Whether to buy a house or live on rent?


Whether to buy a house or live on rent?

Life is tough and at times like this, you understand what is the importance of having a home. In this state not having a stable income and living on rent can combine to be your worst nightmare. But don't worry, we are here to evaluate a question which comes to the mind of many millennials and aged too. Should I put my life earnings in buying a house or should I live on rent and keep the lump sum money invested. Let's check that out.

A typical scenario :

 Property on home loan: This is the approach that a majority of people take in order to buy their first home. There is nothing wrong in this, but we are here to check whether paying all that interest is making you financially better off or worse. So let us start with a typical example, wherein you bought a house for 50 lakhs and took a home loan for 20 years. Below is the loan structure:


Keep in mind, we haven't considered the capital appreciation for the house. In general property rates advance by 6% every year. So the value of your 50,00,000 (0.5 cr) house after 20 years at a capital appreciation of 6% will be 1,60,35,677 (1.6 crores). So let us calculate the total financial effect on you from this 20 year transaction. You made a positive cash flow of 56,21,797 (1.6 cr - 1.04 cr) in 20 years. 

Now, what if you were living on rent in the same apartment? The rental income of a property is usually 3.5% of the price of the house. So the first years rent will be 1,75,000(14,583 per month). Let's assume the rental cost increases by 6% every year too. Therefore, the total rent you will pay in 20 years will be 64,37,331. However, since you were paying an EMI of 43,391 every month, you will have extra cash with you, which you will invest in index funds like Sensex, which gives 13% CAGR return (compounded annual growth rate).  Now, I am considering the factor that your rent will increase therefore, your investment amount will reduce each year. Check that out in the table below.

YearEMIRentDifferenceAmount invested per month
143,39114,58328,80828,808
243,39115,45827,93327,933
343,39116,38527,00627,006
443,39117,36926,02226,022
543,39118,41124,98024,980
643,39119,51523,87623,876
743,39120,68622,70522,705
843,39121,92721,46421,464
943,39123,24320,14820,148
1043,39124,63818,75318,753
1143,39126,11617,27517,275
1243,39127,68315,70815,708
1343,39129,34414,04714,047
1443,39131,10412,28712,287
1543,39132,97110,42010,420
1643,39134,9498,4428,442
1743,39137,0466,3456,345
1843,39139,2694,1224,122
1943,39141,6251,7661,766
2043,39144,122-7310

If the above investment strategy is followed for the remaining money, your total corpus (principal + return) from the investment at a return of 13% in 19 years will be 1,92,59,142 (1.92 crores ) and an additional 13% return for the last year on this corpus (since you are not investing any money in last year) will take your total corpus to a whopping 2,17,62,830 (1,92,59,142 * 1.13 = 2.17 crores)


Now, let's calculate the financial effect on you when you were living on rent. You will have a positive cash flow of 1,53,25,499 (2,17,62,830 - 64,37,331). Surprising right :). When you are living on a rent you are making a better financial decision for yourself. The additional cash flow due to living on rent is 97,03,702 (1,53,25,499 - 56,21,797). 

The takeaway here is that it doesn't necessarily mean that having your own house will give you more security and better financial position in life. The reason is that, if your money is kept in form of a real estate property, you have very low liquidity, how are you going to sell it in scenarios like today. Also, if you just lack 2,00,000 for some expense, are you going to sell your whole house worth 50,00,000. Doesn't make sense right. Contrary to that, the same disadvantages are tackled with living on rent. You have ample ending balance, which increases every year, in your index fund as shown in above table. You are paying off your rent, living in the same apartment and having additional cash flow and can withdraw money anytime you want without the need to sell the entire corpus.

Fact: That is the reason why even Anushka and Virat are okay paying rent of 15 lakhs per month instead of buying a property of 100 crores (which mind you they can easily afford).

Thanks for reading!

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Comment on any query you had like me to address.

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