To rent or to buy? A guide to choosing the most suitable choice!
Most Indians ultimate dream is to own a home, but does it really make more financial sense than renting? The answer is dependent on a variety of factors and personal preferences. This article discusses the pros and cons of buying versus renting a home. If you’re torn between the two options, keep reading to make the best choice.
Renting vs. buying: what’s the difference?
Ownership is the primary distinction between purchasing a home and borrowing one. When you purchase a property, you become its owner; this does not occur when you sublet a property. But there are other factors to consider as well.Here are three crucial elements that could influence your choice.
Rental Ratio
It is the ratio of a property’s price to its annual rent. It is suggested that you purchase a property if its value is 20 times the yearly rent. If you hire a house for Rs 25,000 per month, that comes out to Rs 3 lakh annually. It will cost you a total of 60 lakh rupees if you reside there for 20 years. The rent ratio favors buying a property rather than renting if the price of the property is less than 60 lakhs. However, renting a home makes more sense if it costs more than Rs 60 lakh.
Capitalization rate
It is the amount of money your house can produce each year as a percentage of its value. Assume you paid 75 lakhs for a house and leased it out for 20,000 per month. As a result, the property presently generates 2.4 lakhs per year, or 3.2% of its actual value. When you take into account the annual property tax and upkeep costs, the rental yield can be less than 3%. According to experts, purchasing a home makes sense only if the rental yield is greater than 5%. In practice, that is a pipe fantasy in today’s world, particularly in major cities where rental yields range from 2% to 3%.
Debt service ratio:-
If you take out a loan to purchase a property, you must factor in the cost of repayment when deciding whether the asset will be profitable for you. As a general guideline, it is not advisable to buy a property if the equated monthly installment (EMI) is greater than 30% of your monthly income.
Should you buy or rent a house? Here’s how to decide:-
To determine whether buying or renting a house is right for you, consider these six factors
financial circumstance
Purchasing a property is a major decision that depends largely on your financial standing. It entails a significant upfront investment and if you choose to take out a home loan, you will be required to pay Equated Monthly Installments (EMIs) over a long period of time, which can be a considerable expense. Therefore, having financial stability is essential when considering buying a property.
Location
When the location of your house is already set, relocating to different cities becomes a considerable challenge. It is essential to ensure that you do not have to move away from your current area soon when purchasing a house.
Lifestyle
If you desire to live according to your own lifestyle, renting a property may not be suitable for you as you are obligated to comply with your landlord’s regulations.
Advantages
Having ownership of a house enables one to make modifications as desired and utilize it for any purpose without being constrained. Conversely, renting a property does not offer the same level of flexibility.
future of the real estate industry
Over the years, the property market has experienced numerous fluctuations, and the state of the real estate market typically influences whether buying a house is a wise decision. In a volatile market, buying a property with the intention of selling it quickly may not be the optimal choice. In such circumstances, renting is a more sensible option.
Tax advantage
When deciding whether to buy or rent a house, one important factor to consider is the potential tax benefits associated with each option. Both buying and renting a house can come with tax benefits.
If you decide to buy a house and take out a home loan, you may be eligible for certain tax deductions. For instance, under Section 80C of the Income Tax Act, 1961, you can claim a tax deduction of up to ₹1.5 lakhs per year on your home loan repayments. You may also be able to claim deductions on registration charges and stamp duty.
Alternatively, if you rent a property and receive House Rent Allowance (HRA) from your employer, you may also be eligible for tax benefits. The HRA amount can be up to 50% of your basic salary if you live in a metro city, and 40% if you live in a non-metro city. Section 10(13A) of the Income Tax Act, 1961 allows for the HRA to be tax-deductible.
Ultimately, the decision to rent or buy a house is a personal one that depends on your individual circumstances and priorities. By considering the pros and cons of each option, including the potential tax benefits, you can make an informed decision that is right for you.
