Renting vs Buying a House: Which is the Affordable Option?

Residential properties attract an ever-increasing number of investors for multiple reasons. They range from needing a place to stay and setting up a home office to building a luxury retreat and wanting to amplify net worth. In society, and by tradition, the notion of ‘Apna Ghar’ is deeply embedded in the minds of people who, by virtue of having grown up believing in an emotional connect that a personal property emanates, crave owning their own homes.

However, the financial capabilities of different individuals, the feasibility and flexibility of rented apartments, and land prices in cities bend the norms in a slightly different direction. Thus, the working class, more often than not, is forced to consider the debate of renting vs buying a house. 

Factors that Influence Property Purchase or Renting Decision

While a lot of factors influence this debate, and it’s considerably not always a monetary decision, it’s essential to first establish for oneself certain conditions under which both forms of residences can be analysed.

For instance, if you have enough capital to purchase a property in a good neighbourhood, and are considering renting the house, then you might be able to make a good profit out of it. On the contrary, if you are working in a metropolitan city for a short period, you may prefer living in a rented apartment. 

However, it’s not always that simple. Many factors influence the purchase of a property, which we will discuss in the following paragraphs.  

1. Home Loans 

For most people, home loans are the only medium to buy a house. In such situations, it becomes vital to carefully calculate the interest rates that banks charge (which currently range from 6.75% per annum to 13% per annum), the processing fees, and the tenure. This will determine the financial aspects of renting vs buying a house. 

If you are purchasing a house to earn rental income, the monthly installment on the home loan or EMI may exceed the rent. Hence, the house may seem like a temporarily unyielding investment. In fact, in many metropolitan cities like Mumbai, the owner of the house has to pay maintenance as well as repair costs which, on being added to the monthly installments, exceed the rent yield for a long time before future sale heals the loss.

Although you may have to pay a monthly maintenance charge (which in some luxury apartments is enormous), you won’t have to worry about the monthly EMIs if you want to live in a rented accommodation. 

2. Role of Tax in Renting vs Buying a House

Taxes are an important financial aspect of any real estate investment. In fact, more often than not, people invest in real estate assets to avail taxation benefits. Selling and buying residential property is a great way to do that. If you sell a house and use the entire gain from the transaction to buy another house (within 2 years) or construct an independent house (within 3 years), then you won’t have to pay tax or duty for the purchase.

In case the entire capital gains aren’t invested, the balance amount is charged to long-term capital gains tax. However, the entire tax exemption will be reversed if the new property is sold within three years of purchase or construction. In such a case, the profits accrued from the sale of the previous house will be considered as short-term gains and will be taxed at the normal slab rates.

When you give a house on rent, however, the amount of money that you receive as rental income is taxable under Section 24: ‘Income from other sources’ with a 30% standard deduction (for repairs and maintenance). However, if you rent a house, you won’t have to worry about your taxes, maintenance fees, and repair fees, because all your home-related payments will be completed with a single cheque.

3. Lifestyle Factor in Renting vs Buying a House

Renting vs buying a house are poles apart when it comes to customization. Living in a rented house leaves you at a disadvantage there. You have less control over customizing your home or making structural changes. Plus, you have to consult your landlords constantly and get their approvals, often written approvals too, before you can bring about any changes in décor, interiors, closets or painting.

When you live in your own house, you’re more independent and have more freedom in the customization sector, which can be extremely vital adding the element of ‘homeliness’ in homes.

When you live in a rented house, additionally, you may be forced to abide by behavioural norms that many landlords mention in the lease agreements. If you live in your own house, these don’t exist, and you’ll be directly related to all society meetings, norms, events, and agreed upon changes.

4. Relocation Aspect

Renting, in fact, poses a lot of location liquidity, especially if one’s job and office are subject to change. One can easily move out and find a house closer to work or friends. However, such a change in location may pose a rental amount change. This, at times, can be challenging to accommodate along with other kinds of savings on a single salary.

Buying a house to live in, on the other hand, can put you up at a stationary location. In renting vs buying a house debate, the latter is a one time investment. Although it may seem quite mundane after a point, you will not face the impact of rising monthly rent prices or market fluctuations.

When compared to renting vs buying a house could provide an experience of stability and security that a rented house may fail to deliver. Homeowners can use a fixed mortgage payment to better plan their finances and thus not worry about being exposed to the detrimental impact of rising rents.

Generally, trying to sell a house may take more time and require paying a commission to the realtor. The homeowner can still accumulate rental income if he chooses to lease their dwelling, which may help him offset the cost of his new life. Financial objectives, job security, and lifestyle choices are some of the factors that influence a person to purchase a house or rent. 

But it is a wise idea to weigh the pros and cons of each alternative, and you can reach out to your financial advisor or realtor for professional advice.

5. Renting vs Buying a House in Terms of Expenses

While many factors can influence the situations, and though there isn’t a universally viable answer to renting vs buying a house, one can say with surety that it is easier, if not cheaper, to rent a house (notwithstanding the unfortunate situation of the pandemic). As mentioned before, taxes, maintenance, repairs (worn-out pipelines, leakages, machinery, electricity wiring) – all come within one single paycheque of the rent. 

When you draw out the capital expenditure calculations involved in buying a house, you have to consider multiple aspects like home loan interest rates, processing fees, stamp duty, and taxations. Additionally, you will also have to spend a heavy amount on furnishing and renovation along with other expenses.  You may gasp at the amount and put away the idea of buying a house. But, on accounting a tenured EMI and value appreciation, the prospects of buying a house are good. There aren’t any changes that will arise in your capital expenditure, except a few negligible changes in maintenance and repairs. 

However, increases in rentals are annual, and display quite many uncertain fluctuations. Market rates increase, and no one can predict a definite upper limit with surety for the next few years. During such times, owning a house seems more comforting.

6. An Independent House?

The debate of renting vs buying a house is a whole new ballgame when we’re talking about independent houses. In this case, location, leisure, and individual preferences are of primary importance. Independent houses usually have high rents and are usually opted by people in the retirement stage, or joint families, or families seeking leisure in a permanent home. In such situations, it hardly makes sense to be living in a rental place and having to seek permissions for gardening or interior changes, considering your primary aim was comfort.

Financially, however, maintenance of the house is very expensive, and thus there may not be many profitable sale prospects in future. Future sales may purely be based on land price, which, if not in an ever-increasing metropolitan city, may not be profitable. Besides, if there’s a slightest possibility of a future change of location, it’s much more viable for one to rent the house. There’s more location and financial liquidity that way.

Renting vs Buying a House in 2021

The rate of increase in residential property prices in metropolitan cities may not have been maintained in 2020 due to the outbreak of the coronavirus pandemic, but this rate surely hasn’t dropped. In fact, in order to push the real estate market further back into business, the government introduced and regulated a number of norms. One of the norms is the taxation on capital price.

If the difference between circle rate and sale price of a house exceeds 10%, then the buyer can claim capital tax only on the circle rate price; while paying duty using ‘Income from other sources’ on the remaining price (sale price minus ‘–’ circle rate price). This rule is valid till June 30, 2021. 

Note: Circle rate is the minimum rate per square feet for land or property fixed by the government.

Pandemic Effect

Socially speaking, the pandemic brought a lot of people to introspect their financial investments and lives. While many house owners lost their tenants to unemployment and the ‘enormous cost of living in metro cities’, others found themselves with a secure rental income in times of severe uncertainty. In the midst of the lockdown, many working people moved back into their villages and towns, away from their busy cosmopolitan lives, and found more reason and peace in securing a house in their hometowns rather than in cities. Others have felt the security, comfort, and homeliness that their own houses have brought to them, during a trying time, when slight delays in home loan installments didn’t pose a problem, but paying rent was still made mandatory.

At this point, renting vs buying a house in 2020-21 seems like the debate of any other financial year, with an extra taxation benefit on the buying front from the government. Plus, property prices in metropolitan and other cities keep fluctuating. Even a pandemic as big as the coronavirus outbreak in 2020 hasn’t brought about any drastic drop in property prices over the year. Hence, it seems, after a vastly considerable debate of which form of residence arises victorious, that the question really lies in what kind of investor one is.

Rent vs Buying a House, 2024 trends

In the year 2024, the Indian real estate market is experiencing an enormous shift towards owning a home due to economic stability, changing customer minds, and a new trend of investment opportunities. The financial security and stability that home ownership brings are what make it more attractive to Millennials and Gen Zs. Real estate is an investment that attracts many because of the economic environment in India, factoring in job stability and steady loan terms.

The Indian real estate sector is expected to continue growing, with a particular focus on satisfying the needs of homeowners and property investors. The fast-growing middle class is the reason for this expansion, as it strives for modern living standards and premium house designs. 

It is expected that the country will hit the finish line with incredible economic growth and microeconomic stability in the last quarters of 2023–24, reinforcing the trend towards home buying.

The increase in housing registrations in 2023 resulted in a 22% surge in sales and a 17% increase in new supply. The most influential cities with the largest market have been NCR Delhi, MMR, Bengaluru, Hyderabad, Pune, Chennai, Kolkata, and Ahmedabad, with the growth of residential properties in these areas. In 2024, the real estate industry will focus on engaging with its customers and keeping user-centricity as an approach to accommodating buyers and investors.

However, the choice to purchase or rent should not be made solely based on financial calculations. With the availability of shared ownership models and the rise of the tenant segment, the Indian real estate sector has been caught up in intricate dynamics. The essence of the housing market knowledge is reflected in the convergence of both aspects, namely, ownership and renting, in the context of the emergence of the real estate market.

To Summarize

If owning a house for either emotional comfort or for earning additional rental incomes that emerge with the surety of future costs (definite EMIs and maintenance costs) entices you, then there’s nothing like a residential real estate investment. It’s riskless and rewarding, especially in a known neighbourhood and apartment building in a metropolitan city, owing to dependence on ever-increasing land prices. Besides, it adds enormously to your net worth, which can be a determining factor for someone who wants to financially grow. 

However, if living in a rented property and enjoying the freedom of changing houses whenever you want to. Or having all your home fees dealt with by one monthly cheque, and not having to bear the financial pressure or burden of a loan, entices and attracts you, then living comfortably in your rented home is the choice for you.

Renting vs buying a house, completely depends on where you want to invest. It depends on the time and money you readily have to invest, the willingness to financially grow, and your emotional and financial motivators.