Tuesday, May 5, 2015

Buying or renting a house: Some things you should consider

We all want a house of our own. But, knowing that it involves big bucks, we are left with the choice between buying a house and taking one on rent. It can never be an easy decision to arrive at. Few people may argue that staying on rent is equivalent to throwing the money down the drain, when the same amount can be utilised for a home loan, which can help build life's biggest asset. However some may see the logic in the flexibility that renting can offer like being able to choose the location,  proximity to workplace or, just the requirement for a bigger house, things that one may not be able to afford otherwise.
Though there are compelling arguments in favor of both buying and renting a house, but the decision will depend an following aspects. This article will try to help you get the answers to this  most baffling question, whether you should rent or buy?
Life always gives you options and on few occasions, one option will stands out from the others But, at times the options in hand are simply too complex to choose immediately. This requires one to go into  deep analysis from all sides and look at all the options available in hand before a making a decision.
Now coming to the scenario we are talking about, that is whether to buy a house or rent a house. Speaking logically, buying a house would be the best option especially when you are young and even if it means paying EMIs for several years.
Now this raises several questions like  how can this compare to renting a house or what if one can rents a house for a lesser amount, much less than the Home loan EMI, and that difference can be between the rent one pays and the EMI can be invested in many financial instruments and be let to grow to buy a house later. And some might think that how does the idea of owning a house would mean financially or is it just a matter of security?
Now to answer these questions we need to look into two scenarios.
Scenario 1 is that you buy a house today. And the basic steps would be to make a down payment, then take a home loan and later on pay EMIs for next 20 years of the remaining amount. And after 20 years the house is yours. Also one can keep living in the house as well. Simple isn't it?
Now let us see scenario 2 that is to rent a house today, and then buy it later. In this one will have to pay a rental deposit, and then pay rent every month which is less than the EMI that one would have paid on taking a home loan. Then, that difference be invested in various financial instruments and allowed to grow say for 20 years and then one can buy a house from the investments that gets accumulated. Sounds logical?
Since both the scenarios seems somewhat logical so how to choose now and why?
Buying a house does make financial sense, especially for the reason that it will be an asset that will keep appreciating in its value.
But there certain factors too like income tax on EMIs for home loans and HRA for rental purposes which could be the same. However, the rental deposit that would pay will be returned to you without any interest when you vacate a rental premises and this could actually work in favor of buying a house.
So let us take you through the things to consider before deciding to buy a house:
  1. The return on your investment should be decide if the one should put money in a bank or invest in a house.
  2. Your financial position should be taking into consideration. If one earns Rs 1 lakh/pm, they are entitled for a loan of Rs 40-50 lakh for tenure of 20 years. But if the monthly expenditure is less than your salary minus equated monthly installment (EMI) towards the home loan. That is not all, as one will have to shell out 20 per cent of the cost of the house upfront, which for a Rs 50 lakh house is Rs 10 lakh. Ideally, you should set aside four-six months of salary (Rs 4-6 lakh) as contingency fund. Lastly, there should be some surplus after paying the monthly EMI and household expenditure, so as to cover your investment needs and any immediate rise in interest rates. Only when one can fulfill these minimum conditions, can they buy a house.
  3. Home loans are for long tenures, hence banks do not give home loans without thoroughly checking your employment record. So, it’s better to rent if you are not sure about your employment prospects.
  4. Keep track of economic cycles. As buying when the economy is turning around gives a  buffer of 4 to 5 years at the least. So, be on the look out of the job market starts that is when are they picking up and when the stock markets are rising as equities are a lead indicator of the economy. Also, monitor the interest rate cycle as that is an uncertain component in EMI.
  5. Lastly, it is difficult to dispose a house quickly because of the large amount of capital employed. Hence, it is always better to invest in areas with basic infrastructure in place like Good roads, malls, parks and schools, Furthermore ensure appreciation in your property.
Hope this helps in solving your dilemma. Do post your comments below to let us know if it helped.

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