Should you buy a house or stay on rent?

 

 

renting-or-buying

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

Disclaimer: The information, analysis and opinion contained herein pertain only to Market price action for the specified period. The same, (1) do not constitute investment advice offered by the issuer, (2) is solely provided for informational purpose and therefore is not an offer to buy or sell securities, (3) is not warranted to be correct, complete or accurate, (4) may not be copied or redistributed, (5) This report is an intentional literature, intended for information purposes only. The issuer shall not be responsible for any trading decisions, damages or other losses resulting from, or related to this information, data analysis and opinion or their use in any way.

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