Rent or Buy a House? - Analyse with Calculator - YouTube

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Namaskar, my name is Mukul, and welcome to Asset Yogi.

Friends, today's video is on a very common topic that

Whether we should buy or rent a house?

Which deal is more profitable

Many subscribers asked this question several times

So I'll try to cover all the possible factors.

A lot of arguments happen on buying or renting

People give different reasonings for this

So broadly, there are only 2 factors.

One is financial, that if we see the house as an investment,

Then what is beneficial among renting or buying

The second is qualitative, that if we aren't seeing the house as an investment

Then what all factors should we consider

Like safety or security, whether we want to use the house for long or short term.

So I'll try to cover all these factors in this video.

Now if we talk about financials,

So the people who give arguments to buy a house,

Says that if you live in a rented house,

then that money will be wasted and will go in the pocket of the landlord.

But if you borrow a loan and pay EMI with that money,

Then you'll own that house one day and since real estate is appreciable in long term,

So that also becomes a good investment.

Second, the people who give arguments for renting,

Have an opinion that we should always rent a house because it's cheaper than buying

And the money which will be saved can be invested

to some other asset where you get better returns

Like stocks and mutual funds.

And their second argument is that, if you're borrowing a loan,

Then the interest paid is also rent.

You're borrowing money and giving rent on that.

So this is also a valid argument.

So we'll try to understand these arguments with calculations

So that we can decide what's good for us

In fact, I'll share my personal opinion at last

So keep watching this video.

So first of all, let's see these calculations.

I created this rent vs buy calculator on an excel sheet

You can also download this, the link is in the description.

In all the yellow marked cells, you have to insert input values

Renting scenario is on left hand side and buying is on right hand side.

In whichever case, Net savings will be more,

Will be the better option.

First of all, type an analysis period for how many years you are considering that house

After that, type your monthly rent of the house which you want to buy

If you rent a house, you also get HRA tax benefit if you are in a salaried class.

So if you're not in a salaried class Or you don't get any HRA tax benefit,

Then you can type 0 % here.

Otherwise whatever tax you pay 10%, 20%, 30%, type it here

I didn't considered the further tax slabs in HRA

I directly considered the tax bracket so that calculations become easier

So it will get adjusted according to the monthly rent

and your effective monthly rent will come here

Annual rent comes here if we multiply it by 12.

After that, I considered the annual rental increase to be 8%

You can change according to you

Normally it increases by 5-10% every year

So we can change according to that.

So I considered 7-8% as an average and took 8%

Rent Analysis Period, that means,

I calculated what will be the total rent you'll pay in 20 years

So in this case, it's 66 lakhs.

Now let's discuss the inputs if we buy the same house

Let's say the house is worth Rs. 50,00,000.

Let's say you pay Rs. 10,00,000 as the down payment

Normally you have to pay 15-20% of the down payment

because the maximum loan amount you get is 80-85%

So I considered the minimum down payment which is Rs. 10,00,000.

And your loan amount will be calculated according to that

Let's assume the interest rate of the loan to be 9%

So according to 9%, the actual EMI will be around Rs. 36,000

Let's say the tax bracket is 20% as we took in renting also

So if you borrow a home loan, you get tax benefit on interest

So the effective interest rate becomes 7.2%.

If you subtract 20% of 9% from 9% then it comes out to be 7.2% as the effective interest rate.

Now I didn't considered slabs here also

As the maximum benefit on the interest rate for a home loan is Rs. 2,00,000

I took 100% to ease out the calculations

So I subtracted 20% from 9% and the effective interest rate comes out 7.2%

So our effective EMI becomes Rs. 31,494

According to that, the net effective interest payment in 20 years will be around Rs. 35,58,553

Right? Now we also have to include other costs in buying

So you'll pay maintenance each year which I took Rs. 2000 monthly

I considered inflation of 6% and each year, there will be some increment too

According to all this, you'll pay around Rs. 9,00,000 as the maintenance charge in 20 years keeping inflation in mind

So now we'll add the total costs in 20 years

Add maintenance, interest payment, and the price of the property

And the total cost comes 94.4 lakhs.

So we saw the total cost paid in renting in 20 years which is, Rs. 66,00,000

And the total cost in case of buying comes out 94.4 lakhs.

Now let's talk about savings and investments.

Firstly, let's discuss about buying,

If we sell this property 20 years later, we'll get some annual appreciation

which I considered 8% because we can consider 7-8 % as a normal appreciation over a long period of time.

So the future value of your property will become Rs. 2,33,04,786.

That means the house which was worth Rs. 50,00,000

After 20 years in the future, it will be worth 2.33 crores.

So this was the whole profit and when you subtract these costs then

the net savings are future value - costs, which come out Rs. 1,38,63,378.

Now let's talk about the savings in renting

So firstly, the down payment is not here

So 10 lakhs are saved here which you can invest anywhere.

After that, if you subtract monthly rent from monthly EMI,

that also comes out as saving.

So Rs. 21,000 are saved here.

You can invest all these savings and if you invest it for 20 years,

Let's say with 8% of expected returns, and I considered the same returns everywhere

I considered Rental increase, expected returns, and property appreciation as 8%

Here I considered the interest rate we get in an FD which is around 7-8%

I haven't considered taxation here on the interest rates.

So let's say we consider it as post-tax returns

So let's say you get 8% returns.

So now we have to find the future value that after 20 years,

These 10 lakhs will be 46 lakhs if it grows on 8%

And if your monthly savings keep growing at 8%

Then it becomes 1.23 crores.

So the net profit in the case of renting will be

You'll add 46 lakhs in the future value of monthly savings

And then subtract 66 lakhs approximately

So this comes out as your net savings in the case of renting which is Rs. 1,04,34,206.

So in this case, you can see that the real estate option is better

Because net savings here is Rs. 1,38,63,378

so you're getting a profit of 34 lakhs in buying a house.

So in this case, buying becomes better.

Now let me change some scenarios.

Let's consider the analysis period to be 5 years and check what's coming out

You can see that as the analysis period is decreased,

Rental becomes more beneficial because real estate is always beneficial in the long terms

and renting is beneficial in the short term

Secondly, if we're taking 5 years period, it's a possibility that real estate gets a better appreciation

We also saw that sometimes it gets appreciated by 15%, sometimes 20% also.

So this scenario changes and in this case real estate becomes better.

It's also possible that real estate does not give any returns in the period of 5 years

So in this case, we face loss and you're paying EMI from your pocket

And in renting, you're still in profit because you can at least gain 7-8% in returns.

And now let's again go for the long term and discuss 1-2 scenarios more

Let's take 20 years again

And let's consider it as 8% and

if anyone even has a little knowledge,

That person will invest in mutual funds, stocks, and similar assets.

So let's say the average returns on this saved money,

Down payment and monthly savings,

Comes out 12%.

So the scenario changes completely.

Here it became 2.38 crores and here 1.38 crores so the net benefit of 1 crore.

So it depends on how how much returns you can earn and

secondly, It also depends on if your monthly rent was more

Sometimes the prices of properties are down and the rental increases

So let's say that the rent of this house be Rs. 25000

Then the scenario changes again and real estate becomes better.

So it depends upon the current market situations and deals you're getting.

You've to insert those inputs.

In upcoming videos, I'll also discuss the relation between the monthly rent and property price

And how can you find that which property is expensive and which is cheaper?

So you can play around like this and you'll get this calculator in the description

you can download it.

So as we saw in the calculations,

there's no straight forward answer to which is better among renting or buying.

It depends on market conditions, returns generated, or type of deal you're getting.

But if we talk about the long terms, like after 20-25 years,

Then the people who buy their house are in benefit.

Now, why am I saying that?

Because in renting case, we assumed that we'll invest

the money which we saved by not paying the down payment

And also invest the difference between EMI and rent with expectations of good returns

But if you get money in your account,

human tendency is to spend that money and improve lifestyle.

That's why my personal opinion will be that if you're talking about your 1st house,

Then you should definitely buy one house

Whether you buy it in the outskirts or in another city

wherever you want to take retirement, or you can also buy a small house.

But if your view is short term, like 4-6 years in a city,

Then renting may be definitely better

In that case, you should delay your buying plan or if you want to buy,

Then you can buy a small house in another city.

So these were the financial things

But when we rent or buy a house,

We have to consider other factors too

Let's discuss them also

Arguments in the favour of renting are

1. If your job or income is not stable, then you should rent a house

Whenever you plan to buy a house, plan it for the long term for about 8-10 years

Or you would like to take retirement there

According to that.

If your job or income is unstable or let's say if you want to start a start-up in the future,

Then you should rent a house.

2nd point is flexibility.

When you rent a house, let's say you want to do a job for 1-2 years

Nowadays people even change cities quickly

In Banglore, after some time Gurgaon, or Hyderabad

So in this case, renting is always beneficial

The 3rd reason for renting is lower risk.

When you rent a house, you don't commit anything special.

You just need to pay brokerage, the cost for rental agreement, transaction costs are already less

So more money is not invested.

Also, you don't need to maintain that house and take its headache.

4th reason is location choice

You can rent a house in the location of your choice.

In fact, you can change the location quickly.

If you want to live near a school, hospital, or office

So you have tons of choices under renting.

So these were the reasons why should you rent a house.

Now let's discuss why should you buy a house.

The biggest reason is that you are the decision maker of your house.

If you want to improve it or work on interiors, so you can do it

You don't have to think about the restrictions of landlords

The landlord may ask you to pay increased rent anytime.

If you have your own house then you won't face all these things and you don't need to do frequent shifting.

And this is a big reason why people buy a house.

2nd reason is security and comfort.

When you buy a house, you feel stable in life and there's financial security.

In the future, whether the job remains or not, income increases or decreases,

You have at least this surety that you have a place to live.

Now for this, you can buy a small house or you can buy it anywhere

You'll have surety and feel stable in life.

3rd reason is forced savings, when you are paying EMI,

You are automatically saving money and investing it.

4th is long-term investment.

Real estate is a long-term investment as I told you before.

It is an illiquid asset. That means it cannot be bought or sold quickly.

And that's why you get an appreciation for holding it for the long term.

So all these factors help to decide whether you should buy or rent a house.

This is a very individual decision. You can consider the factor which you find important.

And whenever you go to buy a house,

Check whether a bubble is there in the market or not

Maybe the prices of real estate are high or moderate.

So I'll discuss in an upcoming video how to find this.

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