The million-dollar question for a potential investor - to buy or rent a home. Probably one of the hardest decisions to take, this is something that almost everyone goes through, at one point or the other.

 EMIs’ versus rent

 “The common argument for buying a house using home loan is that you keep paying EMIs’ instead of paying rent and viola, before you know it you are a proud home owner. Unfortunately, there are no free lunches in an efficient market and none so in this case either. Imagine yourself taking an EMI but buying a house you don’t stay in yourself – wouldn’t you be getting rents from the place to pay off the EMIs’? So won’t that make it a free home also? Herein lays the tricky concept of opportunity cost of capital that escapes the layman. For rental properties the relation between rents and home price is Home Price = Rental / Capitalisation Rate.

The Capitalisation rate, circularly defined, is the ratio of the rental to the home price. Alternatively, it’s the difference of the cost of capital to the expected rental growth rate,” explains Prakash Gurbaxani, Founder & CEO of QVC Realty. For some people, buying their home makes the most sense, and for others, renting is best. To determine which is right for you, you first need to determine whether you can afford to buy. Then you need to consider other factors, including the time you’ll stay in your new home, the home’s prospects for appreciation and taxes.

The fundamental issue is your finance. The most important thing is to be realistic about your situation. It’s common for first-time buyers to jump into a loan that they cannot afford. Owning a home costs more than the monthly cheque you send to the bank. Add the cost of maintenance, electricity, water and utilities, and it will add up to much more than the fixed monthly rental. “Unless one expects to move out of Bangalore within foreseeable future, I would recommend one to buy property than use the rent option. Bangalore, with all its limitations and issues, is very much the city of the future. The city has arguably the best climate any city in India can boast of. Industry is booming and there are a lot of opportunities. The city has some very good educational institutes and some of the best hospitals. It is very cosmopolitan and the people are some of the friendliest you will come across. And real estate is always the best form of investment,” says Nitesh Shetty, MD, Nitesh Estates.

“Buying a property for self-use is always better than rentals. About a year ago one could buy a property almost with the same outgo (bank loan installment) as that of monthly rentals. Now with the interest rates higher than last year, the monthly outgo may be higher than the rentals. However, one should know that though the outgo is higher, the same is not going towards expenditure but towards creation of an asset, which in the long run, will appreciate reasonably. Renting is mainly for people who are either on the move or on transferable jobs. Hence, buying for self-use is definitely better than renting. For many, home ownership is not only a great source of pride, but can mean significant tax savings and even reduction in monthly payments depending on your interest rate and home loan specifications,” says Balakrishna Hegde, Managing Director, Chartered Housing.

Personal choice

It should be understood that whether an individual buys a house or stays on rent, is on one level largely a personal choice. Says Amit Bagaria, CEO and Chairman, Asipac Group, “The amount that an individual or a family has to pay as an EMI when they buy a home with a home loan is only marginally higher than what they would have to pay as rent for the same home. Thus, if the individual or family is sure that they are going to live in the same city at least for a few years, buying is always better.” There are factors, financial as well as non-financial (individual needs and aspirations), which need to be considered while determining the feasibility of options.

At any point of time, from an economic efficiency point of view, the rational choice between paying rent and paying EMIs is a call on factors ranging from the interest rates to growth rate of rentals—to your opportunity cost of capital. Also the utility one derives from owning a home adds an intangible to the equations. Simplistically, given the constraints the average homebuyer faces (such as salaried incomes, societal pressure, personal preferences); these are some practical issues to be considered.