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Should I buy a flat or rent one?

Real estate investments have caught everyone’s attention in the past decade and everyone with 5-10 lacs salary has tried to buy Rs 40 lacs flat. Buying a house has always been considered as a good decision by our forefathers. However, time has changed and now the theory of our forefathers does not hold good. Real estate as an asset class gave lacklustre performance from 1994-2004 and from 2009 onwards the prices of real estate have declined by 30%.

So that leaves us with question whether you should buy a home or rent one. Like any other asset class real estate has also delivered returns based on the economic cycle. If you have funds and the real estate market is down, I would suggest you can evaluate buying a house at a good bargain. If you want to buy for investment it’s better to wait and analyse the economic data. If there are signals of economic recovery you may buy real estate for investment purpose.

Interest on home mortgages is deductible, which sounds good but is usually overrated. Yes, it’s deductible but the deductibility doesn’t offset the fact that you are paying someone interest. It’s an expense, and you are worse off because of it. It may be worthwhile, all things considered, but it’s still an expense.

When you rent, the landlord picks up the taxes, insurance, maintenance and sometimes utilities. If you buy, plan on replacing the water taps one year, the flooring during another year, etc etc. Hope that you don’t need to replace all of them the same year.

Most people thinking about buying compare monthly payments to rent, which is a good starting point. However, some of that monthly payment goes to principal. It’s like saving. To put buying on a level playing field with renting, look at just the part of the monthly payment that will go to interest.

Transaction costs are large in housing. Real estate agents charge one to two percent commission on sales, which will make moving expensive. You can sell the house yourself, but keep in mind that it’s a lot of work and your house may not be exposed to as many buyers, reducing the price you can get for it. This argues against buying unless you are confident you want to stay in the house for several years, preferably even longer.

Renters should keep in mind that they do not control their housing destiny. If the landlord decides to sell the property, you’ll be looking for a new home. The landlord can also raise the rent at the end of the lease. The landlord can also decide not to rent to you, though that’s rare for people who are well behaved.

One of the benefits of owning a house is the ability to do with it what you want. When your daughter wants her bedroom walls red, you can be the cool parents and change the color of the wall. You can build a bar counter in the living room and have toilets in any color of the rainbow.

Owning a house gives you some flexibility, but also requires flexibility. When you get a bonus from work, you can upgrade your housing by adding a hot tub. Renters don’t have that option. When you lose your job, you can defer replacing the carpet.

At the end, we recommend running the numbers as best you can, then asking yourself if buying or renting is worth the cost.

 

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