Nitin Kamath, co-founder of Zerodha and popular financial advisor, once advocated for renting instead of buying a house. Recently, however, he made headlines by purchasing a luxurious home. This decision left many people questioning his previous advice, with some even accusing him of hypocrisy. However, Kamath has addressed the issue, admitting that renting has its downsides.
The Debate: Rent or Buy?
The choice between buying a house or living on rent has been a common dilemma for many. Anshuman Magazine, the Chairman and CEO of CBRE India, explains that there isn’t a straightforward answer to this question. It varies depending on personal circumstances such as income, risk tolerance, lifestyle, and financial stability.
Both options come with their own benefits and challenges, and the key is to understand which one suits your life situation better.
When Buying a Home Makes Sense
For first-time homebuyers, purchasing a home can be a smart financial decision. Anshuman advises that if you plan to buy, it’s important to put down as much money as possible upfront. This reduces the amount of loan you’ll need, resulting in lower interest payments. He also emphasizes keeping the loan repayment period as short as possible, though it will increase your monthly EMI (equated monthly installment).
If you are financially stable and plan to stay in one place for a long time, buying a home can offer several long-term benefits.
Example: Financial Breakdown of Buying a House
Let’s assume you buy a house for ₹50 lakhs. You make a down payment of 20%, which is ₹10 lakhs, and take a home loan of ₹40 lakhs at an interest rate of 9%. With a loan tenure of 20 years, your monthly EMI would be around ₹36,000. However, considering tax exemptions on the EMI interest, the effective EMI could reduce to ₹31,500.
You would end up paying around ₹95 lakhs over 20 years, including interest and maintenance costs. But if the property value appreciates by 7-8% per year, you could sell it for about ₹2 crores after 20 years. This means a potential profit of ₹1.05 crore.
When Renting is a Better Option
For individuals with unstable jobs or those who move frequently due to work, renting makes more sense. Renting offers flexibility without the long-term financial commitment of EMIs. It also helps avoid the additional costs of home maintenance and property taxes.
Renting is also a viable option for those who prefer to invest their savings elsewhere, like in stocks, mutual funds, or other assets, which could generate better returns in the long run.
Example: Financial Breakdown of Renting a Home
Let’s say you pay ₹15,000 per month in rent. Over 20 years, assuming an 8% annual rent increase, you would end up paying around ₹66 lakhs in total rent. If you invest the ₹10 lakhs that you saved from not making a down payment on a house, and earn 8% returns, this could grow to ₹47 lakhs in 20 years.
Additionally, you’d save the difference between the rent and a typical EMI. If you invest this monthly saving of ₹24,000, earning 8% annually, it could accumulate to around ₹1.3 crores over 20 years. In this scenario, your total savings and investments would amount to ₹1.77 crores, minus the ₹66 lakhs you paid in rent, leaving you with a net saving of ₹1.11 crores.
Financial and Lifestyle Factors
When deciding between buying and renting, several factors come into play. Buying a house offers stability and forces you to save in the form of monthly EMIs. Eventually, you own a valuable asset that you can sell for a profit. It also provides emotional security and a sense of ownership.
On the other hand, renting allows you to live with less financial stress and gives you the flexibility to move as needed. If your job or lifestyle requires frequent relocations, renting could be a more practical choice.
Buying a Home: Key Advantages
- Stability: Owning a home provides long-term stability. You don’t have to worry about rent hikes or moving out because of a landlord’s decision.
- Forced Savings: Paying EMIs is like a forced savings plan. Over time, as property prices rise, your investment grows in value.
- Tax Benefits: Homebuyers enjoy tax benefits on their home loan interest and principal repayment under sections 24(b) and 80C of the Income Tax Act.
- Emotional Satisfaction: There is a deep sense of emotional satisfaction in owning your own home. It gives you the freedom to design, decorate, and renovate according to your preferences.
Renting a Home: Key Advantages
- Lower Monthly Costs: Renting a home typically costs less per month than buying one, especially in the initial years.
- Flexibility: Renting gives you the freedom to move whenever you want, without the burden of selling a property.
- No Maintenance Hassles: Homeowners need to spend on maintenance and repairs, whereas tenants usually don’t bear these expenses.
- Investment Opportunity: Instead of tying up money in a house, renting allows you to invest in other financial instruments that may provide higher returns.
Conclusion
The decision to buy or rent depends on your personal financial situation, job stability, and long-term goals. If you value stability and long-term financial growth, buying a home might be the right choice. However, if flexibility and lower monthly expenses are your priority, renting could be more beneficial. Whatever your choice, it’s important to weigh all factors and plan carefully for the future.
