Rent or buy a house? Be realistic!

The article Should you buy a house or stay on rent? has generated a lot of response. While some visitors have  agreed, others have differed. In this note, we respond to some of the points of disagreement.

1. A rent of Rs 13,500 is high for a property worth Rs 2,500,000

A large number of readers believed that there was a mismatch between the assumed rent amount and the property price. Property prices and the rent that they can fetch not only vary from one city to another, but also vary between different localities in the same city. Factors like the location, amenities available and quality of construction, among others often come into play in determining the rent (as also the price of property) that a given property can yield.

The discussion in the article pertained to a property in Mumbai. The numbers chosen by us were not hypothetical. On the contrary, they were actual numbers for a house property in the western suburbs of Mumbai, which has recently been put up on rent

Of course, the numbers (for both the rent as well as the property) would vary in different locations across cities. While evaluating the trade-off between staying on rent and buying a house property, individuals would do well to consider rates that are applicable to their area of residence, thereby making the discussion relevant for them.

But yes, to reiterate, generally there tends to be a predictable rent to property price relationship.

2. Rent is constant over a 20-year period

The uptick in rent paid is vital to the discussion and we have not ignored the same. We have assumed that the rent of the house increases every year by 5 per cent, and the calculations take the same into account. Again, the rise in rent payouts could vary significantly from one location to another. However, the assumption made by us would certainly qualify as a reasonable one if not accurate.

3. Appreciation in the value of property not taken into account

We have discussed appreciation in the value of the property; however we have chosen not to quantify it. The reason being that factoring in the same would have definitely tilted the discussion in favour of buying a property. Contrary to what some of the feedback suggests, we were keen on presenting both the options in an unbiased manner.

In our note, we did make a mention that the appreciation in the price of the property needs to be factored in even though we have not ventured to estimate that gain. The article explicitly mentions "while staying on rent would be a pure expenditure, buying a house should be regarded as an investment, as an asset is created for the home buyer. The asset's value is likely to increase over the course of time (a vital factor that we have not considered)".

4. No final conclusion given

As visitors would appreciate, the nature of the topic under discussion is such that there can be no single conclusion. A 'one size fits all' approach would not work here. Whether an individual should buy a house or stay on rent will to a large extent depend on his personal choice. Many factors, both financial as well as non-financial, (which would vary for each individual) need to be considered while making a decision.

However, our in-house view on the stated matter has been explicitly mentioned in the article. We quote "At Personalfn, we maintain that every individual must own property (for residential purpose), as the same has a vital role to play from an asset allocation perspective. To that end, buying a property should be taken up on priority, and discretion can be used in terms of the location and size of the property".

The underlying intention behind this article was to educate individuals of the various factors that need to be considered while making that perennial choice -- to stay on rent or buy a house. There is a need to understand that a plethora of factors, most of them subjective in nature, will come into play while making this choice. Hence making a number of assumptions would be in order. On our part, we ensured that realistic assumptions are made, wherever necessary.

We fully appreciate that the factors could vary significantly for various individuals and they would do well to take into consideration their individual needs and conditions to arrive at a conclusion that would be applicable (and exclusive) to them.

By Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue -- Real Estate & You - please click here.