Portfolio

Rent or buy: What makes better financial sense?

Sousthav Chakrabarty | Updated on November 27, 2019 Published on November 27, 2019

Moneywise, it’s better to rent a house and invest in SIPs than to buy one and pay hefty EMIs

Last week, at my friend Ravish’s birthday party, I met one of his close friends, Aayaan Bhatnagar. We spoke about our respective professions. Aayaan and his wife work for an IT MNC in Bengaluru.

Being a finance professional, my conversation veered to personal finance, and we touched upon a few aspects of it. Here, I will share my views on a question that I answered him in detail: is it better to live in a rented house for 20 years and start mutual fund SIPs, or buy a property with a home loan to be repaid over 20 years?

Most Indians are raised with the mindset that owning a home is the ultimate financial goal. Though a lot of emotions are attached to the home we own and live in, staying in a rented property is often not a bad option. Let’s take a holistic view on both the options.

Option 1: Buy a house

Going by the trend in several places, it is safe to assume that property prices will increase at 8 per cent per annum over the next 20 years. Currently, you can get a home loan at 8.5 per cent interest for 20 years.

Current home price: ₹90,00,000

Future home price: ₹4,19,48,614

EMI per month: ₹78,104

Total EMI paid over 20 years: ₹1,87,44,960

 

Pros and cons of buying

There is no denying that the feeling when you own a house cannot be compared to that of staying in a rented house. But, when we look at the financial aspects, there are several points to focus on. A major plus in buying is the tax benefit on the principal and interest paid on home loans.

Among the disadvantages of house ownership is the pain involved in selling the property if we move to a new place. Then there is the feeling of being ‘stuck’ at one place and sacrificing career opportunities in other places. Also, one can’t be sure one will reside permanently in a city.

Option 2: Rent a house, start SIP

Through a systematic investment plan (SIP), one can invest a small amount in mutual funds at monthly or quarterly intervals. What makes SIP a good investment option is the flexibility in choosing the frequency and amount. Every month/quarter, a specific amount (decided by the investor at the start of the SIP) is deducted from the investor’s bank account and invested in the chosen MF scheme. The investor is then allotted units of the scheme per its NAV, or net asset value.

As the investment amount is broken into equal instalments, the market’s ups and downs are averaged out. The investor can redeem the units or switch to another scheme. However, some MFs might have a specified lock-in period.

In the second option, let’s say the rent is ₹25,000 per month. The future SIP value is calculated keeping the monthly SIP contribution and rent amount in mind. The SIP return value is calculated at 12 per cent per annum.

Rent amount: ₹25,000

SIP amount: ₹53,104

Future SIP value: ₹5,30,58,751

Pros and cons of renting

If you are staying in a rented house, you can easily move from one place to another, whether within the city or outside it, for better career opportunities. There is no tension involved in selling the house. Besides, there is a tax break on HRA (house rent allowance) if an employed individual pays rent. Even if the person is not a salaried individual, there is a tax break, though smaller.

The flipside with renting a house is that you do not, at the end of the day, own a house.

Verdict

After a careful analysis, we can say that both options have their positives and negatives.

However, it is better to pay rent and start an SIP as, after 20 years, the SIP value will be around ₹5.3 crore. On the other hand, the value of the property bought on loan will be around ₹4 crore, wherein, one would have paid around ₹1 crore just in interest payout (total home loan minus total EMI amount paid over 20 years).

We have taken the monthly rent amount at a constant of ₹25,000 for 20 years (generally, home rent keeps on increasing on an annual basis).On the other hand, the monthly SIP amount can be increased over time as, with a gradual increase in salary, the investor will keep having a surplus to invest in MFs.

The author is co-founder and CEO of Capital Quotient, a SEBI-certified financial advisory firm

Published on November 27, 2019
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.