Ownership of House Vs Rental stay…..

There is a big debate when it comes to making a decision pertaining to House. Some believe owning a house is best thing to do, while few others feel staying on a rental flat is better.  If you are in the same dilemma this post will shed some light in helping you make an informed decision.

Let us first take a look at what happens when you buy a flat?

The first thing is how you want to buy this flat, meaning from own funds fully or will you be taking a loan? If own funds then there is not much to think go ahead and just buy it. However, if you are planning to raise a loan then you need to consider the following:

·         What will be the quantum of loan?

·         Whether your income supports this quantum?

·         What will be the loan tenure?

·         Will this be your last property purchase for self-use or is it the first?

Why above questions are important to answer, you will find out soon…

Typically it is observed that if you are buying 1^st property at an early age you probably do not have very high income to take up a 2 BHK apartment and hence will settle for 1 BHK flat. Over a period of time your income rises and so is the family… right? Now with this surplus income you are in a better position to move in a 2 BHK apartment. So in say 5-7 years you probably will sell your 1 BHK. After clearing the outstanding loan if any, the balance amount you will utilize to make down payment for new 2 BHK flat. This flat is also bought on loan most likely. If yes, you are again under burden of loan. As the flat is big so will be the EMI, property tax, maintenance and other related expenses.  In some cases people go a step ahead and buy 3BHK or 4 BHK after another 5-7 years. Typically this will be your last property for self-use, as you may be in your late 50’s or sixties.

Now, if you analyze the above scenario you will notice that in about 15-20 years of time horizon you change anywhere between 2- 3 houses. All the houses were bought on loan. Since in former years of loan most of the EMI (Equated Monthly Installment) goes towards interest payments you end up paying only interest in first 5-7 years. Not to forget the amounts you had spent on registration and stamp duty, and other relevant taxes, maintenance which you paid for the society, property taxes, and repairs and renovation and interior decoration if you did any. When you sell the property the money spend on these never comes back only property appreciation is what you get. One major change which happens during this phase is that children are growing and maybe after education will take up job and move out. Now only you and your partner is left out in this big 3 or 4 BHK. So now this big house is too big for just 2 people.

What happens when you stay on rent?

The rent amount is always less than the EMI amount. For e.g. if you decide to stay in a decent society in 1 BHK and if you decide to buy, you may end up paying about say Rs.38, 000/- as an EMI plus maintenance and property tax, etc. So typically if the cost of the flat is say rupees fifty lakhs, then close to 15 lakhs goes towards down payment and Stamp duty and registration charges. Whereas the same flat in same society will be available for a monthly rental of about Rs.12, 000/-You end up saving about Rs. 30,000/- every month. Start an SIP of this amount, and increase it over period of time as your earnings grow and as long as you wish to stay on rent.

When you stay on rent there is always a concern about changing the flat every 11 months, yes?

Well this is really not as big a concern as you may think. Why? Most of the investors buy flat for rental incomes. These investors are cash rich and may not be looking forward to sell their flat any time soon. Also these investors are open to enter into 33 months to 55 months of rent agreement. This helps you both in saving the cost of brokerage payment every year. The brokerage is paid only once in 55 months. Yes the rent increases typically by 10% every 11 months but then you do not have the burden of EMI. As your family size and income grows you may at any time decide to move to a bigger flat. When your responsibilities towards yours kid’s education and marriage is over they probably will move out and would like to stay on their own maybe in same city, or any other location depending upon their job placement.  Now when only you and your partner are left behind you may take a call how big a flat you people actually need, and take decision accordingly.

As mentioned earlier should you had invested the balance amounts available since no EMI’s were paid over these years, you will have enough corpus to buy the desired property from your own funds. The other benefit of this is you get upper hand in negotiations since you have the capacity to pay the entire amount in one single go J

So give some careful thought to the above two scenarios if you are looking forward towards making a decision of owning or renting a property. See which of the above two makes more sense to you based on your current financial position and family requirements, and just go ahead with your decision.