Should you rent or buy a house? Things to keep in mind…
July 10th, 2018
I have got a job and need to shift to another town. I am getting married and need to move out of
my parents’ place. My office is too far from where I live, I need a place closer to work!
These are few situations which prompt the eternal question for people looking at
accommodation needs –
Should I rent out or just buy a home?
It is a tough situation to be in, as to whether you should buy or rent a place is indeed a big
decision to make. It is a decision that can have a financial impact and sometimes, an emotional
impact too. Often, many of us in this situation can take months to decide on a choice. Well, what
are the factors that need to be considered to take a logical and financially viable decision? How
should you look at these factors?
To make it easier, we have listed down a few factors that can help you make a better decision
when it comes to opting for a place –
Income generation: First and foremost, is the income generated solely by yourself. The income
is everything that you earn for yourself, in most cases it is the monthly salary if you are an
employee or your monthly earnings if you’re into business. In some cases, people do have more
than one source of income which is an additional bonus.
Income generation needs to be considerably high (as a rough estimate, upward of 10-12L per
annum for a property worth 50-60L) if you are looking at purchasing a property in top cities
such as Bangalore, Hyderabad, Chennai, Pune, Ahmedabad, etc. In these cities the average rate
of a double bedroom flat is anywhere between 50-60L* (excluding those in upscale localities). If
the location happens to be Mumbai or Delhi, the annual income needs to be much higher as the
price of a double bedroom can range anywhere between 80L-1.8 CR*. So, if you are moving to
the top cities in India, it is important to double check on everything from property rates to
property developers to property location, etc.
So, if your income is lower than required, it is only logical that you should rent out instead of
buying a home.
Down payment and Bank Loans: In most cases people do go with a bank loan for the
purchase of homes and that makes absolute financial sense as the ‘financial burden’ is split over a
time period of 10/15/20 years. The initial down payment, which is usually 20-25% of the total
property cost, and the loan rates are related and determine the Equated Monthly Instalments or
EMIs. The down payment again, depends upon your financial capacity at the time of purchase
and it can vary – higher the down payment lower will be the total cost of the EMI..
As an ideal measure, the EMI should be around 30-40% of your monthly income unless of
course you have other sources of income that can offset the additional amount to be paid.
Also, it is important to consider your previous loan payment, if any, and at what stage of
payment you are at – are you nearing the completion or have you just about started? This is
called the Debt-Income ratio and most banks or lenders look at this ratio before sanctioning
your home loan. The decision to purchase a property while having other loans might lead to
additional burden. So, as a potential home buyer, having no other commitments can make it
easier on your future home loan.
Time of stay: How long will you be at the place? You will need to have an answer for that. It
makes sense to buy a home if you are going to stay for a longer period. The length of the period
will be partially defined by your income levels (higher income can help you repay in shorter
duration) but again you can take the call here. For example, if you have shifted town due to job
and are likely to shift again or even change companies that could entail your relocation, it makes
perfect sense to just rent out instead of buying home and getting caught in the EMI bracket. But
if you are confident that you will stay, say, for more than 8-10 years or have decided to base
yourself out of the town no matter what, then it is advisable to buy a home as it is a long-term
objective. But here again, you will need to consider the cost of home.
Future Property Value: Sometimes, you may want to buy the home anyway regardless of how
long you plan to stay. It could be because you like the place or because you foresee the purchase
as a great way to have rental income. In such instances, it is important to keep one important
thing in mind – the Future Property Value. The future property value of your potential home
will vary based on many factors ranging from – the location, to the amenities and facilities
provided, the availability of adequate social infrastructure, the neighbourhood and water
availability to name a few. You will need to do considerable research to comprehend and assess
the value of the property so the purchase becomes a source of long-term recurring income for
Buying or renting has been the age-old question in the real estate scenario, and you will need to
consider the above factors before taking a decision. One thing has to be clear, if you are shifting
to big towns or cities due to job (or even marriage) or simply want to relocate, renting out first
and then validating the purchase on aforementioned factors makes perfect sense unless of
course, you have the financial muscle to buy the desired property outright. Renting out first,
gives you the time to mull over various options for purchase while accommodating you for the
*Price per square foot is an average estimate taken and is subject to change, please check the