Buying vs Renting: Which is Better?

One of the key financial goals of any person is to have their own roof over their head. For the older generation, when a person has their own home is when such a person was considered settled in life. However, the new generation loves the fast-paced life and is in constant search of better opportunities. Given this changing scenario, there is a rising debate about whether it is better to pay rent or buy your own home. This is a never-ending debate and there are pros and cons in each scenario. 

Let us understand the pros and cons of renting or owning a house which can help a person make a suitable decision regarding the same. 

Pros and cons of buying a home?

Buying a home is essentially putting down roots in a place. The owner and their family buy a home with long-term plans and a vision for their future. However, the pros and cons of having a home today are highlighted below.

1. Pros 

The key benefits of buying a home are,

1. Having a financial security 

The first and foremost benefit of buying a home is the financial security that it gives the owners. Real estate is one of the most expensive assets that a person usually owns and it can be used as collateral in times of need. Apart from the financial security, buying a home also provides a sense of personal space and a safe haven where they and their family can make future plans and have a sense of belonging not only in their house but also in the community. 

2. Tax benefits on home loan 

As mentioned above, buying a home is quite expensive and often beyond the reach of an average Indian without financial assistance in the form of a loan. With a view to ease the burden of the taxpayers, the Income Tax Act provides many deductions and exemptions to the taxpayers for a loan taken to buy a home. These tax benefits include deduction under section 80C up to Rs. 1,50,000 for the principal amount paid. Taxpayers also get a deduction up to Rs. 2,00,000 for the interest portion of the EMI under section 24 of the Act. 

3. Safety of investment 

Real estate investment is considered to be safer than other forms of investment like stocks, mutual funds, etc. The returns in real estate investment is lower but the capital investment is secured as the property rates rarely come down. 

4. Freedom to customize the home 

Buying a home gives one the personal freedom of customizing the space as per their own preferences. This freedom is limited in the case of a rented space as the owners may or may not agree to necessary modifications. 

2. Cons 

After discussing the benefits of buying a home, let us now focus on its limitations.

1. Increase in EMI cost 

The immediate drawback of buying a home is the increase in monthly expenses. The EMI cost usually accounts for at least 50% of the monthly expenses. When compared to rental expenses, the outflow is quite high and therefore requires proper financial planning to stay afloat. 

2. Requires a huge down payment  

For an average Indian, the dream of buying a home is with the help of a loan. However, lenders will never provide 100% of the value of the home as a loan and at least 10-20% is to be met by the buyer in the form of a down payment. Arranging this down payment is also an uphill task for most people and takes a huge outflow from their savings.

3. Increase in ancillary costs (maintenance) 

Buying a home will come with a host of ancillary costs like maintenance, property taxes, home renovations, repairs, etc. Such costs add to the burden of the owners and eventually increase the overall costs of the property.

4. Reduced mobility or flexibility to relocate 

One of the biggest limitations of buying a home is reduced mobility. Owners have to either sell their place if they are relocating permanently or rent it out. Also, if they are still paying EMI on their home, the added rental expense on the new place will double the financial burden. Hence, any decision to relocate needs careful consideration for owners.

5. Government hassles at the time of purchasing or selling the property 

In India, the hassles related to buying and selling premises make it a very cumbersome process. This often discourages potential buyers from buying a property and they rather prefer renting one. 

Pros and cons of renting a home?

Renting a home is another option for people to have a roof over their heads. However, like buying a home, this option also has its own pros and cons. Let us discuss them in detail hereunder. 

1. Pros 

The merits of renting a home are mentioned hereunder. 

1. Reduced rent cost as compared to EMI

The rental costs are quite lower as compared to the EMI costs. For example, in cities like Bangalore, the cost of buying a home can be Rs. 1,50,00,000 approximately and the EMI for the same can be a minimum of Rs. 80,000 or Rs. 90,000 depending on the down payment. On the contrary, the same place can be available for rent within Rs. 30,000 to Rs. 40,000 approximately. This effectively reduces the costs for the person by almost half thereby increasing the monthly savings along the way. 

2. No hassles of paying ancillary costs

The tenants are free from incurring any extra costs of owning a property like property taxes, repairs or renovations, etc. These are the responsibility of the owners of the property and therefore, reduce the overall costs of the tenants. 

3. Relatively lower fluctuations in rent costs as compared to EMI 

The EMI costs of a person fluctuate with the rise or decline in the interest rates in the country or any other external factors. The rent cost on the other hand rarely fluctuates and is more or less constant unless there is a major appreciation of the property value in the long term. 

4. Increased mobility and ability to relocate 

The greatest advantage of renting a place is increased mobility. Tenants do not have to worry about missing any better opportunities on account of putting down roots and therefore can easily move between cities or even to another country. 

5. Tax benefit of HRA 

Another benefit of renting premises is the tax benefit in the form of HRA. The calculation and tax benefit under HRA are available under the section of the Income Tax Act. This section provides exemption on the basis of the lower three parameters namely, 

• The actual rent paid less 10 percent of the basic monthly salary
• HRA received from an employer
• 50 percent of the basic salary (if the taxpayer is living in a metro city)
• 40 percent of the basic salary (if the taxpayer is living in a non-metro city)

2. Cons
   1. Increase in rent cost every year

A basic rent agreement usually includes a clause of increasing the rent by at least 5% every year. This means that the rent cost will increase every year till the time the person stays in the rented place. Eventually, the rent cost may not justify the benefit of paying higher EMIs and buying a home would be a better option. 

2. No asset built against rent expense 

The rent cost although lower than the EMI on such property does not provide any benefit of asset creation. When a person pays the high EMIs, they are at least building an asset, and therefore such expense can be treated as capital investment. On the other hand, the rent expense does not contribute to any fortune or asset building and therefore, can be treated as a dead expense. 

3. Limited freedom to customize your personal space

Rental premises have a limited scope of customizing and making it their own space. This often poses to be a hindrance in giving a sense of belonging in such a place. Buying your own home eliminates this feeling and provides them with all the freedom to create their own personal space. 

4. Possibility of moving out at short notice

With rental spaces, there is always a possibility to move out at a short notice. The owner of the house may want to sell the place or may want to occupy it for themselves. Therefore, there is a lack of stability in rental spaces that cannot be eliminated.

What is better buying or renting? 

Buying or renting a place is a question that is considered by every individual at some point in time. While renting gives the freedom to move to better opportunities at any given point, buying a home provides a sense of stability and an asset that can be depended on in any unforeseen circumstances. Buying a home is an expensive option as compared to renting one. However, renting a house no longer becomes an attractive option if the rental costs are more than the EMI cost for the same place. Currently, the real estate market is going through a relatively slump, and therefore it is an excellent opportunity to make a capital investment in real estate. 

Simple ways to choose between renting & buying a house

Here are some simple tips for an individual to choose between renting and buying a house:

1. Assess your financial situation: Determine your budget and assess whether you have enough savings to afford a down payment, mortgage payments, maintenance costs, and other expenses associated with homeownership.
2. Consider your lifestyle and future plans: Think about your lifestyle needs and future plans, such as job security, family plans, and long-term goals, and how they might impact your decision to rent or buy.
3. Compare the costs: Calculate the costs of renting versus buying a home, including rent, security deposit, maintenance, property taxes, and insurance, and compare them to the costs of owning a home, including mortgage payments, down payment, closing costs, and ongoing expenses.
4. Evaluate the real estate market: Study the real estate market trends in your area, and assess whether it is a good time to buy or rent based on current property prices, interest rates, and other market factors.
5. Seek expert advice: Consult with a real estate agent, financial advisor, or mortgage lender to get expert advice and guidance on the pros and cons of renting versus buying a home, and which option may be more suitable for your financial and personal circumstances.

Ultimately, the decision to rent or buy a house in India depends on a range of factors, including your financial situation, lifestyle needs, and long-term goals. Careful consideration and expert advice can help you make an informed decision that best meets your needs and aligns with your financial and personal goals.

Conclusion

Both renting a place and buying one have their own pros and cons and what may fit one person may not be a good fit for another. Hence, the decision to buy or rent a property has to be carefully taken after considering various factors like the cost for each option, the locality, appreciation of the property value, mobility, etc. 

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