Home - To Own Or To Rent?

Making the decision to go from renting to owning your dream home is the biggest decision one can possibly make! The decision to construct or buy a house is not an easy job. 

We need to understand the pros & cons of owning & renting both before taking any final decision.

To OWN: PROS

• You can choose where you want to live - location/area/society/city
• You can leverage your investments by taking a loan
• Owing is kind of forced savings
• Get the security of equity ownership
• You pay for the ownership of your own property
• Potential equity growth - capital appreciation
• No landlord & their rules to follow
• Can renovate/reconstruct property anytime
• The mortgage (home) loan rate is the cheapest among all kind of loans
• Hedge against inflation, rather provide a better return than inflation in long-term
• Tax-efficient
• Protection from the rising rental cost
• Get community & stability
• A vehicle for retirement
• RML (reverse mortgage loan) is available in the worst scenario post-retirement

CONS

• EMI cost more than monthly rental outflow
• Have to save for down payment, which is a minimum of 15% - 20% of home value
• Will bear the burden of property tax & insurance cost
• Difficult to change/shift to another location, if doesn't suit to you
• The cumbersome process to liquidate & transfer in case of succession
• Part-payment in cash component above the market valuation, for which you don't get a loan
• Pay for the parking space
• Registration cost
• Cost of interior
• Preferred location/story charges
• Society maintenance charges/deposits

To RENT: PROS

• Low upfront and ongoing costs
• Flexible lifestyle
• Not responsible for home repair
• Not responsible for property tax & home insurance
• No risk of depreciation, if the house value come down
• Can change/shift to another location easily, if doesn't suit to you
• Amenities included

CONS

• Rent money is dead money - you are paying for the landlord's mortgage
• Rent is rising faster than income
• A threat to your privacy
• Play by the landlord’s rules
• Have to move out whenever asked by a landlord
• You still need to save for advance deposits required by a landlord
• Pets can be a problem

Buying or renting is not an instant or easy decision for many. And there is neither Right nor Wrong to follow anyone. Its total depends on your utility, income, and circumstances which have to get change over a period of time. 

Some amount of homework &calculation is required to do before making any final decision:

1. Checklist:
• Do you plan to live in this home for 5 or more years?
• Do you have enough contingency funds?
• Do you have enough savings to pay the down payment &  registration fee?
• Can you budget your EMI along with maintenance cost, taxes & incidental cost?
• Can you further plan to invest for your other financial goals? 
• Do you have a credit score of +700 in CIBIL?
• Are you comfortable with the location/area/society/city where you want to buy your house?

Prima facie, if your answer to above all questions is 'yes', then go for burning a house else prefer to stay in a rented one as of now.

2. Affordability calculation:
• Another calculation you can do apart from the above that if you want to buy a house property that cost Rs.50 lacs to you then checkout with buying you have to pay 10 lacs immediate down payment + 35000/- EMI (appx.) for 20 years to the Bank if going for the loan. On the other hand, you can get it on rent at 15000/- p.m. 
• So it will be an immediate cost of comparison as per your affordability to take a decision.
3. Ratio check:
• What is the house price to annual rent ratio? Ideally, anything below 25 is good from a buying point of view, however, this ratio is difficult to get in metro cities.
• Historically return from the property is 11% CAGR and rental yield is appx. 2% - 3% p.a. 
• Your Home EMI should not be more than the threshold limit of 30% of your net monthly income.
• Ideal asset allocation for any millennial could be Equity (50%-75%), Real Estate (0-25%), Debt (10%-20%), Gold (5%-15%) and Insurance (5%)
• [Disclaimer: this is not a recommendation, check your risk profile & other parameters first]

In India buying a house is seen as a lifetime investment. It is an emotional decision to buy a house. However, the millennial's mindset is now somewhat different from their previous generation. The youth today want to stay away from buying a house and rather like to live in a rented one. They want more liberty so as to move across geographically anytime without worrying about the property and also to be free from the burden of EMI.