Shelternomics — Understanding the economies, convenience and practicality of renting or buying a house.

”Home Ownership is a liability”, surprised right….

Even I was when I first time heard from Robert Kiyosaki in his famous book “ Rich Dad Poor Dad”. The statement was quite contradictory to every Indian dream of owning a house since childhood.

We were made to believe that Paying rent is a waste of money, it is like paying somebody’s mortgage whereas Buying a house is the greatest form of wealth creation and stability in life and it has become the ultimate goal of every person who has started his career.

When I ponder, the internet is filled with articles about Rent Vs Home Buy. Confusion was not stopped as below mentioned contexts made me deliberate more on this subject.

Curtesy dreamstime.com

1. I lost an opportunity of gaining from a price appreciation of a project referred by my friend in 2017 at the rate of Rs 4500 per sqft which is now more than Rs8500 per sqft.
2. My neighbour in Mumbai repents for purchasing his flat for 1.7 CR in 2015 as other flats in the same apartments are being sold for the same rate even after 7 years. I was staying on rent at 1/3rd of his EMI outgo.
3. My senior was transferred from Kolkatta to Mumbai. He has a beautiful row house in Kolkatta which is constructed as per his personal interest with high-quality materials and interiors. He is not comfortable in letting out on account of fear of encroachment or poor maintenance by tenants. The house is still kept vacant.
4. My house in Hyderabad was kept vacant for 8 months as I could not able to get a proper tenant, later found a tenant who harassed me by not paying rent regularly, moreover, they damaged my interiors and sewage pipes and I incurred Rs 3 lacs in repairing it. I was not getting rent but I had to spend.
5. In haste, I sold that property but property prices doubled in the same locality within 3 years making me repent for my decision.
6. I know a client of mine who has got 6 houses and his rental income is more than his business income.
7. On account of my job profile, I deal with so many loan defaulting customers who have taken their dream house but are exhausted with savings for paying Margin money, registration, Interiors and monthly EMI burden.

With all the reasons mentioned above, I was oscillating between purchasing a new house or continuing on rent. So I dig further, did some research and wrote here in detail for helping people like me to take a decision on whether to purchase a house or not. It would be a bit lengthy but worth going through.

We will discuss in detail about

Why anyone would own/buy a house?

Pros and cons for both the perspectives of owning a house and being on rent.

Comparing buying a house as an investment with other asset types.

What needs to be considered if you want to buy a house?

Why anyone would own/buy a house?

Emotional Attachement

Being Indian “Roti, Kapda aur Makaan (Food, clothes and Shelter)” has become an essential part of our life. A lot of emotion is attached to the shelter, which preferably should be of our own not the rented one(Makaan khud ka hona chahiye).

Peer/Social pressure

If you have started to earn, every relative and friend will ask when are you getting married and buying a house. and the pressure multiplies if any of your friends or relatives of your age buy a house..that peer pressure combined with the jealous factor will definitely influence your purchase decision.

Lifestyle Inflation/Step-up lifestyle

A steady flow of income gives stability in life and at the same time pulls for a better lifestyle.

Though many of us might have grown up in an environment where a family of 5 people were ok with living in cringed 1 or 2 BHK houses but changing times raises our aspiration for better communities with security, a swimming pool, children’s area and Gymnasium etc..So people buy houses for stepping up their lifestyle.

If the above reasons are sufficient for buying a house why some people are preferring to stay on rent, in spite of having the capacity to buy a house?

Staying on Rent perspective

Rent on the positive side :

Flexibility

Renting helps you live freely irrespective of location, neighbourhood and climate.

Even if your office moved far off location or transfer to a different place you just can shift yourself to that location unlike binding to your own house and wasting time travelling daily or compromising on your professional growth. (I used to travel 60 kms daily on 2 wheeler as my office was moved to far off place from my own house).

If you don’t like the rented house you have got all the flexibility to move to a better house.

Predictable expenditure

You know how much to pay every month in terms of rent.

There is no chance for an abnormal increase in rents because it is linked to bank interest rates and the availability of houses, the market always maintains the equilibrium.

Stay liquid

If you don’t have a mortgage EMI commitment, there is a chance to save and pursue other financial and personal goals like children’s education, retirement planning, travelling places etc.

The pressure would be less even in case of emergencies if you stay liquid.

Rent on the negative side:

Not Building Equity

You are not Building equity by paying rent, it is as good as paying someone’s mortgage.

Less control over your space

Though you are paying rent, a lot depends on the whims and fancies of your landlord. Homestay should be peaceful and pleasant. Too much interference, rules and regulations by the landlord might irritate you.

Might be expensive

House shifting is very painful, it drains your energy physically and mentally. Moreover, frequent shifting of the house has involved a cost.

Security deposit is another considerable factor when taking a house on rent. In cities like Bangalore and Mumbai landlords charge 12 months of rent as a security deposit.

Let’s discuss how Buying a House has an effect on us.

Buying a House perspective

Positive side:

Long term Wealth creation

House being an illiquid asset, it gives stability, a feeling of achievement and builds a log term wealth.

Forced Savings

It is quite natural if one has the biggest commitment like mortgage EMI every month they would be very conscious about their expenditure and in turn savings. There are many people in my acquaintance who have taken Home loan for 20 years but for fear of long-term commitment, they made their lifestyle frugal and closed the loan within 8–10 years.

Future Passive Income /Easy credit

A paid-off mortgage loan is just like a risk free and tax free passive income.

On the other hand with paid off credit history, financial institutions would prefer to give credit at better rates which helps in pursuing some business opportunities.

Value appreciation

Over a period demand for housing is increasing day by day and thus the value of houses also increases, our houses are becoming the biggest assets in our financial journey.

Tax benefits

Many governments encourage people to be part of real estate and Infra projects with Income tax rebates and schemes like Pradhan Mantri Awas Yojana etc.

On the negative side:

House is an Illiquid asset

It is not easy to liquidate a house immediately in case of emergency unlike any other asset(will discuss further in Economic angle elaboration)

Cost and energy involved

The process of buying a home itself is a stressful job. Finding the right location, builder, gathering margin money, quality materials etc drains your energy. Even the same is applicable if you want to let it out….finding a tenant, ensuring correct maintenance, collecting rent etc creates a lot of pressure.

Added to this, expenses involved in maintenance, handling repairs, loan insurance and property insurance, society fees etc

Losing flexibility

You are bound to stay in the same house even if you don’t like the house and far from your office.

Your own house commitment might be a hindrance to progressing in your career.

Your dream house might become Old Fashion

With new technology and innovative projects coming into real estate we are seeing better societies and quality houses both in terms of durability and esthetic sense, and you might repent you should have waited before buying that house of yours.

The above perspectives of renting vs buying might give some clarity in making a decision to buy a house but there is one important Economic angle that needs to be explained in detail.

Economic Angle

Money… Money… A lot of Money

House purchase is the biggest financial decision in your life. It is not just mortgage loan and EMI…Owning a home is an expensive affair.

Your budget requires below mentioned annual costs. It is said that 1% of your property valuation would be your housing cost

• Property Registration cost.
• Cost of Interiors/Home improvement**(people are spending 5–30% of the property valuation for home improvement).**
• Mortgage loan insurance.
• Property Taxes.
• Property Maintenance (leaking roofs, broken pipes, damaged interiors or periodical painting of the house)
• Renovations and upgrades.
• Homeowners Association/Society fees.
• Utility bills(water, municipality fees etc)
• House insurance( to save from burglary, fire etc)

Is buying a house a good investment when compared to Equity/mutual funds?

In my view Equity has an edge over real estate, of course, pitfalls are there on both sides.

• Less Yield: The average return in the last 30 years in real estate is 7–8% and the Rental yield is 2–3% whereas Stocks/mutual funds have given an average return of 12%. (Since 1990 Sensex moved from 1000 to 60000)
• Not a diversified investment, bit risky : House being a high capital-intensive asset our bet is on a single unit but a mutual fund or index fund is diversified into multiple companies, industries, nations etc, so the risk is diversified and mitigated.
• Can’t be fractioned: Investment in a house can’t be fractioned in an emergency, you have to sell the whole property where as it is easy to liquidate some units of mutual fund or shares whenever required and keep the remaining with you.
• Ease of operation: A lot of time and energy is involved in purchasing, maintaining and liquidating a property whereas you can sell equity at the click of a button.

Rent Vs Buy a practical calculation :

Considering Home loan interest rates hover around 7%-8% , real estate price appreciation of 7%-8% is of no use….with such a big investment, the yield is only 2% even on a 10% appreciation..

You can check this Rent VS Buy real-time calculator.

In this example, I have taken an ideal property in a metro city.

Property value- 75,00,000

Down payment- 15%

Loan Tenor-15 years

Annual Maintenance cost- 4%

Property Appreciation-7%

Rent-15000

Annual rent appreciation-7%

The above example resulted in rental option as better with the given input variables, but it all depends on rate appreciation over the property. If the appreciation is more and rent also increases at higher rate buy option looks attractive, like one which we are witnessing in some places like Hyderabad for last couple of years.

But it is not possible to be fortunate always, only a lucky few have benefitted from unexpected appreciation …

So does that mean one should leave on rent forever? If not, how to decide when and where to buy a house ? What are the important things to consider before making a decision to buy?

Who should buy a house?

Tick if you have all the criteria mentioned below

• At least 6 months of Emergency fund.
• Proper life and health cover.
• No debt
• Saving plan for Children’s education and retirement.
• Whether you are going to stay in the same location for at least 10–12 years.
• Job security/Employability, no frequent transfers.
• A minimum of 30% down payment as liquid cash, I would suggest 50% of the value of the house.
• Your home cost i.e monthly EMI including average maintenance cost is below 30% of your net take home salary.

Summary :

Having your own home is a big milestone for most Indians and there are always emotions connected to it.

I know the house is a tangible and stable appreciating asset unlike equity, but we have witnessed the downfall of the same in 2008–2012 period.

Both options of Rent and owning a house have got advantages and disadvantages.

Understand the economics involved in renting or buying a home (shelternomics).

Nowadays it has become a fad to buy bigger houses(above 1500/2000 sq ft). Earlier family 5–6 members were having a comfortable stay in 600–700 sq feet houses, now smaller families of 3–4 members are preferring for above 1200sq ft average.

Bigger houses come with higher maintenance costs and taxes.

In general, we use only the bedroom, living room and kitchen more. I know many couples repented buying and staying in those bigger, lonely houses(the upper portion of duplex houses or other bedrooms are always unused) when their children moved off in pursuit of their careers.

So it is not advisable to stretch yourself and go for your dream house with 90% home loan and become house poor. Instead, go for a first house within your budget, invest properly and accumulate amounts for 15 -20 years and buy your dream house.

Real estate is not always a preferred investment option. It is really a bad investment choice considering your house is taken on 7% loan which appreciates only at 7%-8% …it is just 1–2% mileage…mutual funds are a far better investment option in a long term.

Emergency fund, Insurance, Children’s education planning, retirement planning and accumulation of a down payment are your priority personal financial components before your own shelter.

“An asset puts money in my pocket. A liability takes money out of my pocket.”

-Robert Kiyosaki

A house bought in haste will lead to financial empty calories and will become a liability instead of an asset.

If you have made a choice and want to buy a house by taking loan , You can check this option

Keep watching this space, I write topics on personal finance and productivity.