Whether living on rent is a good choice or not is a common question asked by most people. Buying a house is one of the most important financial decisions of our lives. The proverbial saying “having a roof over one’s head” has an emotional appeal to it. Most often we associate esteem and status in society to owning a house. While commuting to work or going anywhere in the city we find tons of advertisements from builders on a plethora of luxury apartments and houses. And we start thinking about when we will own the house of our dreams.
But is buying a house the best thing to do in the present market scenario? Buy a house today if you are sure that you will live there for the next 15 years. You can use this calculator to check when it is wise to buy and when to rent. As per the current condition of the real estate market in India, you will be better off living on rent than buying. There are several reasons to support this view point. Here are the top ones:
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Heavy burden of monthly EMI as compared to living on rent
Let’s say that Rahul wants to buy a flat worth Rs 80 lakhs in Bangalore. He does a down payment of Rs 16 lakhs and takes a home loan of Rs 64 lakhs @10% rate of interest. He plans to pay off the loan within the next 20 years. Accordingly, he has to pay an EMI (equated monthly installment) of Rs 61,761 every month.
On the other hand, if he decides to go for living on rent then his monthly rent will come to around Rs. 27,000. That’s a saving of Rs. 34,761 per month. The monthly EMI is roughly 2.5 times the rent amount. And this factor will keep on increasing as the price of the property increases.
In any case, the monthly EMI should not exceed 1/3rd of monthly take home pay. This is important to ensure that it does not put any strain on the finances and force to take cost cutting measures. So, in the above case if Rahul has to pay an EMI of Rs. 61,761 every month then his gross monthly income should be at least Rs. 1,85,283. This translates to an annual income of at least Rs. 25 lakhs taking into consideration other perks like PF contribution by employer, special allowances, bonuses, stock options etc.
So, in this case if Rahul does not have an annual income of minimum Rs.25 lakhs then it will not be wise to take the home loan. Otherwise he will have to sacrifice on a lot of day-to-day things like travelling outside, going out for movies, dining in good restaurants, buying expensive gifts etc. He will be better off living on rent instead.
Lot of additional costs when compared to living on rent
Buying a house is not the end of the road. There are a lot of accompanying costs that come after this. The owner has to pay property tax, society maintenance charges and repairing costs on a frequent basis. As the years pass by with more and more usage, the house undergoes wear and tear. It has to be maintained and repaired regularly. In addition to this, water taxes and corporation tax will increase with inflation.
On the other hand, if a person chooses to rent a house, he does not have to worry about all these things. He can leave all of them to the owner. In this way, he can easily save another 5-6k per month. Also, if the owner decides to sell the house in future then he will have to pay capital gains tax on the proceeds.
Takes away personal freedom
Imagine that you don’t like the job that you are in. Every day you go to office and fear what fault your boss will find with your work that day. Your boss does not spare a chance to criticize you. You want from your heart to tell him to go to hell. But then the thought of this month’s EMI and the next month and the next to next month EMIs comes to your mind. And you decide otherwise.
Imagine being stuck in this situation for the next 20 years just because you have to pay your monthly EMIs. Would you really be happy if you have to continue working like this? Of course, you can change your job and move to a different company. But what guarantee you have that there also you will not face a similar situation? Even if luckily you didn’t, would not it be great if you did not have to carry this burden every day?
At the same time, you will need to do a lot of changes in your personal life as well. You will have to cut down on a lot of areas like frequently going out for movies, dining out, buying expensive gifts, holiday trips etc. You will not be able to enjoy your life and live it to the fullest. All the time you will be worried about the next upcoming EMI.
Unable to quit job to pursue your dreams
Many people harbor dreams of starting their own business. They dream of becoming their own boss and living life on their own terms. No more worries of the 9-5 job, no further stress regarding the demanding boss at office or the bad-tempered client. Finally, they have been able to create a passive income source large enough to support their lifestyle.
Now think of someone who has taken a large loan for the next 20 years. Every month he has to pay a fixed EMI to the bank without any delay. If by chance he misses one or two EMIs then he has to pay a penalty on top of the usual EMIs. Would he ever be able to quit his job to start his own business? The answer is NO.
That is because in the starting months he may not be able to get the expected returns from his business. Usually in the initial phase, the business goes through a lot of ups and downs. It is highly volatile and one cannot expect to generate large revenues or profits at that point. Only after years of consistent hard work and effort, the business begins to take shape and starts giving returns. But with the burden of monthly EMIs, the thought of quitting job to focus on business goals goes out of the window.
HRA benefit on the rent paid
Salaried individuals who are living on rent can claim the House Rent Allowance (HRA) to lower taxes. This can be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation. If you don’t live in a rented accommodation, this allowance is fully taxable.
The deduction available is the least of the following amounts:
a. Actual HRA received;
b. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
c. Actual rent paid less 10% of basic salary + DA
We can understand the HRA computation better with the following example:
Mr. A, employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2017-18 i.e. Assessment Year(AY) 2018-19.. He receives a Basic Salary of Rs 25,000 monthly along with DA of Rs. 2000, which forms a part of the salary. He also receives a HRA of Rs 1,00,000 from his employer during the year. Let us understand the HRA component that would be exempt from income tax during the FY 2018-19.
| Sl. no. | Particulars | Amount (in Rs.) | Amount (in Rs.) |
| 1 | Actual HRA received | 1,00,000 | |
| 2 | Rent paid (15000 p.m. * 12 months) minus(-) 10% of {(250 00p.m.*12) + (2000p.m.*12)} i.e.10% of Basic + DA | 1,80,000 32,400 | 1,47,600 |
| 3 | 50% of {(25000p.m.*12) + (2000p.m.*12)} (50% is considered as the accommodation is in Delhi) | 1,62,000 | |
| 4 | Exempt HRA = lowest of 1,2,& 3 | 1,00,000 |
Therefore, in the above example, the entire HRA received from the employer is exempt from income tax.
Living on rent offers greater flexibility for relocation
Let’s assume that you buy a house today. After few years, a cosmopolitan area comes up in the city which is better than where you are staying now. You so want to shift to that location but you cannot. The reason is that you are simply stuck with your current house.
On the other hand, a person living on rent can easily pack his bags and move to his favourite location.
Also imagine that you want to move to another city for better job prospects. Or simply you want to change your job but the new workplace is very far away from your home. Daily commute to office and back will become a headache for you. And if you are in Bangalore, then it will be a nightmare. With the kind of traffic, going to office and coming back itself will take 3-4 hours at the least. But if you are living on rent then you can easily move to a place near your office.
After 20 years, difficult to find a buyer for the old property
After 20 years, if the value of your 2 BHK home is Rs.2 crores (although it seems a bit unrealistic as it will be a very old flat in the middle of a crowded city) then you make nothing out of it. Even if it is that much, no buyer will be interested in a 20-year-old property. With rising suicide rates world-wide, who knows something unfortunate happens at your floor and you will end up selling it at a lower price.
Rental income from real estate is very poor
Buying a house for investment purposes is not a wise decision given the current situation of the real estate market in India. If you are buying for regular cash flows in the form of rent, rental yields are typically at 2%-4%. FDs will offer much better returns. So, that doesn’t justify investment in an apartment. The other option is capital appreciation. Real estate market is heterogeneous. Even with in the same city, you will have different pockets showing different levels of price appreciation.
We have been reading about oversupply in the real estate market for a long time. So, there is a clear cut mismatch between actual demand (and not investor demand) and supply. At some point of time, this should not reflect in prices too. I personally feel, in absence of actual demand (to live in), builders are relying on investor demand (for capital appreciation) to make sales. If they reduce prices, they will end up killing investor demand too. Something they can’t afford to do. Let’s hope builders give up soon and price correction will follow.
If an asset class has done well in the past, it does not mean it will do well in the future too. This applies to all asset classes including equities, debt, real estate, commodities, gold etc. Real estate, due to its heterogeneous and illiquid nature, becomes even more complex.
Money saved on EMIs can help to accumulate big corpus
Let’s take the example mentioned in the first point. Rahul wants to buy a flat worth Rs.80 lakhs in Bangalore. He does a down payment of Rs.16 lakhs and takes a home loan of Rs.64 lakhs @10% rate of interest. He plans to pay off the loan within the next 20 years. Accordingly, he has to pay an EMI (equated monthly installment) of Rs. 61,761 every month.
On the other hand, if he decides to go for living on rent then his monthly rent will come to around Rs. 27,000. That’s a saving of Rs. 34,761 per month. This sum if invested in SIP in a good equity mutual fund for 20 years then at 12% rate of return will accumulate a gigantic corpus of Rs. 3,47,31,381!! The money invested would get multiplied by over 4 times. This money can then be invested to do the full down payment and buy a new home. So he will not have to take any loan at all. Moreover after 20 years, he will have a clearer idea of where he will stay for the rest of his life. And he can happily stay in his new home for the remainder of his sunshine years.
Young age is the time to experiment and enjoy your life. Go on an adventurous trip, explore some new places, start a business of your own, make mistakes and learn from it, tick off items from your Wishlist and it goes on and on. But all this is possible only if you are not under the heavy burden of EMIs. In the end, decision is yours. May the Force be always with you on your life’s journey.