Should you BUY or RENT a House – Which is better?
When you are in school, there it was taught that human being has 3 basic necessities- Food, Clothing and Shelter. You need a house for shelter but it is most common query whether to Buy or Rent a House. This question comes when you decided either to Buy a House by taking Loan or you should live in Rented house? This decision depends on certain factors, once you understand that factors it will be easily for you to take decision. Let’s understand it in detail-
Arguments in favor of Buying a house:
- If you own a house you have a sense of security and satisfaction of having your own house.
- You don’t have to pay any land lord and have no feeling that you are filling pockets of any third party.
- It is a long term investment as value of House will appreciate in future.
- You can arrange your house as per your need, there is no intervention of any third party.
Arguments in favor of Renting a house:
- If you rent a house- it is cheaper as rental cost is far less than interest on home loan.
- The money you saved from EMIs can be invested in other assets like Mutual funds and Stock market that have good potential to grow your capital.
- If you take Home loan then you are borrowing money and giving rent on that borrowed money as an interest, so it is mirage that you are saving the rent.
- There is a NO load on your head that you have borrowings or loan and you can sleep peacefully.
When you see these arguments, in both cases it seems to be correct. So what you should do? First see which side of arguments are more appealing to you. If you have the answer, you have already made your mind. But if you are still in confusion then you need to think it from 2 angles- First is Financial angle and Second is Emotional angle-
1. Financial Angle: From this angle decision is little bit easy as you can calculate everything on excel and see which is better for you. Below is SS of excel where all factors from financial angle are included-
The above calculation is for 15 years. Where your rent is Rs. 15000 and you are falling in 20% of tax bracket. The cost of the House is assumed to be Rs.50 lakhs and down payment is 15% and interest on Home loan is considered as 8%. In this case, you clearly see the RENT is good but now consider the case below-
Here if you are paying rent of Rs. 20000 and if you get rate of return around 10% (post taxed returns). Clearly Buying is better option for you.
So financially all factors mentioned in excel impact you decision. You can download this excel here and fill all the entries as per your situation and see which is better option for you.
If this excel has given you a direction where you should go, now you have to consider the second emotional angle for Buying or Renting your House.
2. Emotional Angle: Let’s suppose in excel after filling entries it has come, you should RENT your house. But you are emotionally attached that you need your own House. You should consider this Emotional Angle too; because Humans are not Machine who can work on outcome of excel. Same way if your excel calculation showing you should Buy the house but you are not comfortable in living with headache of Loan, you should also consider this angle.
The Thumb rule: Consider 60% of emotional angle and 40% of financial angle and go ahead with your decision.
Pro TIP: If you are a person who knows about investment and knows how to invest in appreciating assets, then you should go for RENT the House and invest that savings in good assets like Stock market and Mutual Funds. But if you are person who do not know about investments and you have tendency to spend money if money is available to you in liquid then you should BUY the house as it will block your money and you will do forced investments.
Final Words: Buying or Renting a house is depends on personal choice and differ from individual situation. Just think on all angles and then take a wise decision.