For years, one of the most debated questions in the Indian real estate sector has been whether it is better to buy or rent a home. This decision can have long-lasting financial, emotional, and lifestyle impacts. With rising real estate prices and escalating rents, choosing between renting and buying has never been more challenging or significant.
In this blog, we explore the key factors to consider when making the choice, guided by data and trends observed across major Indian cities. We will also provide a comprehensive analysis of both options to help you make an informed decision.
To Buy or to Rent? The Indian Real Estate Market in 2024
According to a recent study by real estate consultancy Anarock, rental values in key micro-markets of India’s top seven cities surged by up to 72% between 2021 and June 2024. This increase in rents outpaced the growth in capital values in cities like Bengaluru, Pune, Kolkata, and Chennai. On the other hand, cities like NCR, Mumbai Metropolitan Region (MMR), and Hyderabad saw higher capital value appreciation than rental values.
For instance, rents in areas like Bengaluru’s Sarjapur Road and Pune’s Hinjewadi rose over 50%, while capital growth was notably high in places like Noida’s Sector 150 and Mumbai’s Chembur. These trends are essential when considering whether to buy or rent, but they are far from the only factors. Personal preferences, financial stability, job growth prospects, and family size also play crucial roles.
The Rising Sentiment Toward Homeownership
An increasing number of tenants view rent as a recurring expense, while EMIs (Equated Monthly Installments) are perceived as investments towards a non-volatile asset. This shift in mindset is partly due to relatively cheaper home loan interest rates, averaging between 8.75% and 9.5%. As a result, the median age of first-time homebuyers has dropped from 42 to 34 over the past three years, with millennials and Gen Z opting for homeownership earlier than previous generations.
According to data from NoBroker, younger generations today are buying homes after renting only four to five times, compared to nine times a decade ago. But does this mean that buying is always the better option? Let’s take a closer look at the factors involved.
Key Factors to Consider When Buying a Home
1. The Emotional Parameter
Buying a home is an emotional decision for many. Homeownership is often seen as a symbol of stability, success, and security, especially in India. For some, owning a home is part of creating a legacy for future generations. This emotional aspect cannot be overlooked, but it should not be the sole factor driving your decision.
2. The Financial Parameter
Before you jump into buying a house, it’s important to understand the financial implications. Buying a house involves several costs, including:
- Down Payment: Typically, a down payment of 10-20% of the property’s value is required. This upfront cost gives you partial ownership of the house and is often a significant financial commitment.
- Home Loan Interest: Most homebuyers in India take a loan to cover 80-90% of the property cost. The interest on the loan is essentially a rent you pay to the bank instead of a landlord.
- Maintenance Costs: Homeownership comes with the responsibility of maintaining the property. Monthly maintenance charges, repairs, and upkeep are ongoing expenses that need to be factored into your budget.
3. The Investment Parameter
Many people view buying a house as an investment. However, while property values can appreciate, there are risks involved, especially if the housing market slows down. It’s essential to evaluate whether the appreciation in capital values in your desired location justifies the costs associated with homeownership.
Key Factors to Consider When Renting a Home
1. Rent and Deposit
Renting offers flexibility, and the upfront costs are usually lower. In most cities, you will need to pay an upfront deposit, which can range from 2 to 12 months of rent, depending on the landlord and location. This deposit is refundable when you vacate the property.
2. Lower Maintenance Costs
While tenants are responsible for keeping the property in good condition, major repairs and long-term maintenance generally fall under the landlord’s responsibility. This can significantly reduce the financial burden for tenants compared to homeowners.
3. No Long-Term Debt
One of the major advantages of renting is that you are not tied down by a long-term financial obligation. This flexibility can be particularly appealing for people who are unsure of their long-term plans or those who frequently relocate for work.
What Is Rental Yield?
A key concept to understand when deciding whether to rent or buy is rental yield. Rental yield is the annual rent earned on a property as a percentage of its total value. In India, rental yields typically range between 2% and 3%.
For example, if you own a 4BHK apartment in Noida worth ₹5 crore and the monthly rent is ₹65,000, the rental yield is 1.56%. This means it would take around 65 years to recover the property’s value through rent alone. In such a scenario, renting may seem like a better option unless the property’s value appreciates significantly over time.
Risks of Buying a Home
While owning a home comes with several benefits, there are also risks associated with it:
- Long-Term Debt: Home loans usually span 15-30 years, meaning you could be in debt for a large part of your life. A significant portion of your income will go towards paying EMIs, which could limit your financial flexibility.
- Risk of Defaulting: If you default on your home loan payments, you could lose the property, and your credit score will take a hit. This could make it difficult to secure loans in the future.
- Maintenance and Upgrades: As a homeowner, you will need to constantly invest in maintaining and upgrading your property to retain its value, especially if you plan to rent it out or sell it later.
Crunching the Numbers: Is It Cheaper to Rent or Buy?
When comparing the financial implications of renting versus buying, renting often comes out as the cheaper option in the short term. Let’s break it down:
- Renting: If you rent a house, you avoid the large upfront costs of a down payment and have lower maintenance costs. The flexibility of renting is particularly appealing for people with unstable job prospects or those who prefer mobility.
- Buying: While buying a house involves a significant financial commitment, it does offer long-term security and the potential for appreciation in property value. However, the return on investment is not always guaranteed, and the initial costs can be prohibitive for many people.
According to some estimates, the net benefit from renting a home could be ₹1.73 crore, compared to a net benefit of ₹1.61 crore from buying, assuming a 6% annual return on investments and a stable rental yield. However, if the property market appreciates at a faster rate, buying could become more advantageous.
The Emotional vs. Financial Dilemma
Ultimately, deciding whether to buy or rent a home in India comes down to balancing emotional and financial considerations. For some, the stability and pride of homeownership outweigh the financial risks, while for others, the flexibility and lower costs of renting are more appealing.
Tips for First-Time Homebuyers
If you’ve decided to take the plunge and buy a home, here are some tips to keep in mind:
- Save for a Bigger Down Payment: The larger your down payment, the less you will need to borrow, which can save you a significant amount on interest over the loan’s tenure.
- Check Your Credit Score: A higher credit score will help you secure better loan terms, including lower interest rates.
- Consider All Costs: Don’t forget to factor in maintenance, property taxes, and registration fees when budgeting for your home purchase.
- Plan for the Long Term: If you’re buying a home, plan to stay there for at least 5-7 years to maximize your investment.
- Use Financial Tools: Use rent vs. buy calculators to assess your financial situation and determine which option makes the most sense for you.
Snehil Yadav, a luxury real estate influencer says, “There is no one-size-fits-all answer to the question of whether to buy or rent a home in India. It depends on your financial stability, personal preferences, and the real estate market in your desired location.”
Renting may offer flexibility and lower upfront costs, but buying a home provides long-term security and the potential for financial growth.
Whatever you decide, be sure to weigh all your options carefully and consider both the emotional and financial aspects of homeownership.