What's the smarter choice — to buy a flat or rent one?

Owning a home provides long-term stability and a sense of security for raising a family, particularly in cities where property values are likely to appreciate.

When Rajesh Mallya, 48, Senior Vice-President at an education solutions firm, moved to Mumbai from Bengaluru in 2014, he decided to rent an apartment, like many others who relocate for better career prospects. Subsequently, however, instead of  continuing to spend around Rs 35,000 a  month on rent, he decided to buy a flat and settle down in Mumbai for good with his family.

Mallya explains that he chose to settle in Mumbai because of the city's superior career prospects and quality educational institutions (for his son). Additionally, his family sought to create an asset and own a property in the city. The decision involved a significant financial commitment, as his Rs 60-lakh home loan translated to a hefty EMI (equated monthly instalment) of nearly Rs 60,000.

On the other hand, Rishi Arya, a 38-year-old MNC executive in Vadodara, has been residing in the same rented flat for the past decade. He says he has consciously chosen to continue to rent instead of buying a flat.

"Purchasing a house at this time would mean directing a significant portion of my salary towards EMIs. So, I feel paying rent of Rs 18,000 is a better option at present,” says Arya.

While it's often a hot topic of debate, whether to rent or buy  a flat is an intensely personal decision — individuals need to take the call based on where they work, their commute, long-term plans on whether they intend to relocate or live in the same location, affordability, home loan eligibility, etc. Then, there are intangible parameters like a sense of belonging, stability, and freedom that an owned apartment can provide.

It's also crucial to weigh these factors against the current market landscape, characterised by high interest rates and rentals in certain areas, and then make a well-informed decision.

Sameer Shah, a 48-year-old insurance advisor from Nashik, owned a house till 2022, when he decided to sell the property to take advantage of the appreciation in real estate prices. He had purchased the flat in 2019 for Rs 55 lakh and sold it for Rs 1.25 crore, clocking 127 percent returns. He used the proceeds to pay off his loan and invested around Rs 90 lakh in equity and mutual funds.

Shah does not intend to buy another flat for at least five years. “Paying a monthly rent of Rs 12,000 is much more manageable than EMIs of around Rs 40,000,” he adds.

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Factors to consider

According to Ravi Shankar Singh, Managing Director, Residential Transaction Services, Colliers India, when considering the long-term implications of rent versus buy, it's essential to factor in the dynamics of both options. While rents tend to escalate annually, interest rates fluctuate with a repo rate hike or cut, which can increase or decrease the EMI outgo.

Given a loan tenure of 20-25 years, it's crucial to weigh the options carefully. Rental yields in India range from 2.5-4.5 percent of the market rate of the property, while bank interest rates start from 8.10 percent per annum, linked to the credit profile of the borrower.

“Owning a home provides long-term stability and a sense of security for raising a family, particularly in cities where property values are likely to appreciate,” says Sudhanshu Mishra, Principal, Partner Square Yards. Renting, however, offers flexibility when relocating for better career or educational opportunities, he added.

Ultimately, the decision will boil down to your personal, career, and financial goals.

For instance, Arya is uncertain about his long-term stay in Vadodara, and buying a property would limit his liquidity in case of an urgent need for funds. So he prefers to stay on rent.

“However, if one is looking for a home for personal use with a long-time horizon, they should buy because one cannot predict the price rise accurately,” says Singh. Many intend to buy a house eventually, but want to wait until they have created a large enough corpus that will reduce their loan requirement.

Mishra advises those intending to purchase flats to evaluate their loan eligibility, compare home loan interest rates, and  find out the maintenance costs.

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Building a corpus

Arya’s goal is to purchase a flat with his savings in the future, once he's decided on a city to settle in, thereby avoiding the burden of a home loan and interest payments. Similarly, Shah's long-term aspiration is to buy a flat using the appreciated value of his investments, allowing him to achieve his dream without incurring debt or interest expenses.

“The residential real estate market has witnessed a bull run in the last three years. We have seen prices almost double in this period because of the pent-up pre-covid demand,” explained Singh.

Anuj Kesarwani, Founder,  Zenith Finserve, explains the financial implications of buy versus rent through a hypothetical scenario involving two individuals, Raj and Vijay, who have identical salaries of Rs 10 lakh in 2016.

Assume that Raj decides to purchase a Rs 43 lakh-house with a 20 percent down payment and a 20-year loan at 8.5 percent interest. But Vijay chooses to rent a similar house for Rs 25,000 per month and invests his savings in equity mutual funds through the SIP route, earning 12 percent annualised returns.

According to Kesarwani’s calculations, Vijay's decision to rent and invest would have enabled him to accumulate enough monies to buy the house outright in 13 years and five months. On the other hand, Raj's decision to buy with a loan would result in a gross cost of Rs 80 lakh, including Rs 37.25 lakh in interest, over the 20-year loan tenure.

According to Kesarwani, "This underscores the importance of considering all costs, including interest and tax implications, when deciding whether to buy or rent a house. It is important that individuals have diversified investments, such as  equity mutual fund SIPs, to achieve long-term financial objectives. At the same time, you will also have to consider the implications of waiting for, say, 13 years to own a place that can offer you stability and a sense of belonging, both of which cannot be measured solely in financial terms.''

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Which option is right for you?

Mishra presents an alternative perspective through another illustration. Consider a property worth Rs 1 crore, which can be rented for Rs 22,000 per month with a two-month security deposit of Rs 44,000. To buy this property, a 25 percent down payment (Rs 25 lakh) is required, followed by a 20-year home loan of Rs 75 lakh at an interest rate of 8.5-10 percent. This translates into a monthly EMI of Rs 65,000-70,000, coming to a total repayment of  over Rs 1.60 crore over the 20-year period.

In contrast, renting the same property would result in a total rent outflow of approximately Rs 1.61 crore over 20 years, considering an annual rent increase of around 8-10 percent. Although the initial cost of renting is significantly lower (Rs 44,000 security deposit), the long-term costs of renting and buying are similar.

Buying requires higher upfront costs but allows you to build equity in a property that may appreciate, creating an asset. Renting offers flexibility, lower monthly costs, and the opportunity to invest the difference between the rent and the EMI in other financial instruments, potentially generating higher returns.

The decision to buy or rent also depends on one's risk tolerance and lifestyle preferences.