What makes a better sense? To own a house or stay on rent?
While owning a house is an emotional aspect to most Indians, we looked at this issue purely from a financial angle.
Case Study:
Let us take a case study to understand the pros and cons of owning a property vs staying on rent.
Following assumptions were made in arriving at the conclusions:
- A is aged 35.
- Income: Rs.1,85,000 per month
- Expenses: Rs.85,000/- per month
- Current Savings: Rs.35,00,000
- Annual growth in Income: 8%
- Annual Inflation: 6%.
- Cost of House: Rs. 1 Crore.
- Housing loan: Rs. 75 Lacs at 9% for 25 Years.
- Rental Expense: Rs.25,000/- per month
- Annual increase in Rent: 3%
- Annual Appreciation of Property: 5%
- Property tax and Repairs: 0.50% of property value
Observations:
If Mr. A opts to buy a house (Utilizing current savings of 35 Lacs).
- Capital appreciation of House after 10 Years (assuming a growth of 5% per annum) amounts to Rs. 1.62 Cr.
- Home loan outstanding at 10th year is 62 Lacs. So, the property value after ten years is Rs. 1 crore, which is back at present value!
- With investments made from savings after considering the EMI outgo, Mr. A would accumulate around Rs. 37 Lacs over 10 Years.
- Net worth of Mr. A after 10 years (including House value) would be around Rs. 1.37 Crores.
If Mr. A opts to rent a house.
- A can make Investments out of his current surplus and monthly savings. His net surplus is Rs. 41 Lacs at the end of first year after considering for rental outgo.
- Assuming investments to appreciate by 10% annually, Mr. A’s net worth after 10 years under this option would be around Rs. 2.01 Crore
Renting Option is beneficial – Net worth higher by around 50% – 2.01 Crs., vs 1.37 Crs when you own a home
Mr. A can avail tax deductions u/s 24 on home loan interest. This additional benefit of Rs.1.02 Lacs for a 10-year period is not very material compared to Rs.64 lacs in savings if he opts to stay on rent.
Note: If you require the detailed workings on the above , please email us @wealthfirstfinservllp@gmail.com
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