"Hey! We are looking to buy a house in Bangalore. We feel the rent we are paying (Rs. 30,000) is like a dead money. We just keep paying it month after month but there is no benefit to it. Instead, we will pay that amount towards the EMI for the house loan. At least, we will have a house of our own."
This is exactly what one of my coworkers told me recently. And this is exactly what many of us believe. We feel paying out EMI instead of the rents would be financially more beneficial. I believed in it too.
In this blog, we will see if this hypothesis holds true and what would be a better option for us – to rent? Or to buy?
Let us assume you go ahead and start looking out for a property. You would preferably want to buy a 3 BHK house which not only caters to your current needs (when your parents/ relatives/ friends come in) but also the future needs (when you have children). A typical 3 BHK house can cost anywhere between 70 Lakhs – 1.5 Cr depending on the premium and the location. For today’s calculation let us consider a house worth 1.2 Cr. If you happen to take 1 Cr loan from the bank (remaining from your pocket) at 8% per annum, you would have to pay close to Rs. 85,000 per month for 20 Years in EMI.
Scenario 1 - If EMI is too high to pay on monthly basis:
You will have to reduce the budget of your house. Let us assume, you look for house at around 60 Lakhs and you take 50 Lakhs of loan from the bank (Bank typically gives 75% - 90% of the house value as loan). For 50 Lakhs of loan, you would have to pay 42,500 for 20 years. You can reduce the EMI further by increasing the tenure.
Scenario 2 – Change in Job/ job location:
Let us say you found a beautiful property in Sarjapur. It is right next to your workplace. A year later, you get a good offer from another company. The only problem is that your new office is now in Yelahanka (or somewhere farther from your house). You do not have a choice to shift to a different house that is closer to your workplace. You will have to to travel as and when you would need to go to office. May be your current organization doesn’t ask you to visit your office daily. But we never know what your new company would really ask for with this constantly changing organizational decisions.
Even worse, if your new job location is in a different city – say Mumbai/ NCR or may be an onsite. What do you do with your property? You either have to drop the offer or give the house on rent.
Scenario 3 – Renting the new house:
Typically, rental yield in Bangalore is around 5%. This is higher compared to rental yields in other parts of the country (Mumbai: 4%; Noida: 2.5%; Pune: 3%; Chennai: 4%). Considering a high yield of 5%, your 1 Cr house will fetch you a rent of ~42k per month while you pay an EMI of about 80k. On top, consider vacancy time of a few months once in a while where you would not be getting any rent while you still have to pay the EMI. Adding to this, you would still have to pay rent at your new location.
Scenario 4 – Cost of Maintenance:
We tend to ignore the cost of property tax, monthly maintenance charges, sinking fund charges, repair charges, etc. while we make the decision of buying a house. These costs add to your bills and it needs to be considered.
Scenario 5 – After 20 years of ownership:
The big positive change here is that you would have probably closed your loan or at least reduced it to a great extent. You are almost owning this property entirely by yourself (previously bank held the papers and unless you pay the EMI promptly, they can choose to sell the house and pocket the money). The value of your house might also have appreciated well.
But... the problems –
You can not be really sure if you would've stayed in the property for the entire 20 years.
The EMI might’ve forced you to forgo a lot of other investment opportunities or save for your child’s higher education.
You might’ve dropped a few good opportunities as you were locked in with the house.
You might’ve dropped a plan to start your own business as you would have had to find a source to pay your monthly EMI.
Your house is now 20 years old – Older design, older technology, older architecture.
Alternate Choice – Rent:
What happens if you scrap the whole idea of buying a house and instead rent? Simple, you have to shell out that 30k every month. The advantage of doing this is that you now no longer have to worry about your job change. You can choose to rent a place much closer to your workplace, no cost of maintenance and also pay lower on monthly basis. You can find a good 70-80 Lakh home for 30k - 35k rent per month at a good locality. Agreed, you need to bear the trouble of finding a new house and shift, but you need to do that only if required and it doesn’t stop you from exploring opportunities.
Now, is the 30k rent really a dead money?
Not really! Think of it this way. If you owned the house, you had to pay the EMI of 80k. Instead, you now have to pay the rent of 30k. Let us assume, you invest 30k (of the remaining 50k) in a basic mutual fund that gives a return on 12% on an average for next 20 years. That amount would be a corpus of 3Cr by the end of 20 years. Remember, you have invested only 30k. You still have the 20k buffer which you would otherwise pay in EMI. You can use this money to buy the property you desire, when you are closing your retirement age and you are quite certain on how your future is going to span.
Having said this, life can not be lived based on the excel sheet or pen and paper. There are situations when buying a house is necessary or makes more sense. Like in cases where you and your parents live in a rented place and they've always dreamed of living in their own space. It is as much necessary as much as it is your duty to gift them a house for everything that they have done for you. Or in cases where you know for certainty that you would continue to live in a particular place.
Bottom line is buying a house is an emotional choice. And it needs to be considered as an emotional decision. We try to justify it by giving it different explanations. It is best to be entirely sure of what your future holds and a sound financial position before buying a house. It is best to stay relived from all the tensions and energy that you would carry with buying a house. Renting will be much simpler choice at the start of our career and you can plan your dream house as and when you grow older. Now is not the time for you to pull yourselves too thin. Go out and explore. 😊
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