Should you buy or rent a property?

Should you rent or buy an apartment?

Rishabh lives on rent in Vasai, a suburb north of Mumbai, where he shells out  rent of Rs 9,000 for a one-bedroom flat. His commute to office in Powai takes more than an hour.

His plan for the next few years is to continue living on rent because he hasn’t saved enough to pay an equated monthly instalment of about Rs 25,000 for a Rs 40 lakh one-bedroom unit in Vasai, after depositing at least 20 percent upfront.

“If I buy a house now, I will end up spending a major portion of my salary in servicing my EMI and hence the decision to continue staying on rent,” he told Moneycontrol.

Lara Shukla is 28 years old and lives in a two-bedroom apartment in Noida, near New Delhi. She pays almost Rs 28,000 as rent and maintenance every month. She moved two months ago from a society where she paid Rs 14,000.

“We decided to upgrade to a housing society with better facilities just about 2 km away and the maintenance amount is Rs 5,000 per month,” she explained.

Asked if she would continue to stay on rent or purchase an apartment later, she said her budget is Rs 50 lakh, but making the downpayment is the big hurdle.

“It’s been difficult moving houses all these years. The biggest challenge has been finding a clean and liveable apartment on rent. I am looking around for options to buy, but don’t have the corpus for downpayment yet,” she said.

So, should you rent or buy an apartment? The most important factors in deciding this is one’s budget and the availability of ready finance. Remember, interest rates are high and so are rentals in some markets.

The Math

An apartment worth Rs 2 crore in a Mumbai suburb with a rental yield of about 2 percent per annum would cost Rs 4 lakh per year, or over Rs 33,300 a month, in rent. Renting the same apartment for years may result in paying out Rs 2 crore over 50 years instead of shelling out the entire amount in one go.

Even assuming a 5 percent rental escalation every year, one will have 25-26 years to pay the equivalent of the lumpsum amount that a homebuyer would need to pay now, according to Abhishek Kiran Gupta, CEO of CRE Matrix, a real estate analytics firm.

Gupta said most homebuyers opt for home loans, which significantly adds to the cost of ownership and if one were to account for the interest cost as part of overall home ownership cost, the period would rise to 30-35 years of rental outgo.

“There’s also the added advantage of mobility. You can move homes across cities at the drop of a hat. This is the prime reason why millennials and GenZ prefer to rent houses… Having said that, if the emotional attribute of owning a house weighs heavy on the family, then the purchase becomes necessary,” said Gupta.

The other school of thought believes it is better to buy an apartment if you have the funds. A buyer could consider putting off a house purchase if prices in a micro market were to go down in the long run, but that hardly seems to be the case.

“In most micro markets across the country, both rentals as well as capital values are witnessing a growth trajectory,” said Pankaj Kapoor of Liases Foras. “Since there is an upside in property prices, it makes sense to own property. Sales across cities has grown by 3 to 4 percent over the last one year and there has been a robust new launches pipeline. Rentals too have shot through the roof in some cities, especially Bengaluru. It makes sense to buy rather than rent.”

Kapoor said rentals are a barometer of price productivity. An increase in rental yield means there is an upside in terms of capital values – therefore, an apt time to consider buying property.

“Catch the bus now if you have the means to buy property now, especially the reserves for downpayment,” said Pradeep Mishra of Homents Pvt Ltd.

In Gurgaon’s Dwarka Expressway area, rents that were at about Rs 20,000 per month for a two-bedroom flat before the pandemic now hover at about Rs 30,000 in an established society, depending on the amenities available. Capital values too have increased – from Rs 7,000 per square foot to Rs 12,000 per sq. ft in the secondary market.

“You may want to consider buying property if you are assured of regular cash flow, immediate funds to be paid as downpayment. Making quick money should not be the criteria because under the Real Estate (Regulation and Development) Act, a buyer may have to forfeit 10 percent if he intends to withdraw the booking,” Mishra explained.

There is price appreciation in both the rental and the capital market. Also, property transactions are taking place in new areas as well as in established areas.

“Property owners in established areas are upgrading to new projects with better facilities and those people wanting to buy their first home are considering options in existing areas as well as upcoming locations. There is healthy sales traction,” Mishra said.

Also, besides the funds available, a prospective buyer should also keep in mind the location of the project, distance from the workplace, amenities available, public transport, cost of living, pollution and crime levels, he added.

If you have decided to invest in property, estimate the total cost of ownership, including parking charges, stamp duty, registration charges, and interiors. Take into account the monthly maintenance charges that you may have to pay.

Make sure you keep three to four options open and don’t fixate on a single property. The golden rule is to explore. Of four properties you select, at least one developer or seller in the resale market will get back to you. The buyer should be willing to negotiate hard or walk away.