallen in horizon of 5 years or more.
- There are multiple returns i.e. Rental value as well as Capital appreciation
- Presently home loans are @8-9% which can be considered cheap. Even if someone has got the full money to buy a house, he can take loan and invest that money with small risk and fetch returns @10-12%. Meaning, you can earn more than the interest you pay.
- As per present norms one can claim tax benefit on both, Principal Repayment, which falls under section 80Cuto Rs 1 lacs, Interest repayment upto Rs 1.5 lacs per annum. Considering person is in highest tax bracket, he would save upto Rs 50000/-per annum on interest repayment.
- One also saves on rent.
- If taken on loan, the interest paid per month is close to sum of Tax savings per month+Rent saved per month then virtually you are not paying any interest. Doesn't it makes sense to buy a house @0-3% Interest rate? After-all, once that loan is over, you will be proud owner of a property.
- This is a inflation proof investment and always hedge against Inflation. If commodity prices rise, rentals are bound to rise.Property value is directly proportional to rental value and if rental value rises, property price also rises.
- If you are paying high EMI for home loan, it inculcates the habit of savings and curtail unnecessary spends which we might not adhere to if we have no monthly commitments.
- Also one factor which might not be always true is that your income is bound to increase but your EMI's are not. Eg. if your income is Rs. 50000/- per month and EMI for home loan is 22000% which is 44% of your monthly income might stress your monthly budget. However after 5 years your income might be Rs. 80000-90000 per month and your EMI of Rs.22000/- would be paid of very easily. Whereas rentals would have increased in the same proportion of your Salary.
- Above Owning a property also has high emotional value and gives you a sense of Pride at the same time giving you more Credit Worthiness.
Why Renting a House might be better idea
- One can have excellent cash flow and no high monthly commitment of EMI's.
- One can invest the surplus and reap the benefits of "Power of Compounding."
- If you are not living there yourself and rent it without proper documentation and agreement, you might falling trouble and face tough time getting the premise vacated.
- If you get transferred frequently to different cities then buying a house might not be very appealing.
- Need to spend in the maintenence of house@ 1-1.55 per annum.
I am sure you all might have different other reasons both in favour as well as against this opinion which you may share in the comment section.
