Rent V/s Buy
Should you rent or should you buy your home?
For some people, buying their home makes the most sense, and for others, renting is best. To determine which is right for you, you first need to determine whether you can afford to buy
Lets Do some calculation
Assumption:
· House cost 20,00000 (20 Lacs), which can be rented at 5000 per month rent
(Assuming a tier-II citi, you can make your calculation as per rates in your citi like house costing 40 Lacs can be rented at 10,000/-)
· Rent increasing 5% per annum house appreciating 5% pa
Point is that rent and home prices will increase same rate,as it can not happen that one is steady or slow and other is increasing very high,
Even though in past property prices increased by more than that but they are cooling down now and even decreasing
· At current Rates the EMI will be 20000/- pm.
· Saving denotes what amount will be saved if living in rented house instead of buying and paying
EMI Saving =EMI-Rent
Of these saving 1 lacs will be invested long term in equity/mutual fund that can fetch 15% return (though it can be higher but i m taking a conservative view)
for eg. in first year i will save 1,87,716 of which i will invest 1 lac and rest 87,716 i will spend on my lifestyle
· i have negated tax benifit because HRA component is not taxed.
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Year Rent per annum, EMI per annum Saving (Annual) Amount invested each year from saving |
|
1 60000 247716 187716 100000 |
|
2 63000 247716 184716 100000 |
|
3 66150 247716 181566 100000 |
|
4 69458 247716 178258 100000 |
|
5 72930 247716 174786 100000 |
|
6 76577 247716 171139 100000 |
|
7 80406 247716 167310 100000 |
|
8 84426 247716 163290 100000 |
|
9 88647 247716 159069 100000 |
|
10 93080 247716 154636 100000 |
|
11 97734 247716 149982 100000 |
|
12 107751 247716 139965 100000 |
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13 102620 247716 145096 100000 |
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14 113139 247716 134577 100000 |
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15 118796 247716 128920 100000 |
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16 124736 247716 122980 100000 |
|
17 130972 247716 116744 100000 |
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18 137521 247716 110195 100000 |
|
19 144397 247716 103319 100000 |
|
20 151617 247716 96099 100000 |
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TOTAL 1983957 4954320 2970363 2000000 |
Assuming 1,00,00 invested each year with 15% return compounded annually the total value at the end of 20 year 1,19,44,677 (around 1 crore 20 lacs) 9 lacs that I didn\'t invested and spent.
Assuming property appreciated 5% each year house value after 20 years will be 53,06,595 (Around 53 lacs)
Pros & Cons of Buying V/s Renting
Pros:
· You have a good social status as in India a social value is attached to the house
Cons:
· You Always have to pay the EMI on time irrespective of any financial problem like job loss, medical emergency etc
· You cannot change your locality say if some bad people comes to live in your area or any plant open there.
· When people are changing jobs so frequently its not certain that you will be bound to a specific city always
· All maintenance cost and property taxes are now your liability
· You can use the money you save by renting and invest it somewhere else. You can afford to invest in stocks, bonds and other things that have a better rate of return.
· Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the 'tax benefits' of owning into a buying decision
· Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.
· The Tax Break is NOT a Reason to Buy because HRA component of ones salary is not taxable and if you buy home you can not claim HRA.
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