Wealth Guide: Real Estate - Renting Vs Buying A House: What’s more profitable in long run? Explained By Expert

Wealth Guide: Real Estate - Renting Vs Buying - The debate surrounding renting or buying has been ongoing for decades. Every generation has a different take on the matter, especially in India. While the goal might be to purchase your home eventually, instability of the market, inflation and price opacity can often derail these plans. 

Most individuals purchasing property today have grown up with the dream of owning their home; a dream that they saw with their family even before any income started hitting their bank. Despite being driven by emotion at the very core, the decision to buy or rent in the current economy is a practical one and involves in-depth calculations. A slight change in variables such as interest rate, down payment, the opportunity cost of capital, etc., can easily change your thought-through decisions. Rohit Malik, Founder and CEO, Clicbrics, says, “People on both sides of this debate are convinced that they're right about their choice.” “To make this decision easier, here's a long-term view of what buying and renting would mean for your finances,” as per Rohit Malik.

Empirically analyzing impact on your finances

“While you may evaluate purchase and rent as a monthly debit from your bank account, the two are entirely different in the overall calculation. The simple difference between your rent and your EMI payments is that the first is an expense, while the second is an investment to build an asset that can potentially earn money for you in the future. Moreover, your EMI remains constant during the loan tenure unless you have a floating interest rate, while your rent will surely increase over a period. IF you dive deeper into the mechanics of both, there are greater long term tax-benefits to paying an EMI as opposed to rent,” he explained.

“Various emotional and fiscal factors form the basis of this decision. Diving deeper into the mathematics, you will realize that the rent you end up paying monthly is likely lower than your EMI instalment. However, it is still advisable to buy if your pocket and long term goals align with the vision,” he suggested.

How rent and EMI impacts your financial future?

“As tempting as it is to have a detailed calculation of how rent and EMI affect your financial future in the long term, it's best to understand this complex concept with simplicity. For instance, in Mumbai's Bandra, a 2 BHK apartment costs around Rs. 70-90K when renting and about Rs. 1.7 Crore while buying. If you take out a home loan of 80% or Rs. 1.36 Crore for 20 years at 7% p.a, your monthly EMI would be around Rs. 1.5 Lakhs. The rent you would have paid, assuming it stays static, over 20 years would be Rs. 1.68 Crore. The price of your house after EMI, downpayment, registration charges and stamp duty would come out to approximately Rs. 2.63 Crore,” he said.

“In 20 years, the property would have also appreciated Rs. 4.73 Crore if we consider the minimum rise in the price of 4% p.a (considering the average rate of appreciation for property in India is 6% p.a.). Thus, in 20 years, you could either be Rs 1.68 Crore short and own no asset or own an asset with a capital gain of close to Rs. 93 Lakh, with the potential to earn more,” he added.

Real estate investments can be critical to your investment portfolio

“With changing market dynamics, real estate investments can be critical to your investment portfolio. While diversification is promoted, real estate investments are a safe bet backed by a tangible asset that can be used to generate passive income. After a slump, the real estate market in the country is growing, and thus, it is a great time to invest if that is something you are looking at. In today's day and age, prop-tech tools can also simplify the primary due diligence for your property buying needs. New players in the market are revolutionizing the industry through innovative approaches designed to give you personalized recommendations, estimations, and real-time prices of the properties you consider. It is that simple,” he further explained.

“Every facet under this discussion comes with its own set of benefits and challenges. Despite the current market being primed for making a purchase, especially in the residential space, you must choose to rent or buy in accordance with your budget and personal and financial goals,” he concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)