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Bangalore Real Estate: A “Rent or Buy” No Brainer

February 21st, 2007 | Tag(s): | Popularity: 20% [?] |

I enjoy going through the housing section in Craigslist for Bangalore - there’s a wealth of data on market rates for renting & buying apartments, houses (bungalows) and plots. The most fun is when you can estimate what it would take to rent vs. buy the same place. Here’s an example:

This ad features a 3 bedroom apartment (2250 sq ft) @ Rs 4250 per sq f. The basic price works out to about 95 lakh rupees, and after adding registration costs, let’s round it up to 1 crore (10 million) rupees.

Now, here are ads (1, 2) for 3 bedroom apartment rentals in the same complex - same location, amenities, etc. The expected rents are Rs 20,000 to Rs 23,000 per month. Given that these are smaller (1450 sq ft), let’s be generous and say that the “for-sale” apartment would rent out for Rs 30,000 per month - which I doubt it would.

If one were to purchase the “for-sale” apartment at 100% with a 20-year home loan at a fixed interest rate of 12% (which is at the bottom end of what most banks would charge today), the monthly installment works out to Rs 110,000 using HDFC’s EMI calculator.

That’s a 4x difference - don’t forget the maintenance costs, property taxes, etc. Put it another way, the Price/Rent ratio on this place is 1 crore purchase price / 3.6 lakhs annual rent = 28 !!

So, buy or rent? The answer’s obvious.

4 comments:

  1. Pradeep [March 13th, 2007]:

    Yeah!!But the only difference is - At the end of the tenure, the person who paid the rent will still have no asset!!!

  2. Kaushik [March 13th, 2007]:

    Well, I have addressed this “concern” about not owning the property before - please refer to this post & comments:
    http://www.galatime.com/2007/03/02/bangalore-real-estate-%e2%80%9crent-or-buy%e2%80%9d-ii/#comments

  3. powermyloan [March 19th, 2007]:

    Owning a property is always better than living on rent, but what must be taken into account is the right time. There is always a right time to do even the best of the things, so with current high property prices and now increased loan rates, in my opinion waiting for next 2-3 months may not be that bad an idea

  4. Bhaskar [August 26th, 2007]:

    The pre-tax yields on residential property in India historically has been around 4%, using calculations similar to the one presented here.

    One could assume that the returns on the 10-month advance paid for rents could address the maintenance and property taxes.

    Tax considerations could skew the economics. For a rented property, the rent collected could be offset against the tax paid towards the housing loan. Possibly, the additional interest outgo be considered an expense offset against other income?

    Appreciation rates of the property itself is one other factor.

    A more comprehensive computation considering the tax aspects and home price appreciation would be a better guide for decision making.

    Investing in real estate on the basis of rental yields has never made sense. However, the investors in real estate seem to have gained considerably over many years.

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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.
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