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Is renting a house cheaper than buying a house overall?

Strictly answering according to present scenario and assuming that a person is buying on loan\mortgage.

Short to the Medium-term: Renting is definitely much cheaper.

1)) Long Term: Buying may turn out to be cheaper. But again buying on Loan\Mortgage will negate any appreciation on the house.

In today’s scenario with increased connectivity across Delhi-NCR region, you can easily rent a 3 BHK for about 8K PM, to buy the same property if one takes maximum allowed the loan of say 85%, you will end up paying at least 30K as monthly EMI for 20 yrs. The price of the property is not going anywhere but either stable or down, just take a look around and you will understand what I mean. Towers after towers all around which are only half occupied and the equal amount under construction ! With this glut of supply which has been created around us, the demand will never be able to exceed supply for a very long time, consequently rents and value of the house can never go up, as they are simply the function of demand and supply.

Rent HouseBut again house for most of us is not just a commodity but much more with the kind of emotional value attached to it. Hence as per my advice which is purely based on my own experience, if and when you buy a house, which you must, always do it with minimum possible loan\mortgage. Until then stay on rent, save the rest diligently and trust me, in a few years you will have a significant amount saved up to allow you to own a house with very low loan liability.

Over the short term, there are much higher transaction costs associated with buying. (Though if you move every 6 months, the transaction costs in renting will be much higher than if you rent the same place for years.)

Also the “100% mortgage” may be higher than the rent. Over the medium term, inflation pushes up the rent.

When I say “100%” mortgage, I don’t mean that you should try to borrow 100% without putting any money down. Instead, I mean you should take into account not only the mortgage payments you are charged but also the return you’re no longer getting because you no longer have your deposit invested.

2)) Over the long-term, buying is cheaper.

I’ve lived in this house for just over 18 years. My monthly mortgage payment is about half what the rent would be if I wanted to rent it. Compared to those costs, the marginal cost of “what I have to do vs what a landlord would have to do” is tiny.

In seven years time, my house will be paid off, so my mortgage will drop to zero.

There’s some more complex financial calculation about asset values, which takes into account the “money illusion”, how inflation discounts the real value of the mortgage company’s position, the fact that long-term, house prices broadly move with wage inflation, and volatility… but for the moment, the simple “after 25 years, you own it” is big enough.

3)) If you are going to live in a place like forever, i.e. not changing the city, then it is wise to buy a home, depending on your financial stability.

Following are the top reasons why Buying is preferred over renting, in case of longer duration:

  1. Financial Credit Value: Buying a house on your name, of course, improves your stability & credit value. People’s perception changes & family hold a next level respect for you. (at least in India)

  2. A sense of belonging-ness: For a person who was not born in the city, will sense the inseparability of a local person.

  3. Tax Savings: Indian Tax policy states that you’re exempted from the taxes up to a certain value or yearly repayment amount (whichever is lesser) on Home loans.

  4. Sturdy identity and location: More time you spent in one location, you become familiar with the locality and people start to know you. The longer you stay (with Civic sense of-course) you become a respectable person of the locality.

Appreciation Value: In the current scenario of the Indian economy, real estate prices are bound to appreciate and thus longer you stay better are the return.

For the shorter duration, ideally less than 10 years, it is wise to rent a property.

4)) In India, just from a cash flow perspective, renting is insanely cheaper as compared to buying.

Rental yield is 2–3% annualized, while the interest rate is north of 9%

A 2 Crore INR ( 300K USD) apartment (mind you anything cheaper is probably not worth living), will go for a month rental of 60K, that is about 1K USD (max), that is about 12K a year. Subtracting expenses and property taxes – the net yield will be 8K a yield of < 3%.

5)) Renting is usually not cheaper.

Generally, the monthly mortgage payment is very similar to the rent when you move in. But rent increases over time, whereas the mortgage stays the same. So if rent is 1k a month and mortgage payment is 1k a month then assuming 7% rent rises then in 20 years your rent will be c. 3800, but the mortgage will be the same and your income will have increased. Plus in another 10 years, you’ll own the place whereas you’ll be paying rent until you die.

 

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