Renting vs. Buying a House: Which is Better?

Buying a house is the ultimate dream of most people in India, but does it really make more financial sense than renting a property? Well, the answer depends on multiple factors and personal choices. This article focuses on various aspects of buying vs. renting a home. If you are confused between both options, read on to make the right decision.

Difference between renting and buying

The fundamental difference between buying and renting a house is ownership. When you buy a property, you own it, and that does not happen when you rent one. But this is not the only thing to consider. Here are three important factors that can help determine your decision.

1. Rent ratio

It is the ratio of the price of the property to its yearly rent. If the property’s worth is 20x the annual rent, it is advisable to buy it. Suppose you pay a monthly rent of ₹25,000 for a house, it amounts to ₹3 lakhs per year. If you live in that house for 20 years, it will cost you ₹60 lakhs in total. If the property’s price is less than ₹60 lakhs, the rent ratio is favorable for purchasing the property instead of renting. But, if the price of the house is over ₹60 lakhs, renting it makes more sense.

2. Rental yield

It is the measure of cash your house can generate every year as a percentage of the property value. Suppose you have bought a house for ₹75 lakhs and rented it out for ₹20,000 a month. So, the property is currently generating ₹2.4 lakhs per year, which is 3.2% of its actual value. If you consider the property tax and maintenance expenses you have to bear every year, the rental yield can turn out to be less than 3%. Experts suggest that buying a house makes sense only if the rental yield is over 5%. Practically speaking, that is a distant dream in today’s scenario, especially in metro cities where the rental yield is around 2% to 3%.

3. EMI value

If you take a loan to buy a property, you must consider the repayment expenses while determining whether the property will be profitable for you. A rule of thumb is, if the equated monthly installment (EMI) is more than 30% of your monthly income, it is not advisable to purchase the property and vice versa.

Advantages of renting a house

1.  Reduced responsibilities

Living in a rental property entails lesser responsibilities and costs. You only need to pay the rent and unincluded utilities for a rented property while the owner pays for the taxes, repair costs, and maintenance expenses.

2. Low upfront costs

Buying a property comes with many upfront expenses that may put a dent in your budget. On the other hand, if you rent a house, you may have to pay a security deposit and a few months’ rent in advance. So, it will be more affordable to rent the property than to buy one.

3. Easy to relocate

It is easy to leave a rented house as it is by definition a short-term arrangement. So, if you need to change cities, you may easily leave the old house and find another one in the new city you move to.

Disadvantages of renting a house

1.  You have no control

When you rent a property, almost all the power belongs to its owner. They can periodically increase the rent and even make it unavailable for renting at any time. These uncertainties make renting a property a risky option.

2. You can never make it your own

You cannot make changes to the rented house in most cases. Some owners do not even let you hang a painting and modifying without their permission may result in the loss of the security deposit.

Advantages of buying a house

1.  Security

When it comes to renting vs. buying a house, the one aspect that gives a significant advantage to buying is security. When you buy a property, you own it and have the right to decide how long you want to stay there. Moreover, you can freely make modifications as per your needs and even sell it whenever you want.

2. It is an investment

A house is an asset that increases in value over time. So, you can treat buying a property as an investment. It gives you the freedom to sell the house and make a profit. You can even rent it to generate regular income.

Disadvantages of buying a house

1.  Huge responsibility

Owning a house comes with a lot of responsibilities and added expenses. You have to pay for maintenance, property tax, utilities, and much more out of your pocket.

2.  Difficult to move out

Investing in a house means you will have to rethink before moving. If you get a dream job in another city, you cannot leave until you find a buyer or tenant.

3.  High upfront costs

When purchasing a house, you are required to give a lump sum as a down payment. There are also other associated costs like registration charges and stamp duty.

How to decide whether to buy or rent a house

Here are six factors that can help determine if you should buy or rent a house.

1. Financial situation

Your financial situation is the most significant aspect to consider. Buying a property requires you to pay a huge amount upfront. If you opt for a home loan, you need to pay EMIs to repay it for over a long tenure, which can be rather expensive. So, financial stability is crucial to buy a property.

2. Location

The location of a house is fixed. This makes moving to different cities quite challenging. Buying a house requires you to be sure that you do not have to change your current location anytime soon.

3. Lifestyle

Renting a property means you have to follow your landlord’s regulations. So, if you want to live on your terms and as per your lifestyle, a rented house may not be the place for you.

4.  Flexibility

Owning a house means you can modify it whenever you want and use it for any purpose without any obligations. Renting the property does not allow that flexibility.

5.  Real-estate market condition

The property market has seen a lot of ups and downs over the years. The real-estate market situation often helps decide if it is a good idea to buy a house. If you are purchasing a property to sell it soon, it might not be the best choice in a volatile market. Renting makes more sense in such a situation.

6.  Tax benefit

The tax benefit is an important aspect of deciding whether to buy or rent a house. Both options can come with tax benefits.

• Tax benefits on home loan: You can claim a tax deduction of up to ₹1.5 lakhs a year on the home loan repayment under Section 80C of the Income Tax Act, 1961. You can also claim deduction on registration charges and stamp duty.
• Tax benefits on HRA: Some employers pay House Rent Allowance (HRA) to employees who live in a rented property. The HRA amount is 50% of your basic salary if you live in a metro city. For non-metro cities, it is 40% of the basic salary. Section 10(13A) of the Income Tax Act, 1961 makes the HRA tax-deductible.
  The ‘rent vs. buy a home’ debate is never-ending. Now that you know the pros and cons of both options, you will be able to make an informed decision depending on your requirements.

Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.