Is Renting Really Cheaper Than Buying?
Despite the fact that home loan interest rates are at a record low today, a large number of people are still toying with the idea of real estate investments rather than making a swift move. Why? One explanation for this is financial insecurity. Times are not really good. What if I lose my job? What if my business does not do well? Amid all these apprehensions, most stick to renting. Now, is that the right move?
Renting generally gives a feeling of lower liability, and that's true. In cities such as Gurgaon, Noida or Pune, you can rent a house worth Rs 50 lakh for only Rs 10,000-15,000 a month. At the same time, if you buy a home at the same cost, you have to shell out anywhere from Rs 30,000-32,000 as an EMI (equated monthly installment) on a home loan of Rs 45 lakh at interest of 8.4 per cent a year. That's double the amount of rent you pay.
There is another way to look at it. You can't live in a rented house forever. Even if you want to, your landlord may not let you do that. You can be asked to vacate the house for any reason and then you have to relocate to a new place bearing substantial waste of time, energy and money, of course.
Here is a case in point.
Mukesh Saini, 52, rented a 2BHK apartment at Rs 12,000 a month in Gurgaon's Sector 56 in 2010. His landlord increased the rent by 10 per cent every year. In a period of five years, the rental outflow touched Rs 20,000 a month. One fine day, his landlord asked him to pay either Rs 25,000 as rent or vacate the premises. Why? The Metro rail construction got completed in year 2016, boosting property prices and rentals.
Saini had no choice but to move to another locality. However, the average rentals at nearly all the locations were hovering at Rs 20,000-25,000, and he had no choice but to resort to a 2BHK builder-floor accommodation at Sector 45 for Rs 20,000 of monthly rent. He paid almost Rs 10 lakh as rent during these five years and got nothing in hand.
If he would have purchased that kind of a house at prevailing market prices of around Rs 50 lakh, he could have created an asset for his family. Today, the capital value of such properties in that location is recorded at Rs 70-90 lakh. Now, you can observe and analyse several such examples around you and decide what works better, renting or buying?
Also, renting a home is riskier and uncertain.
The notice period is usually one-two months. Even in the worst-case scenario, if you lose a source of income, your landlord may not bear with you for more than two-three months. Banks, on the other hand, can provide you with much more time in case you default on EMIs. Usually, banks give a reminder for the first three months when your EMIs are not paid. After that, they send a legal notice, and in case the EMIs are not continued during this period, they wait for three more months before declaring it a non-performing asset (NPA).
Considering your good track record with them, they can offer a moratorium period ranging 6-12 months or more, on a case-to-case basis. This way, you get more than a year to bring your finances in order and resume EMIs. Remember that auctioning a property is the last thing any bank or financial institution wants to do.
Nevertheless, as a property owner, you have much better options in hand than a tenant. If nothing works, you can consider selling your house and secure capital gains – and even that makes your financial position stronger than being a tenant.