To rent or to buy a home, that is the big question
By Sumeet Vaid, www.mydigitalfc.com
The two giant real estate deals of residential properties in prime locations in Mumbai and Delhi made to the headlines recently. Yet, with housing prices sky-rocketing post the real estate slump in 2008 properties in cities like Mumbai and Delhi are beyond the reach of the common man. Many studies reveal that over the last year the property sales in major metros have been stagnant despite the meticulous efforts put in by the real estate developers.
Now, it is not rare to find clients who come to me with the notion that today renting a house is better than buying one. Buying a house is one of the biggest financial decisions one takes in an entire lifetime and the dilemma of ‘rent versus buy’ continues to perplex many people across salary brackets.
A research conducted by the Center for Economic and Policy Research in Washington, DC estimates that the fair value for a property in any area is equivalent to approximately 15 times a year’s rent.
However, one should not adopt one-size fits all approach – a likely risk if financial decisions are made on hearsay rather than based on your overall financial plan.
The decision should be holistic: The decision about where one has to live is dependent on various factors including lifestyle, personal preferences, proximity to family and friends to list the few. Along with this, one also needs to ascertain the investments required and the funds available to make such a decision.
Understand the location dynamics: How locations/areas are likely to develop is also an important consideration one has to make. In urban areas, with limited space, a large part of the development is taking place beyond the established regions of various cities. While today, these areas might seem to be far, a decade down the line, with development, these could be among the best areas to live.
Try to envision the kind of development possible in an area before you decide to invest your money. If you rent a house, it is relatively easy to shift from an existing location to another if you are not satisfied by the way things turn up near your house. However, as an owner, it might take time to find the right buyer to sell your property before you can shift.
The risk of home ownership: Some industry analysts are predicting that property prices are likely to correct over the next few years. As a homeowner, one should be able to realise that there exists a risk of property prices declining. If you plan to stay in the house yourself, a drop in prices may not affect you much but if you plan to sell the property at a later stage, then this is an important risk factor to be considered in your financial plan.
Ownership comes with responsibility: When taking a decision to buy, also remember that along with the housing EMI, one has to manage expenses towards maintenance too. Before you decide to buy, it is prudent that you estimate the amount that you are likely to incur on a regular basis. A financial planner can help you in understanding the various costs that are typically associated with home ownership.
Is it investments versus dreams? From a financial viewpoint, you also need to understand how buying a house will impact your lifestyle. The increased responsibility and cost of ownership may compel you to limit your travel and shopping splurges. You need to decide for yourself about the willingness to make the adjustments required to buy a house.
Integrating it into your financial plan: While making a decision about rent versus buy, involve your financial planner in the process. Irrespective of whether you plan to buy the house in your current city or in your hometown or plan to live on rent – your financial planner can help you adequately weigh the pros and cons in each scenario. Either decision needs to be integrated into your financial plan to ensure that you do not derail other dreams in pursuit of a house.
(The views expressed here are personal, and do not necessarily represent that of the FPSB India. FPSB India is the sole marks licensing authority for the CFPCM marks in India.)
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