Buy Vs Rent

Tarak asked me

Don’t you think that staying in a rented house for long run (say 5 yrs) means waste of a huge amount. If you take 10k INR per month as rent for 5 yrs, then you are spending (5*12*10000) 6 lacks INR for nothing. Please share your view in this regard.

I think this is purely a quantitatively defined advantages of buying a house. This comment was prompted by my earlier posts on Why I think we should not buy a house? A quantitative study is important since it can help us provide valuable inputs before taking any significant decision, but should not be the only input. Consider this graphics (calculator is here).

You can do all sorts of calculations and try to predict which option, buying or renting a house, is better. But I think this is an absolutely wrong method of taking this important decision. There can not be one pill for all diseases and hence just thinking quantitatively can not be a solution for everyone to consider buying a house.

The Rent Vs Buy decision is far from just a simple financial calculation that most people get into, and it should be just one aspect of a well qualified decision.

A qualitative decision needs to keep every aspect of your life-style, both now and in future, with different priorities for each person. Here are some of the

1) Stress : Buying a house is never easy (building your own is much worse). As a tenant you can choose to end your tenancy at any point in time, but when you have issues in your house, either you have to keep adjusting or you need to go through the pain of selling the house and buying another house. If you are on a home-loan, the pain is tripled.

2) Freedom: As a tenant you are free of responsibilities, but as a owner you are not only financially but psychologically occupied. The psychological factor is extremely subjective and may vary from person to person.

3) Financial Imprisonment: It is said that you should not put more than 40% of your income into home-loans EMIs. In the world of uncertainties, job-losses and un-steady income it is a big investment and long term commitment which will certainly robe you of financial freedom. The money spent on home-loan EMI is tied up and it is not easy to access that money in case of emergency. As a tenant, you have more access to your own money and can be saved and spent with more financial freedom. It is a personal choice to become a grumpy old man with a large mansion who lived all life in financial constraints versus a happy man currently living in a small flat but who enjoyed all life with whatever money he earned. Also I am not disillusioned person who thinks my kids will be staying with me, when they grow up, in this house that I own when I be old.

4) Career Ambitions: I have heard of lot of folks, who entered executive MBA programs after 10-15 years of job. They use it as a springboard to boost their careers and ambitions. I also know lot of folks, who could not follow such career choices simply because they are tied up with their home-loans. Same goes with taking up another job in a different city or even in the same city (think of travel in cities like Bangalore and Mumbai), and people want to take up a job near their locality. If you have a house, you are definitely living in some constraints.

As I mentioned in my older posts as well that do not buy a house just because everyone is buying or it quantitatively it makes sense, think of other qualitative factors that can impact your life. Also buying a house taking home-loan is NOT an investment. An investment typically means, you want to grow your surplus money and not restricting your freedom to gain a white elephant. Here are the conclusions I wrote in my earlier post

Conclusion:

• Buy a house for living it in you old age.




• Don’t expect your children to stay with you (unless you keep them dependent on you)




• Don’t just buy because everyone is buying, think long term, where you want to settle in your old age. Timing and location are extremely important.




• Buy a house which you can maintain. In old age, it is difficult to spend huge money on maintaining big house. Security is also a concern.




• There are so many investment avenues other than house, think about that. In old age, big house won’t help, but surely the life long memories of your world travel can help. Spend money to enjoy life, and not to get imprisoned by the enormous house loan burden. Strike a balance.




• Keep accumulating small portion of money and buy a house when you are in your forties. At that age, your will be at the peak of your responsibilities, you can have your priorities clearly laid down.




• If you have loads of surplus money, then only buying a house makes sense as investment.