Bangalore Real Estate: “Rent or Buy” Part II
Following up on my previous post about the disparity between renting an apartment in Bangalore versus purchasing it via a home loan - here is another example, courtesy of Craigslist:
Rent @ Rs 45,000 per month: 4 BHK (Bedroom-Hall-Kitchen) apartment, 2200 sft + 350 private terrace, amenities, etc.
Buy @ Rs 1,200,000: Similar 4 BHK apartment in the same housing complex.
Let’s ignore the fact that rents are much more negotiable than purchases (given the “hot” real estate market). Using HDFC’s home loan calculator, the installment (EMI) for the “buy” scenario with 100% financing works out to Rs 136,000 per month - based on a 20-year loan period and a fixed interest rate of 12.5% (I was too generous last time).
Again, ignoring maintenance costs, property taxes, etc. - the buyer would still have to pay over 3x compared to the renter. Or, the Price / Rent ratio is 1.2 crores purchase price / 5.4 lakhs annual rent = 22!
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March 2nd, 2007 at 6:19 pm
You have not taken into account the following:
1. Typically, in any Indian city the rent increases at the rate of 5-10% per annum. At least you have to offset the inflation or the landlord will not renew your lease.
2. If you continue to put the amount equivalent to the rent in any sensible monthly deposit scheme (e.g. Post office, Mutual Fund-SIP, etc) then after the end of your 20 years you will be having a corpus of much more than the amount of money you to buy the property.
3. At the end of 20 years, you are left with “nothing”. When it is time to retire soon, and your income ceases then your property is the only thing that can keep you alive. If you have property, then you can rent some portion of it, or sell it to move to a cheaper alternative. If you do not have any property when you are old then your sons will not take care of you. Thats the fact of life for most people.
Would you still say that renting is cheaper?
March 3rd, 2007 at 3:10 pm
Randhir: Thanks for your comments. Here’s my take:
1. Yes, rents incresae 5-10% p.a. - but we can offset that against increases in property taxes, society maintenance fees, and general upkeep expenses.
2 & 3: Left with “nothing” is incorrect. If I rent this place, I save the difference (136k - 45k = 91k) every MONTH, that can then be invested in a diversified portfolio of stocks, fixed deposits, gold, etc. That would have as good (or better / lower risk) chance of appreciating over the period of the home loan.
In general, I am not saying renting is ALWAYS cheaper. My point is that there is a time to buy versus there is a time to rent, depending on asset prices (over/under-valuation). Right now, I think the better bet is to rent.
Would you agree that investing in stocks is good, in general? Would you then agree that investing in Nasdaq stocks in March 2000 was a good idea?
Looking forward to more discussion on this topic!
March 15th, 2007 at 1:19 pm
I wrote about this with a detailed cash flow calculator (downloadable Excel file) at:
http://www.deepakshenoy.com/articles/realestate/realestatecf.htm
You’ll find that regardless of what you do, renting is a better idea.
In your example above, let us say you considered 136k EMI versus 45K rent, and considered a 5% increase in rent with ZERO maintenance costs of the house (darn nice house that), and invested the remaining in equity mutual funds that averaged 12% a year (historical return of the index).
You will be left with Rs. 71 million (7.1 crores) in 20 years because of the excess of EMI over rent. Considering about 10% average rise in housing prices, this same house will cost you 8 crores after 20 years. (In reality I think you should be able to get it for about 4 crores, because this is an absurdly high part of the cycle)
Consider also that you don’t NEED a 4 bedroom house when you retire. I’m currently helping a retiree scale down a house because it is too big to maintain (essentially, sell and buy a smaller house).
And inflation will come down, and a lot more housing will be available (Bangalore has an estimated 100,000 premium units coming up for sale this year, with the demand at around 40,000 or so).
This calculation does not consider tax breaks on housing - but in India you get a little bit of a break for renting as well, and you can use my real estate calculator to see the difference.
April 28th, 2007 at 12:26 am
Buying a property has a major downside: you cant move it with you if you change jobs or move cities. Granted you can sell the place and buy another one but the transaction cost would not be insignificant.
Nothing beats renting for its sheer flexibility: you can move anytime the roof starts leaking.