Here are tips on whether you should buy a home or live on rent?:
To own it or not, that’s the question!
Here I refer to the constant dilemma that Indians are facing. It’s about owning a home or living on rent.
Owning a home is like a dream come true. You get to live the life to the fullest. But the overall costs associated with it are quite enormous. If living on rent is considered an option, then it has its share of pros and cons.
Even from the investment angle, amongst all the asset classes, real estate has remained the preferred one among Indian investors. But NHB housing price index reveals that real estate ain’t as good an investment as it used to be.
What should you do then?
Should you own a home considering it as an asset; or live on rent because it’s more of a liability?
Read on to acquire a perspective.
Why owning a home is lucrative proposition?
1. From emotional perspective
Since the time you get into a job, you have a dream to own a home. There are psychological perks associated with owning a home.
Nothing beats the warmth of own home. At the end of the day, that’s the place you want to end up. You spend quality time with your families and build memories. Even the most expensive of rented apartments or villa cannot give you the same comfort.
Additionally, you get a sense of ownership and pride associated with owning a home. It ultimately adds to your status in the society. Over a period, you develop an attachment to this tangible asset.
Then comes the case of security. As individuals, each one of us seeks the peace of mind and security. A rented home cannot give you all that. There’s a constant insecurity and instability in life.
Whether you would be able to pay the rent or not? How would you manage the constant escalations in the rent by the owner?
Moreover, in some cases, the landlord may impose restrictions and covenants on the usage of the property and other attached amenities. It curbs your freedom that you would enjoy in own home.
2. From retirement planning perspective
Each one of us dreams of a comfortable and resourceful retirement. As you approach retirement, you endeavour towards paying off all debts and asset creation.
Owning a home can be a significant step in this direction. When you buy a home, you create an asset that will stay intact for substantially long-term. Even in case of a home loan, the EMIs you pay aren’t waste of money.
It is ultimately going towards building an asset for the future. With EMIs, you get the advantage of tax-efficiency and leverage. With a marginal down-payment from your end, you get to create a high-value asset using debt.
The equity generated in own house confer financial security upon you after retirement. You may use it as a reverse mortgage to substantiate your post-retirement income.
Under reverse mortgage loan enabled annuity (RMLeA), you mortgage your house with the bank. Bank calculates the loan amount and purchases annuity from a life insurer. The life insurer calculates the annuity payments; which you receive throughout your life.
Why owning a home isn’t a lucrative proposition?
1. Better investment alternatives
Investors in India are obsessed with real estate investments. They admire it as the highest return generating asset; even more than equity investments. In reality, that’s not true. The numbers reflect a different story.
Take the instance of Rajesh Khanna’s, a Bollywood actor, Mumbai property which delivered a pre-tax return of 15.63%. If you compare this to equities, Sensex grew at CAGR of 15.60%. Although the difference between the two havens might look negligible at 0.03%; but it’s not a universal phenomenon.
Real estate returns are dependent on factors like market conditions, property location, circle rates, the condition of the house, etc. Leaving aside the case of premium properties, every other property won’t give you similar post-tax returns.
Hence, you need to tone down your love for real estate; start exploring other asset classes.
Equity mutual funds have evolved as a promising asset class over the years. The average post-tax returns lie around 12%. Within these, small-caps & mid-cap funds can perform even better, in case you have higher risk appetite.
2. From affordability perspective
Compared to all asset classes, housing property incurs the highest maintenance cost. You may call it a money guzzler.
A look at the expenditure done to keep a house in good shape makes it more a liability than an asset. It starts from the time you purchase a house. You need to make a huge down-payment, home loan EMIs, registration-fee and stamp duty. Apart from these, there are recurring expenditures by way of property taxes, repairs and maintenance.
Try avoiding these maintenance costs for half a decade, and your home will look like a haunted house with a substantial loss in value. These charges are just unavoidable. You can’t escape them at any cost.
Instead, if you live in a rented house, things are pretty less complicated. Especially in case of luxurious properties, the thought of buying can drill deep holes in your pocket. Compared to that, the monthly rent would be quite affordable. And the best part is; you get to enjoy all the luxurious amenities around.
How to go about it then?
Whether you should own a home or not is very circumstantial and subjective. But you can make a decision using these thumb rules.
Rented home is good for you if you keep changing cities owing to frequent job changes and transfers. Moreover, if your current income can’t afford huge EMIs then wait till the income grows.
Buying a home is your thing if you have got stability in your career; you aren’t planning any further relocation. Additionally, you are earning good enough to service the EMIs and shoulder the recurring maintenance.
Owning one home could be a wise decision. But going for a second or third home would be an expensive affair. Ensure that you have enough cash flows to take care of home-associated expense. Don’t let the home loan EMI prevent you from saving for retirement.