Should you buy a house or should you rent ? Buying or renting is an often discussed topic in many personal finance forums. On what parameters would you base your decision ? Apart from the monetary comparisons, the Indian investor often attaches an emotional angle to owning real estate – it is tangible – you can see it to believe it; it is unlike stocks which are considered risky; and our parents push us to the brink about having that one ceiling above our heads. Roti, kapda and makaan ! If you have made a decision already, use the below calculator to ascertain whether it makes sense to buy real estate or to rent it !
How does the buy or rent calculator work ?
The calculator compares the annual outgo or annual amount of money spent when one is renting an apartment against when one is buying year on year. If the rental outgo is more and the buying outgo is less, it means that buying is better. Similarly, if the rental outgo is less and buying outgo is more, that means renting is better.
While calculating the rental outgo , the calculator assumes that
- The rental deposit of 1 year is returned and brokerage fees are lost.
- There is an annual increment in rent.
- There is a lost opportunity cost for rental deposit and brokerage. This means that the investor loses on a corpus of money which he could have made had he invested the the rental deposit and brokerage and not paid them in the rental transaction. This is taken into account by the calculator.
- The lost opportunity costs for rent is also considered year on year.
- Tax has to be paid on the lost opportunity costs of profits considered above.
While calculating the buying outgo, the calculator assumes that
- There is brokerage involved in buying and selling which is lost forever.
- The house will appreciate consistently year on year at a given rate of interest.
- There is maintenance to be incurred on the house (which is a percentage of the apartment cost) and this maintenance increases year on year with inflation.
- When buying the apartment, there is down payment done while the rest of the money paid to the builder is through a home loan.
- The home loan principal and interest will be used for tax deductions according to Indian IT tax laws.
- If the house is sold midway before the home loan tenure has been reached, the remaining principal will need to be paid up.
- Lost Opportunity costs for brokerage paid, down payment of the house, EMI (Equated Monthly Installment) paid and maintenance is considered (after tax).
- No capital gain tax is levied – the investor will invest the capital gains and not pay tax to the government.
Let me explain with an example how the buy or rent calculator works.
I have assumed the following scenario.
Here are the figures which will be used by the calculator as inputs.
If you run these figures through the calculator, you get the following analysis – shown over only 5 years of time. This reveals that though in the first year, renting is better, by the 5th, 10th and 20th year, buying definitely takes over.
The same is demonstrated by the graph below. As the years increase, the value of (Rent – Buy) begins to increase showing that buying is better.
Use the below Buy or Rent Calculator to calculate your values. Make sure you first click on “Click to Edit” and then on “Full Screen View” to view the calculator. Please note that the user is allowed to enter values only in yellow cells and the other cells are locked down to avoid editing.
Please provide your feedback if you have used this calculator.
This article is one from the series from Readers Requests, in response to a query from Rajan, a reader of www.TheWealthWisher.com, on renting vs buying.
Good article but one question here. How did you decided that a 40L house/flat will fetch 20k rent per month? I know its all depends on area/location etc but to me it appears very high. I’m in Bangalore and in sort of good area where flat worth Rs. 40-45L are there but the rent is not more than 10-11k per month. Even fully furnished flats are not fetching more than 14-15k per month. Many of my colleagues rented out 3 BHKs and paying around 18-20k/month but the cost of flats are more than 60-65L.
– Jagbir
@Jagbir, Point taken. Good point and agreed. I think you are right when you say that a 40 lakh house which will not fetch a rent of 20k. Pune has a similar case as of Bangalore.
And therefore, it is worth putting the figures in the calculator to see what the results look like with the figures you have quoted.
Do try and let me know !
You have prepared an Excellent Calculator. Thanks a lot.
BTW, The content of this blog seems to be slightly biased towards Buying. Actually the 40 lakh flats are available for rents in the range 10k-15k. When i entered those values Renting is better even after 20 years. Really good tool to take a decision
Very good tool :)……
Agree with Jagbir and I have tried with the actial (rent) value…. I see the renting is better till the end(so till few year no req to buy so high), the ratio is totally -%…. Thanks for the tool.
@Chirag, Glad you liked it.
Hey Radhey excellent topic.
What’s the link of the buy/rent calculator? The one mentioned above is showing error. Can you please paste it here?
@Sudip D, I will update it by close of play today.
@Radhey Sharma, Ok.
Paste it once you correct it.
Thanks.
@Radhey,
I am also looking for a similar calculator. In the above example you have considered very high figures for rent. I have read in other blogs that even after 15-20 years renting would be cheaper than buying.
Thank you so much for the calculator
Glad you liked it.
Hello,
At present the calculator link does not seem to be accessible
https://public.sheet.zoho.com/publish/thewealthwisher/rent-or-buy-v0-6-1
Can you please provide a New link if possible?
Dear Radhey Sharma,
Thanks for the excellent excel sheet. I had been hunting for one. Thanks a ton. I would like you to consider Stamp duty, Registration charges and Loan processing fee in the initial corpus and Society maintenance cost as recurring cost.
Input for monthly salary with an option for % increase per year and HRA so that the increase in salary in real time and the respective tax implications can also be calculated for person progressing from 20% to 30%.
Could you please make a similar excel to get incurred cost on property that will be used for rent purpose only? – In such case the entire interest can be tax exempted but tax need to be paid on the rental income. This will be helpful to know the cost incurred for persons like me who are using it as an investment. Such an excel will also be helpful to project time when break even will happen and let us know after what period one can sell the property.
Kindly please enlighten me what is “Opportunity Cost”
Thanks nd Regards
Hi!
Great work!
The doubt I have is about saving growth rate of opportunity cost being 15%. Why is the figure so high? If I understand correctly, this is the annual interest on bank savings or maybe government bonds.
Yes, the major reason is government controlling savings rate. I developed countries it is in range 0 to 2%. Also, markets are still developing. If you seem MFs are in just 4-5% households. So in absence of a credible product, the money is saved and not invested. Two more reasons are awareness and risk-taking capability. These two depend on each other but both seems to be lacking by investors at large.