Rent or Buy? Here’s a solution to end the debate once and for all

Should you Rent or should you Buy? That is the perpetual debate in India’s housing market.

Should you Rent or should you Buy? That is the perpetual debate in India’s housing market. There are several repetitive but powerful arguments on both sides. At its core the benefit of renting is that in a market like India, the cost is a third of an EMI. On the other hand, the key contention to buy is that an owned home provides an anchor and a feeling that no other purchase can match.

The loudest proponents of renting a home are the ones who can’t afford to buy a home while the loudest proponents of buying a home are the ones who have already bought one. I must confess I don’t have a hardline position in this Rent vs Buy debate. It is a very personal decision. Even for the same person, the perspective changes depending on the age and stage of the individual. A younger person may want flexibility and would prefer to rent. An older person may want stability and would lean towards buying.

My view is that while the debate is on Renting vs Buying, the solution really is on Renting before Buying. No one buys a car before a test drive. Then why treat a purchase that can be 10x bigger without that experience.

It is not an uncommon pattern in the western world. In fact, the most famous believer of this strategy is probably former US President Barack Obama. Irrespective of his polarising political tenure, there is unanimity that the man was erudite with an extraordinary sense of risk-reward understanding.

How did he apply that to his housing? Despite his monumental personal wealth, he behaved cautiously in his selection. He rented a house until he was certain. After exiting the White House in January 2017, he lived on rent in an 8BHK house for almost six months before buying that same house for over $8 million.

He followed a similar pattern in 2019 when he rented for a few weeks and then bought a luxurious 29-acre estate for almost $12 million.

It is a phenomenon that is at a very nascent stage in a market like India. There are valid reasons for it. The simple reason is that the economics don’t add up. EMI is 3x the rent for the same apartment. Hence a person who can afford to Rent at a particular location cannot buy in that same location.

But there is a deeper cultural issue as well at extreme segments of the home buyer audience. The affordable housing consumer usually believes that renting is a waste of money. Even if he doesn't believe it, his community will guide him towards ownership. That often means taking a bold gamble by buying an under-construction project as there is a disproportionate price premium for a completed project in a market like India.

In the ultra-luxury homebuyer segment, they tend to do it at advanced stages of the project completion or at completion to avoid any scope for disappointment. They want to be the first ‘user’ of an apartment in a new project.

Moreover in the top league, they don't want to be seen as staying on rent. The affordable buyer wants to own a house for gaining community acceptance while the luxury homebuyer doesn’t want to Rent a house for fear of losing societal status.

It is in the upper-housing level that the phenomenon of Renting Before Buying is gaining maximum traction. This is the audience renting in gated communities with several buildings and amenities. They explore the experience, society and gentry first. When they are satisfied and finances are in order, they make the shift from Renting to Buying in that very same project by taking an arguably informed and rational decision. This is the segment that works with the least baggage of culture or status.

I am certain that we will see this trend accelerate further in the upper segment of real estate with the rise of gated communities and decline of standalone buildings. But I suspect this trend will see slower adoption in other segments.

It is said that the fee charged by Obama for a single speech at a major corporate event is a whopping INR 3 crore. Yet, he is measured and cold-blooded when deciding on his housing. Why shouldn’t everyone be like him?