Should You Buy or Rent a House? Different Factors You Must Consider Before Making a Decision

March 13, 2023
No Tags Assigned to this Post

Table Of Contents

“Should I buy a 1 BHK flat in Ghatkopar or live in a rented apartment?” Even though the configuration and location preferences might differ from person to person, most Indians are thinking about similar questions. But one needs to evaluate whether it makes sense in renting a place or investing in a house. The answer is dependent upon a variety of factors as well as personal choices. This article discusses the pros and cons of buying vs. renting a home. If you’re torn between the two options, keep reading to make the best decision.

Renting and Purchasing – What’s the Difference?

Of course, it is the ownership! When you buy a real estate property, you own it, which is not the case when you rent one. However, this is not the only factor to consider. Here are three important factors to consider when making your decision:

  1. Rent-to-income ratioIt is the ratio of the property’s purchase price to its annual rent. It is advisable to purchase a property if its value is less than 20 times the annual rent. For instance, if you pay a monthly rent of INR 25,000/- for a house, the annual cost is 3 lakhs. If you live in that house for 20 years, it will cost you a total of 60 lakhs. If the property costs less than 60 lakhs, it would make more sense to purchase a house than renting it. However, if the house costs more than 60 lakhs, renting it makes more sense.
  2. Rental incomeIt is the amount of money your house can generate each year as a percentage of its value. Assume you paid INR 75 lakhs for a house and rented it out for 20,000 per month. As a result, the property currently generates 2.4 lakhs per year, or 3.2% of its actual value. When you take into account the annual property tax and maintenance costs, the rental yield can be less than 3%. According to experts, buying a home makes sense only if the rental yield is greater than 5%. In practice, that is a pipe dream in today’s world, particularly in major cities where rental yields range from 2% to 3%.
  3. EMI amountIf you take out a loan to buy a house, you must factor in the repayment costs when determining whether the house will be profitable for you. It is not advisable to buy a property if the equated monthly installment (EMI) exceeds 30% of your monthly income, and vice versa.

Benefits of Renting:

  1. Less ResponsibilitiesRenting a home involves fewer responsibilities and costs. A rented property requires you to pay only the rent and excluded utilities, while the owner is responsible for taxes, repair costs, and maintenance.
  2. Low initial investmentPurchasing a home involves numerous upfront costs that may deplete your savings. If you rent a house, you may be required to pay a security deposit as well as a few months’ rent in advance. As a result, renting a property will be less expensive than purchasing one.
  3. Relocation is not a hassleBecause a rented house is by definition a short-term arrangement, it is simple to move out. So, if you need to relocate, you can easily leave your old home and find another in the new city.

Disadvantages of Renting:

  1. Nothing is in your controlThe only one who has complete control over the property is the owner. They can raise the rent on a regular basis and even make it unavailable to rent at any time. Renting a property is a risky option because of these uncertainties.
  2. Fact: It can never be called your ownUnlike your own house, you can’t decide to make minor changes to a rented place. Even hanging a painting on the wall is not allowed, without the owner’s permission. Any kind of unapproved modifications can result in the loss of the security deposit.

Advantages of Purchasing a Home:

  1. Stable & SecureHands down, it’s all about security! That’s the most significant advantage of owning a house. It is your home and you have the freedom to decide how long you want to live there. You can modify it to meet your needs and even sell it whenever you want.
  2. It is the best investmentA house is an asset that appreciates over time. As a result, you can consider purchasing a home as an investment. It allows you to sell the house and make a profit. You can even rent it out to make a consistent income.
  3. Tax benefits on home loansA typical middle-class employed person may now more easily afford to buy a home thanks to the home loan. Based on the applicant’s credit score and capacity to repay the loan, Indian lenders decide whether to approve or reject a home loan application. The fact that a house loan has a lower interest rate than other types of borrowing, such as a personal loan or a gold loan, is one of its main advantages. This is so that the lender uses the property you want to buy as security for the loan amount.

Disadvantages of Purchasing a Home:

  1. Significant responsibilityOwning a home entails numerous responsibilities and additional costs. You must pay for maintenance, property taxes, utilities, and other expenses out of your own pocket.
  2. Difficult to relocatePurchasing a home requires you to reconsider your options before relocating. If you land your dream job in another city, you won’t be able to leave until you find a buyer or tenant.
  3. Expensive initial outlayWhen purchasing a home, you must provide a lump sum as a down payment. Other associated costs include registration fees and stamp duty.
  4. Home loan may carry certain risksIf you are considering opting for a home loan, the normal house loan term is between 10 and 30 years, which is a considerable amount of time. Several unexpected events may happen during this time. Some of these situations could make it challenging for you to pay back the loan. Unfortunate circumstances can cause severe financial hardship and impair your capacity to manage the loan’s burden, which could ultimately lead to the loss of the property. If you don’t pay back the loan, the lender has the right to seize the home and sell it to recoup the money they granted you for the mortgage.

How To Choose Between Buying and Renting a Home?

Here are various factors to consider when deciding whether to buy or rent a home:

  1. Economic situationThe most important factor to consider is your financial situation. Purchasing a home necessitates a substantial down payment. If you take out a home loan, you must pay EMIs to repay it over a long period of time, which can be quite costly. As a result, financial stability is essential when purchasing a home.
  2. Fix your locationA house’s location is fixed. This makes relocating to different cities difficult. When purchasing a home, you must ensure that you will not have to relocate anytime soon.
  3. AdaptabilityOwning a home means you can change it whenever you want and use it for whatever purpose you want. You cannot enjoy that flexibility when you rent a house.
  4. The state of the real estate marketOver the years, the real estate market has experienced many ups and downs. The state of the real estate market can often help determine whether it is a good time to buy a home. In a volatile market, buying a property with the intention of selling it soon may not be the best choice.
  5. Tax advantagesThe tax advantage is an essential factor when deciding whether to buy or rent a home. Both options may provide tax advantages.
    1. Tax benefits on home loans: Under Section 80C of the Income Tax Act of 1961, you can claim a tax deduction of up to 1.5 lakhs per year on home loan repayment. You can also claim a tax break on registration fees and stamp duty.
    2. HRA tax benefits: Some employers provide House Rent Allowance (HRA) to employees who live in rented housing. If you live in a metropolitan area, your HRA will be 50% of your base salary. It is 40% of the basic salary in non-metropolitan areas. The HRA is tax-deductible under Income Tax Act of 1961 Section 10(13A).

The debate over whether to rent or buy a house is never-ending. You will be able to make an informed decision based on your needs now that you understand the benefits and drawbacks of both options. Check out the apartments in Mumbai by L&T Realty, evaluate your credit worthiness and accordingly make an informed decision to buy a home of your own.