To purchase a home is one of the biggest decisions that one makes in his/her life. This has always been confusing for a common man whether to buy a home or just rent it. There are various advantages of buying or purchasing the home. On the flip side disadvantages are also associated which sometimes provide renting a better option. The decision to whether to rent or buy a house usually depends on many factors such as your income, savings, stability of job or business in a particular city, rate of interest, housing stock, tax laws, your monthly cost of living, your personal and family cultural values and many more.
Listed below are the points which will help you in considering whether to take home on rent or buy it. Buying or Renting always varies from nation to nation, as the size and type of economy will govern its finance cost, housing stock, rent etc. In addition, it will also vary from culture to culture and from family to family. It is been observed from the studies that the western countries have a credit culture which means the usage of the earnings frequently rather than savings whereas in contrast to this in Asian countries like India there is a culture of savings of the income and passing it on to the heir. Hence the perspective and views differ widely based on such aspects. There are so many perspectives we have discussed in this article go through all the points we have described so you can make a decision at the end whether to “rent or buy a house”!!!
Rent or Buy A Home?
Advantages of Rent
This option is quite a low-risk one with generally no headache of maintenance. It has a fair share of advantages to its credit:
01. Lower Advance Costs
- Depending upon the agreement with the landlord, the details may vary but the advance or upfront costs are much lower than for buying the house and hence a person with no or negligible saving or for a young person with no family support, this is the best option, as the down payment for a new house to be purchased may be very high varying from 5% to 30% of the value of the house, even though you buy a loan or finance.
- Whenever you shift into new apartment or house on a rent, you’ll typically pay the rent of first month
02. Greater Flexibility and Mobility
- There is more flexibility and ease when you frequently move or shift out in case of rented accommodation from one location / city to other location or a city. However, this will solely depend on rental housing stock available. In countries like India, due to old laws favoring tenants, such stock is neither adequate nor encouraging.
- It is quite easier, cheaper and faster to find a place for rent than buying the home.
- If an individual need to change a home/locality/city due to change in job location or change in children’s school or wife’s job or for any other reason, he doesn’t have to wait for someone to buy old house when he vacates the house.
- It does not require long-term commitment from a house owner and is the best option if you don’t expect to stay in one place for a prolonged period of time.This can be of huge advantage depending on the lifestyle of the person or individual.
03. Low Costs if You Decide to Move
- When there is need to change the location of the residence it is quite cheaper to move.
- In Metro Cities, Moving is generally tough and costly particularly where labor is costly and also in absence of social or family/ friend’s support.
- For homeowners it is usually selling the house and buying another whereas it is not so in case of renting. Selling and buying in two locations simultaneously will be a tough and demanding task.
04. No Responsibility for Maintenance
- The homeowner or landlord is responsible to carry out nearly all the maintenance and repair work on the property. So, it could be a major benefit as a tenant.
- All the problems like plumbing, leakages and other repairs related to the property are the responsibilities of the landlord or homeowners. Hence you can stay hassle free however, care needs to be taken that leakages are not causing damages to natural resources.
05. Amenities Present on the Site
- If you choose and happen to be on rent in a up standard housing complex, you can have access to various amenities and entertainment options. However, it may cost you extra depending on the rules levied by the society to tenant.
- Nowadays, various rental housing complexes are available with the amenities such as pool, gyms, indoor games room as well as outdoor recreational spaces. of course, such amenities are available in case of bought out houses also.
- If you are the homeowner and needs this type of amenities such as pools and entertainment room; it would cost you a fortune for its construction as well as use and maintenance.
06. Financial Benefits
- In case of renting, there are no property taxes to be paid to municipality or state government where you live. It is the responsibility of the homeowner.
- Renting allows you to save the money on interest and down-payments in case of ‘buying a house and paying a loan back’as they are not considered in renting aspect.
- If you are on the start of your career and you don’t have any property then this is quite a perfect and only choice as it will help you to save money for your future use in order to buy the property.
Advantages to Buy
- The sense of pride of owning a home is the feeling which you can never really express in monetary values. There are further various solid reasons which gives an advantage of purchasing or buying a home over renting it. Some of them are included here:
- A shelter or a roof is what a home provides to the family. The permanent shelter of your own, without any obligation to anyone gives the greatest feeling of security particularly to females in terms of “No one can drive you out of a home”.
- As you do not have to pay rent for your life time, you do not have to worry in case of an emergency such as financial breakdown in job or business.
- During those rainy days at least you don’t have to worry about shelter to protect you and your family and loved ones. This is a‘feeling of security’which no amount of money can buy.
- You won’t need any permission or any approval from landlord to make changes to the home as you are the homeowner and it is your own legal property. However, you need to check whether you are not compromising the local authority approvals.
- By buying or purchasing a home, you have that luxury and freedom of owning your own space. Have as many friends over your house as you want, renovate your bathroom or paint the walls in dramatic colors, whenever you wish.
03. Potential to Build Equity / You Build an Asset
- Remember by paying mortgage, you build an asset and after certain period when your net worth increases, your borrowing capacity also increases.
- Whatever payment you make, it goes towards your own mortgage which will increase the net worth when the home/property value increases.
- This is the primary factor which generally buyers keep in mind before buying home.
- Instead of helping the homeowners / landlord in case of a rented home where you are never going to get any rewards from your hard-earned income so vice-versa people tend to think that rather pay the home loans and this mortgage payments are going towards your equity which one-day will results in quite huge bonus for you at the end.
- Always keep in mind the rule that You are the one to be going to be benefited when the prices of the property or house which you have purchased or bought increases over time.
- Buying and owning a home will always give you more privacy as compared to renting the home.
- The homes on rents are usually apartments, flats, and rooms in townhouses with shared common walls and close quarters in the neighborhood whereas single- family home or bungalow gives you more space along with privacy.
- It is also possible to rent a single-family homes or townhouse or row house so this won’t apply in this case. But in general, and many cases it is true.
05. Design / Make it According to Your Needs
- This is quite similar along with the first point of freedom. The home we purchase or buy may or may not meet our needs and choices. Most of the times we will have to undergo some changes in design and improvements to meet and fulfill our needs.
- This can include various changes such as removing walls, re-purposing rooms, addition to building, remodeling and other types of necessary changes and renovation as per needs. This is not allowed in case of living on rent.
- If you are starting from scratch on your land, you can build your house as per your dream, choice, liking and needs, the enjoyment of which will be of great value that ultimately leads to satisfaction.
- It enables stability and you are more likely to stay in that location for a longer period of time where you already own a home and planning to buy.
- This is quite significant for those parents who want to keep kids in a certain school or district.
07. Potential Benefits of Tax
- The tax is deductible when you pay the interest on your mortgage so the buyer experiences tax advantages. The tax laws differs from nation to nation and it would be best if you consult tax expert to weigh the pros and cons of tax, savings v/s interest, rent, EMI etc. in your country.
- Tax advantages are applicable to the property or home purchased on mortgage basis. If not, then no tax deduction benefits are available.
08. Social Factors
- In nation or culture where there are strong family systems and family values are present, this is indeed an added advantage as owing a house can give you social status symbol and it may have lot of other social benefits interwoven with it.
09. Passing on to Heir / Wife
- There are cultures with strong family bonds and ties, where current generation always has a dream of passing enough assets to the next generation / children.
- Home is the first thing in the list where a husband always thinks that, wife would never be helpless in his absence if she has to live alone, if he passes away early in life. In such culture, owning a house can make a wife independent in later life.
Rent or Buy A Home?
Disadvantages of Renting
As discussed earlier regarding the advantages of rent it also shares a fair number of cons/disadvantages which needs to be considered along with its advantages:
01. Less Creative Freedom
- In case of living on rent you will have less or no freedom to change or renovate the things as per your requirement in and around the house to make addition / alteration etc.
- It should be approved by the homeowners or landlords if you want to make any changes or if you make any changes without any permission, you are financially liable to return the place in the condition it was before when you took on rent. In India due to the rent act provision, the landlord may even ask you to vacate and evict you from the house.
- To live on rent generally means to live with bare minimum facilities such as fixtures and colors in the home as decided by landlord, which you may or may not like.
- Those who prefer to have a personalized need of living, this can be restrictive and boring. Where as it is fine for some who can adjust with only basic amenities provided in the home.
02. Limitations to Types of Homes or Certain Neighborhood
- It is likely that you may or may not find a place on rent in the area or neighborhood of your choice. So, you may have to compromise where you want your kids to go to school.
- The homes available for rent comes in all shapes and sizes mostly available are the apartments, flats, row houses and townhouses. Its not the case that you get your choice all the time.
03. Risk of Hike in the Rent
- There will be increase in the rent and this may depend on various factors such as value of home or property increases or the economy grows.
- Whereas, if you are a homeowner, the mortgage repayment remains constant unless you refinance.
04. You are not Building any Equity
- To live on rent does not offer wealth creation or return on investment as the property belongs to some other person.
- Instead the income generated through renting is used by homeowner to pay his home loan or for other various personal purposes and it is the landlord who builds assets and increase his worth.
05. Less Stability
- There are various reasons such as rise in rent price or bad neighbors on the other side of the wall.
- Because of this, the renter tends to move frequently and is less stable in residing at one location.
- In the cultures where you live in a particular social community is defined by caste, creed and social status is important, so one always has to search and find such location, as you may never like to live in an area where you do not get along with neighbors with whom you can socialize on day to day basis. This aspect is very important & governing factor in East and countries like India, Bangladesh, and Pakistan and so on. This is an idea which a Westerner perhaps might not perceive.
Disadvantages to Buy
- We have earlier discussed the advantages to buy a house or a property. As it has advantages it also comes with several disadvantages to its account which are listed below:
01. Maintenance and Up Front Costs
- Buying a home is always expensive as there are so many various costs associated with.
- The upfront cost may be usually high which might not be affordable and even if possible, it would be rather unavoidable.
- After buying the home or property, the maintenance also demands to spend money on it especially if the home or property is old or large one.
- There are various additional costs to the homeowner which includes taxes, insurance and maintenance of the property.
- You need to have enough saving and income to honor these huge costs.
02. Financial Risk
- One of the goals of the homeowner to buy home or property is to build equity or create an assets but there is no guarantee that there will be increase in the property value which you have bought or purchased. It changes from location to location, city to city and nation to nation.
- If the property value decreases, you are at a loss of money. This happens in cities, where the old industries are dying and now there seems no growth of the particular city.
- This situation of decrease in the property value may be due to various economic factors such as recession, or high interest rate or maybe the location becoming less desirable by public.
03. Locks You in a Location
- There is less mobility and less flexibility in case of homeowners if the decision of shifting and relocating is made. If your job / profession demands or compels moving from one city to other over years, owing a house will be the bottleneck.
- Tenant has the flexibility of shifting or to leave easily after fulfilling the notice period. The homeowner is generally dependent on selling of the property before buying one which may take longer time for homeowner to shift somewhere else. This may be sometimes indefinite.
04. Any Responsibility on the Owner’s Head
- When the home is bought or purchased, if something needs to be fixed / repaired, the owner is responsible for any repairs or maintenance to the home or property.
05. Money May be Better Used for Other Investments
- Money can’t be used for better investments as the money will get use on closing costs and down payment for buying house. Your liquidity to spend for better living or even for investing in business would get limited
- Unless the value of your home increase, it would be difficult to gain benefits from buying the home.
- In case of the loss of an entire house from a major damage due to natural disasters such as earthquake, cyclone, flood or a fire, the loss is yours. This is the factor to be considered while buying a home insurance.
06. Loss / Damages Due to Natural Disasters
- In case of a rented house, the loss would be of furniture and fixture or your personal belonging only, and with that minor loss you can walk away if such disaster happens.
07. Enjoying Future Income
- Please note that whenever you buy anything in installments for long term, though you enjoy the house at present, the joy you are deriving is from the future income anticipated.
- The fear and stress of losing the current source of income will therefore always keep you under stress.
- Hence, in culture which is saving oriented, this does not sound to be a good idea.
08. High Cash/ Illegal Payments
- In certain countries, there are parallel economies, where untaxed/ illegal as popularly called Black Money has huge prevalence.
- At such place’s buyer is asked to pay huge amount in cash as upfront cost while buying which an honest businessman or a salaried one may not have.
- This is a problem difficult to attend.
What Shall I Do- Rent or Buy?
The major points that needs to be considered are:
- Mobility, stability in one city / location and its likelihood over a period of time.
- Rate of interest on mortgage, Prevailing Rent and Rent v/s EMI.
- Savings, Capital, budget and other need for money, cost of living
- Increase in value, real estate trends over the years’ history and future perspective.
- Idea of passing to next generation/ Heirs (building up of asset)
- Security of shelter
- Income of the individual
- Savings and credit culture
- Tax benefits
Affordability is the first things to be taken into consideration whether to rent or buy despite the time period to stay in the home. To make up the costs, a person buying the home generally needs to stay there for at least three years. Staying of five years is a preferable time frame. Not necessary that homeowner would stay for the time period mentioned, he may also stay longer than that which depends upon the location and various other factors. In the end there is no absolute right or wrong decision as far as renting or buying is concerned. You need to decide according to your situation and the points discussed above.
Rent or EMI
This is a tough decision and particularly where the real estate prices are inflated, rents are low and rate of interest is high, a typical case in all urban areas of India(Asia). A hypothetical illustration based on real data will give you an idea about it.
Suppose you want to buy a 2 BHK house ad measuring 800 sq. ft. In a middle-class locality of a city, the sale price for such a house may be (say) Rs. 40.00 lac (Rs. 5000 per sq. ft.). Rent of similar house in locality may be Rs. 10,000 per month. Rate of interest on housing finance is 10.5%. Down payment is 25% and loan you will buy is Rs. 30.00 lac.
Your EMI therefore would be Rs. 28,951.00 (for 20 years of loan)
Total Interest payable: Rs. 39,48,156.00
Total Price + interest: Rs. 69,48,156.00 (Over 20 years)
In such a case the rent is only Rs. 10,000/- per month against EMI of Rs. 29,000/- why to pay Rs. 19,000/- per month more.
Further if you invest Rs. 40.00 lac in stock or Mutual fund, you probably will earn monthly return of minimum Rs. 30,000/- and preferably Rs. 40,000/- per month. You can easily pay rent of Rs. 10,000/- and still enjoy the balance Rs. 30,000/- for living or investing in business or investing in other stock / mutual funds.
The only problem in such a case would be the easy availability of “Rental Housing Stock” in your locality. If such stock is limited and if you have to move again and again, then that needs to be avoided.
All prices depend on supply and demand and stock available in that locality. If stock of “For Sale House” is more, buying might be affordable and vice versa. Similarly, if stock of “For Rent house” is more, renting would be a better option.
In a nutshell, if you have enough money/ savings on hand and your income is more or more than average and you are not likely to move from city to city, Buying may be a better option. Otherwise there is no choice but to go for renting.
Hope this article will help you to make informed decision whether to rent or buy. You can share your views regarding this topic (if any) in the comment box below.
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