Renting vs. Buying a House in Mindful Way

Financial influencers often claim that buying a house at age 25 is a significant success worth celebrating. While this can be motivating, is it truly financially logical? This article aims to provide a mindful approach to help you decide between buying and renting a house.

Buying Vs Renting

The decision to rent or buy a house is one of the most significant financial choices faced by working people. It involves considering both financial and lifestyle implications. 

Financial Considerations

People often consider a house an asset, but the house you live in does not generate income, so it should not be classified as an asset.

Initial Costs

When considering the initial costs of buying versus renting a property, it’s important to understand the different financial commitments involved in each option.

Buying a House

• Down Payment: The largest upfront cost, typically 20% of the property’s value.
• GST: Goods and Services Tax applied to the purchase of new properties.
• Closing Costs: Stamp duty, legal fees, registration charges, and other miscellaneous expenses.
• Brokerage: Fees paid to real estate agents for their services. Its usually 1-2% of the cost of the house.
• Renovations: Costs associated with personalising and upgrading the new home to meet individual tastes and needs.

Renting a House

• Brokerage: A fee often equivalent to one month’s rent, paid to the real estate agent for facilitating the rental agreement.
• Security Deposit: Usually equivalent to 3-5 months’ rent, held by the landlord as a security measure. It’s a non-interest earning deposit by the renter. It is refunded only after the rent agreement is over.
• First Month’s Rent: An advance payment required to secure the rental property.

Renting provides access to better locations and amenities without the significant financial commitment of buying a property. It typically involves significantly lower costs compared to buying one. When buying a house, buyers need to pay approximately 10% of the house price as acquisition costs (including GST, stamp duty, legal fees, and registration fees etc) in addition to the actual cost of the house. Furthermore, even a 1-2% brokerage fee for buying a house can be substantial due to the large overall price. For example, if a house costs 80 lakh, the brokerage fee alone would range from 80,000 to 1.6 lakh.

Monthly Expenses

When renting, your primary monthly expense is the rent. Additional costs may include energy costs like electricity, cooking gas etc. Owning a house or flat involves home loan EMI payments, property taxes, maintenance costs, borrower’s insurance etc. In the case of a flat, the owner has to pay a monthly maintenance fee even if the flat is locked and no one is living there.

Long-Term Financial Impact of Renting vs Buying

People are attracted to buy houses and flats thinking that their prices will never go  down. While that is absolutely true in the general scenario, however one should be mindful about the rate of price appreciation. Real estate price rise has reduced sharply in recent years. The total returns from owning a house may be around 5% to 7%. The probability of future price rise of flats in cities is also very slim, given the large number of flats ready to be sold and those being built continuously. 

Renting a home is not always a waste of money. Rent yield from a house or flats is about 3% whereas home loans are available around 9%. So, in case of a home loan, the borrower pays about 3 times to the bank who has given the loan. The bank is the actual owner till you pay off the loan. By renting, the difference between rent paid and EMI for a same house can be invested to generate a substantial capital to buy a house in future.

Renting offers financial flexibility and lower commitment, allowing you to adapt to changing circumstances without being tied down by a huge home loan. However, homeownership comes with tax benefits, such as deductions on home loan interest & principal payments, which can reduce your overall tax liability. On the other hand, renters can claim deductions on house rent paid while avoiding the long-term financial commitment and potential liabilities associated with owning a property. 

Lifestyle Considerations

Stability vs. Flexibility

If you have decided to settle down in a particular place then homeownership offers stability and permanence, providing a sense of security and the ability to establish long-term roots in a community. This stability can positively impact personal and family life by fostering a stable environment for raising children and building lasting relationships with neighbours. Buying a flat offers stability and a sense of permanence, which can be appealing for those looking to settle down after a long professional career.

On the other hand, renting provides greater flexibility and ease of relocation. It allows individuals to move easily for career opportunities or lifestyle changes without the burden of selling a property. This flexibility can be particularly beneficial for those who prioritise experiences and adaptability in their lives. Now, people are more accepting of transferable jobs. Young employees often switch their employers every 2-3 years because of the prospects of higher salary and other perks. These people increasingly prefer living in rented houses rather than buying one. The flexibility of renting can also be beneficial for those who are uncertain about their long-term plans.

Both stability and flexibility have significant implications on personal and family life. The decision to choose either of them should be based on one’s current and future needs and aspirations.

Maintenance Responsibilities

Homeowners are fully responsible for all maintenance and repairs, which can be both time-consuming and costly. From fixing seepage on roofs and walls to plumbing issues, these tasks require ongoing attention and financial investment. 

In contrast, landlords are typically responsible for the maintenance of rental properties. Renters can report issues to their landlords without worrying about the cost or effort of repairs. This distinction has significant implications: homeowners need to budget for unexpected repairs and ongoing maintenance, while renters can enjoy peace of mind, knowing that these responsibilities do not fall on them. 

Customization and Control

Homeowners have the freedom to customise and renovate their space as they wish. They can paint walls, remodel rooms, and make improvements that suit their tastes and needs. This level of control allows homeowners to create a living environment that reflects their personal style and preferences. In contrast, renters face limitations on modifications. Most rental agreements restrict significant changes, meaning renters must adapt to the existing space. However, this can also be a benefit, as it encourages a minimalist lifestyle. Renters often focus on essentials and avoid the cost and effort associated with major renovations. Moreover, a minimalist space with just the essentials promotes calmness, clarity, and even increased productivity. Letting go of possessions or need to control can be liberating and allows us to appreciate the things we truly value. 

Market Conditions

Real Estate Market Trends

Market conditions significantly impact buying decisions. In a growing market, buying a property can lead to substantial capital gains and long-term financial benefits. However, in a declining market, property values can decrease, potentially leading to financial losses. This makes buying in a declining market riskier, with the potential for losing money if the market doesn’t recover. On the other hand, renting offers a safer option in uncertain markets. Renters are not affected by market fluctuations and have the flexibility to move if conditions change. Understanding market trends is crucial for making informed decisions about whether to buy or rent a property.

Interest Rates

Interest rates play a critical role in determining home loan costs for buyers. High interest rates increase monthly home loan EMI payments and overall loan costs, making homeownership more expensive. Conversely, low interest rates reduce borrowing costs, making buying a home more affordable. Renters, however, are unaffected by these fluctuations. Renting offers a stable financial commitment without the worry of rising interest rates impacting monthly expenses. For buyers, keeping an eye on interest rate trends is essential for securing favourable loan terms. Renters can enjoy the predictability of their financial obligations, regardless of market interest rate changes.

Emotional and Psychological Factors

Buying a home often brings a sense of ownership and pride. This is the primary reason why most of our relatives and parents encourage us to buy instead of renting. Homeowners feel a strong connection to their property, which can provide emotional satisfaction. However, this pride comes with stress and anxiety related to the financial commitment and ongoing maintenance responsibilities. The burden of a housing loan and the need for regular upkeep can weigh heavily on homeowners. On the other hand, renting offers freedom from long-term commitments and the stress associated with homeownership. Renters can enjoy their living space without the worries of property maintenance and large financial obligations, leading to a more relaxed lifestyle.

Practical Tips for Decision Making

Assessing Financial Readiness of Renting vs Buying a House

When deciding between buying and renting, it’s crucial to assess your financial readiness. Start by budgeting for both options. Buying requires a significant upfront investment, including a down payment for home loan and other associated costs. In contrast, renting involves a brokerage fee, security deposit and monthly rent. Next, evaluate your credit score and eligible limit of home loan.

A good credit score is essential for securing a favourable interest rate on a home loan. Additionally, plan for future financial stability. Consider your long-term income prospects and potential changes in expenses. This will help you to decide whether you should take the home loan now or better continue to rent and invest so that you have enough money to handle the housing loan related costs without adversely impacting your lifestyle. Ensuring you’re financially prepared will help you make a mindful decision.

Reducing Renting Related Expenses 

Relocating within a City – Moving Cost

Moving costs can be a small expense compared to the flexibility gained by renting. Opting for cost-effective moving solutions, such as hiring movers (Porter in Mumbai) for local moves or using self-service moving options, can help minimise expenses while ensuring a smooth relocation process.

Brokerage Expenses

Brokerage fees can add up to a significant amount, especially in cities with high rental demand. One solution is to subscribe to premium services offered by housing aggregators like Nobroker, 99acres, or others. These services often provide access to the real listings that are posted by owners (without brokerage fees). This allows renters to save on upfront costs while still accessing a wide range of rental options.

By being mindful of these factors and adopting proactive strategies, renters can effectively manage their expenses and make informed decisions that align with their financial goals and lifestyle needs.

Comparing Buying vs Renting a House

Buying 

Merits :

• Security and peace of mind 
• No interference of landlord 
• Builds  a physical asset 
• Tax benefit on home loan (in old tax regime)
• Saving on rising rentals

Demerits :

• Restricted ability to change location for career or family reasons
• Risk of  construction delay in case of under construction projects 
• Huge EMI burden
• Interest expense 
• Maintenance cost
• Huge transaction cost while buying

Renting

Merits : 

• Freedom to relocate  – Flexibility to shift houses for better career or family requirements 
• Renters can stay closed to workplace 
• Savings from down payment and EMI can be invested for better return 
• Cheaper than paying hefty EMI
• Ability to enjoy a house at very low rent (3%)
• No maintenance cost
• HRA deduction in tax under section 10(13A)
• Tax exemption can be claimed on rent paid to parents and even spouses.

Demerits: 

• Temporary interference by landlord 
• Regularly shifting family has to be managed
• Limited control on furnishing  or renovating a rented house
• Annual increment on rentals 
• Cash outflow without building any asset (if you spend all saved money) 
• Effort is needed for finding suitable house on expiry of agreement of the existing rental

Final Thoughts

Renting offers the flexibility to choose cities and localities based on personal needs and budget constraints. Unlike homeownership, which ties individuals to a specific property and location, renting allows for greater mobility and the ability to explore different areas without the long-term commitment or financial investment. 

The right time to buy a house is crucial. If you have a transferable job, buying a flat at your current posting might seem appealing. However, if you’re transferred to a different city, managing the house remotely can become a significant hassle. 

Buy a house when your investment portfolio has reached a desirable size. Purchasing a house and tying up a large amount of capital when your overall investment portfolio is small can slow down your financial growth. During the capital accumulation phase, focus on high-growth assets like equities instead of real estate and gold.

Renting vs buying a house should be decided after evaluating your current financial situation, long-term goals, and personal preferences to make a mindful choice that aligns with your needs. Remember, both options have their advantages and drawbacks, and the best decision will vary depending on individual circumstances.