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Rent vs buy house decision explained with an Online calculator

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The rent vs buy a house decision is a dilemma that the majority face while buying their first home. It is one of the tough decisions of life. Why?

Because when common men decide to buy a house, they are actually making a decision to lead a less-abundant lifestyle. Hence, along with money, buying a house also needs a lot of willpower and motivation.

In some cities of India, residential property has become so expensive that some people decide to continue living in rented apartments. They just cannot afford to buy a decent home. Check the home affordability calculator.

While people are living in a rented apartment, they make a decision, to buy their own home. Paying rent is a lot easier than paying an EMI. How? Let’s see this with an example. But before that, let’s use a calculator.

Home Affordability Calculator

Data InputRemarks
Net Salary (Rs/month)This value should be the average "MONTHLY SALARY" credited in your bank account in Last 12 months. This is not your CTC. If you are entering a value of Rs.1,00,000 - it means Rs.12,00,000 (=Rs.1,00,000x12) was credited into you salary account in last 12 months
Rent (Rs/month)Indicate the average monthly rent you are expected to pay in next 12 months
Other Loan EMI (Rs/month)If you have multiple other loans EMI, kindly enter the cumulative value of all EMI's here.
Asset Size (Rs.)You must enter here the total value of savings plus investments (cash, FD, mutual funds, stocks, gold, etc.)
Expected Home Loan Interest (%)If you will avail a home loan, what is the expected interest you will be charged by the bank/lender
Loan Tenure (Years)What will be the period for which you are expected to take the loan (7,10,15,20 years?)



Purchase Price of HomeValueRemarks
Your EMI Affordability (Rs.)This is the maximum value you should pay per month as your home loan EMI
20% Downpayment (Rs.)This is the minimum downpayment you are expected to pay to avail a home loan. Zero (0) value indicates you've enough asset to buy the property without any loan
Value of Home (Rs.Lakhs)This is the maximum you can spend to buy a home with your net income (or Asset size)
Note

Rent Vs EMI load

rent vs buy house decision explained - EMI vs Rent

Suppose there is a real estate property in Bangalore. Its present market valuation, say, is Rs.50 lakhs. Let's see how the decision unfolds if one takes a decision to buy or rent this property:

  • Rent: If one decides to live in this property for rent, the immediate cost to the tenant will be approx Rs.15,000 per month. This cost will increase after the lapse of every 11 months. Read more about where people spend money in India.
  • Buy: When the home is purchased on a home loan (20% downpayment, 80% Loan), it will cost Rs.35,000 per month as EMI (@8.6% for 20 years). Paying EMI is almost 2.33 times that of rent (per month). Moreover, a lump-sum amount of Rs.10 Lakhs would be needed as a downpayment (self-contribution). Read more about buying a first home.

For a middle-class person, paying EMIs is a huge burden. Hence, buying a house is not an easy decision to make.

Rent Vs Buy Home - 1

So does it mean that paying rent is wiser than paying EMI and owning a home? Not at all. To get more clarity, we will've to develop a perspective on the alternative approach.

What is the alternative approach?

The alternative approach will be to stay on rent and save the extra cost.

rent vs buy house decision explained - Stay Rent Save More

Example: For a newly married couple, the cost difference of 2.33 times is too high. They would rather save those differential Rs.20,000 and downpayment, by staying in rented houses, to lead a more lavish lifestyle.

This proves why the majority of people delay the purchase of their first home. But the question remains, is this the solution to our problem? What is the problem? Buying a house for self.

No this is not the right solution. Why? Because the property prices are increasing at a fast rate. "If we'll not buy them today, tomorrow it will become even more unaffordable".

I'm sure you must have heard this cliche from people around you. But in this article, we will also see the maths behind this saying.

Why the alternative approach is not wise?

The point is, that the cost difference between rent and EMI will always be there. It is not that after a few years, EMI vs Rent ratio will come below 2.33. In fact, it is more likely that the EMI vs Rent ratio will increase with time.

In cities like Mumbai, New Delhi (NCR), Bangalore, Hyderabad, Pune, Chennai, etc this ratio has only increased. The property within the city is becoming costlier and costlier. Affordable properties get pushed to the suburbs.

This phenomenon is more predominant in the above cities. But a subdued version of the same thing can be seen in Tier-II cities of India as well. Hence, it becomes essential for people to know how to maintain a balance between their lifestyle and buying a house.

Why do people buy a house eventually?

Why eventually everyone starts living in a self-owned property over a rented house. There must be some reason why people eventually buy their own house.

The EMI payments that are looking costly now, how do they become a viable option when years pass by? One big reason is, with time people become wiser and also gather more control over their spending.

Yes, buying a home for yourself, over a rented apartment, is a wiser choice. You may say that before even starting this article, we have already reached the conclusion. Sorry, but this is a fact.

No matter what financial calculators say, buying a house for yourself EARLY, is the best financial decision one can take in their life. But still, let's try to play with some numbers and logic to substantiate this claim.

  • Psychological Reason: Paying rent sucks. Rent payments are more like a burden and a self-inflicted pain. When these people meet their friends and relative who own their own homes, the demon of living in a rented house becomes even bigger. In childhood, we've lived in OUR HOME. Then, there was no landlord. But here, there is a landlord who often acts as the boss. With time, this emotion becomes so severe that some people impulsively buy a home. Emotionally there is a huge pride associated with living in a self-owned house. Read more about how to build assets.
  • Feeling of ownership: Once the rent is paid, it is like money spent forever. What does it give us back in return? One month of shelter. Paying EMI has a dual benefit. It gives us one month of shelter, plus it also increases our proportional ownership of the house. Consider EMI as a rent which eventually (say after 20 years), makes you the owner of the property. Read about the preparation required for the home loan application.
  • Financial Reason: This is where the whole mathematics portion of the Rent Vs Buy house decision will be explained. I'll try to use examples to make the conclusion more logical. Let's read more...

Financial Calculation Behind Rent Vs Buy House Decision

Let’s consider a hypothetical example of two friends, Jacob and James. Both are 30 years of age. Let’s assume that both Jacob and James live in a rented house. Both of them pay a rent of Rs.15,000 per month. The house in which they live has a market price of Rs.50 Lakhs.

Jacob decided to buy a similar house in which he is living. He took a loan of Rs.40 Lakhs, @8.6% p.a., for 20 years. While James decided to continue living on rent. His approach was to save the cost of the loan and invest the saved amount.

The decisions of Jacob and James have been explained in the below flow chart:

rent vs buy house decision explained - Jacob James Rent Vs EMI

Though this flow chart is self-explanatory, I'll still like to take a moment and explain the logic and numbers.

1. Explanation of James's Decision (Staying on Rent)

What is decision of James? He has decided to continue living on rent, and save the extra cost incurred in buying a home. What is the extra cost of a home purchase? EMI's and Downpayment. Let's see how the decision of James shapes up.

  • Lump sum Investment: The downpayment for the house is Rs.10 Lakhs. As James has decided to stay on rent, he can invest this amount in say an index fund that can pay 12% p.a. returns. Why only 12%? Because it is better to keep this money safer for future use. Read more about how to invest 10 lakhs in a lump sum.
  • Monthly Investment (SIP): The cost saved in paying rent (vs EMI), is also used for investment through the SIP route. As James has decided to stay on rent, he can invest the differential amount (EMI minus Rent) in say a large cap mutual fund that can pay 14% p.a. returns. Read more about mutual funds SIPs. [Note: Rent increases with time. Hence savings also reduces accordingly.]

Let's see the above theory as calculations in an excel sheet. The idea is to show how much money can be made by James by deciding to stay on rent.

rent vs buy house decision explained - James - Investment Scheme

P.Note: What I've considered here is an exceptional case. Why do I say so? Because I'm assuming that James is judiciously investing each and every penny saved (from not buying a house) for 20 years at a stretch.

Practically speaking, people are not generally as disciplined. Hence, the chances of building a Rs.2.26 Crore corpus by James in 20 years is remote. As per my assumption, the actual value will be much lower.

2. Explanation of Jacob's Decision (Buy a Home)

What's the decision of Jacob? He has decided to buy a house for himself, and move out of the rented house. By doing this, he has bought a property for himself. The value of this property will also appreciate with time. Moreover, as the home loan has been taken, it will also save him some income tax. Let's see how the decision of Jacob shapes up.

  • Property Price Appreciation: The market value of the house at the time of purchase was Rs.50 lakhs. By the end of the loan tenure (20 years), I've assumed that the property price will appreciate at an average rate of 10% p.a. It means, a house which is priced at Rs.50 lakhs today, will be worth Rs.3.36 Crores after 20 years. Read more on How much salary can buy homes in top Indian cities.
  • Income tax Savings: As per Indian tax laws, the interest portion of a home loan can be claimed as deductions (max of Rs.2.0 Lakhs). Assuming that Jacob is currently in the 20% tax bracket & will remain here for the next 4 years. After the fourth year, his tax bracket will be 30%. In this case, his total tax savings in 20 years will be Rs.9.5 Lakhs. Read more about effective income tax paid on salary.

Let's see the above theory as calculations in an excel sheet. The idea is to show how much Jacob can save on Income Tax (due to a home loan), and what'll be his property worth after 20 years.

rent vs buy house decision explained - Jacobs - Investment Scheme

P.Note: There is a difference between how wealth has been created by James and Jacob. To build Rs.2.26 Crore, James has to be extremely disciplined and committed to his investment.

But for Jacob, as soon as he bought the property, the wealth-building goes on autopilot. Income tax Savings, and property price appreciation will happen anyways.

Why buy a home?

People who defend staying in a rented apartment are all filthy rich people. For a common man, the wisest decision will be to buy a home for himself as early as possible. Here are four reasons why one must buy a home (and stop living on rent):

  1. Home is an asset: From the above calculations, you can see that Jacob has built more wealth than James. How? By simply buying a home for self. How one can build wealth? By owning an asset. Jacob has decided to own an asset in the form of a home. Read more on how to build assets.
  2. Forced Savings: Arranging for a downpayment is one of the biggest hurdles in buying a home. Hence, a person who has decided to buy a home will save more to arrange for the downpayment. I've seen people using innovative ideas to arrange for the downpayment amount. Read more on tips & tricks to save money.
  3. Learn Affordability Analysis: We often overspend our money because we do not seem to understand what is affordable for us and what is not. Buying a home early in life can teach one this skill. How? Buying a house is a good thing. But it must not happen that one ends up buying a very expensive house. How to know one’s affordability? Suppose Jacob's salary is Rs.1.5 Lakhs per month. If he pays an EMI of Rs.35K per month, he is utilizing only 23.5% towards EMI. As a rule of thumb, if can keep the EMI/Income ratio below 30%, it is considered great. Read more about what is a debt trap.
  4. Future Savings: Buying a home triggers another set of money-saving avenues. What is it? Savings in the form of prepayment of one's home loan. Buying a property, and prepaying one loan (say 5 years early) can save one lakhs of Rupees. Read more about loan pre-payment.

I personally consider that buying a home is not just a monetary activity. The whole process of buying, and maintaining the house makes us fuller people.

If my child asks me for financial advice, I'll tell him to buy his first home in early 25, and then finish off the loan by the time he is 35 years of age.

Conclusion

Rent vs buy a house is a debate that is continuing for ages. But not buying a house today, is like not delaying your gratifications for living a more abundant life. This is not a wise choice.

Move out of the rented house to your own house as soon as possible. Yes, of course, there are conditions where people cannot buy a house immediately. Those are one-off cases.

There are people who do not have job security. Such people cannot afford to commit to a home loan. Also, people, who work in a city don’t like it. Such people may not like to buy homes immediately.

There are also people, who buy homes for themselves only after their retirement. This is a willful decision, not taken in ignorance. Such people get huge retirement benefits which they can divert to buy a house for themselves. One such example is high-ranking people, retiring from Indian Defense Services. These are examples that are not applicable to the majority.

Not buying a house today, and staying on rent is an individual’s choice. But if there are no big bottlenecks, it is always better to buy a house for yourself than to live in a rented apartment.

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MANI

MANI

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

58 Responses

  2. Very good article, Everything was explained very well about it. You keep giving information like this. It will help us a lot.

    Reply

  3. This dilemma probably ever exists. Your analysis will certainly help in making a decision. Thank you for the helpful post.

    Reply

    1. The biggest assumption you have made is 10% yoy appreciation of the property value. This means, your property value doubling every 6 years (compounding). I haven’t seen it happening in Bangalore or Chennai (the cities I’m familiar of). Not sure about Mumbai. Most real-estate portal has these trends anyway. By simply changing this value to a more realistic number like 4 or 5% (your property value doubling in 11 to 13 years), the property value will be between 1.2 to 1.4 Cr after 20 years, compared to 2.25 cr you saved by renting.
      Buying a house in any of the metros was a wise investment decision 15 to 20 years ago (even now, in some specific hotspots which outgrows the market), but not now in a broader sense.

      Reply

      1. Spot on, 10% real estate appreciation is a dream of fools. I have personal experience with only 1 city, Kolkata, where the rate is less than 2 % for a flat I bought 8 years ago. All the appreciation has been eaten by my loan interest and I am actually in negative returns.

  4. I’m just staying neutral with your article. I have few points to highlight here
    1. As per me, Buying your first home is not an asset. It’s a place where you live. So I can’t think about selling it for my needs, which will again put me in a rent situation or start looking for a property to buy again with the left over money. Some Compromise is needed if we treat that as an asset.
    2. Assuming 10% appreciation as per your calculation and Jacob’s property values at 3.3 cr after 20 years, I believe that’s going to be the market value where newer apartments may also cost roughly the same. Will you buy a 20 year old apt for 3 cr when there is a newly built apt available at same cost ? Reselling (if you think the house as an asset) might be a difficult task until u compromise on the selling cost.
    3. Most Indian mentality is to leave the property to their kids. After all these Hussle of burden and spending years, do you really know if you pass the property to your kids will they stay and enjoy the property. Doubtful. They may move to a different city or even a diff country. After parents are no more, they just simply sell it off and plan for their future.
    4. You need to include registration cost, GST, maintenance cost and additional cost in your calculation for owning a property.
    5. There are so many it’s.. what if Indian government comes up with a financial statement that no more tax benefits on property interests. May or may not happen.

    Reply

  6. Lets do the math
    Property value 70-75 lakhs
    Duties brokerage and other charges 12 lakhs
    Maintenance charges 35k per annum
    Loan amount 50% of home value at 7% interest , balance 50% from savings from last 10-15 years of hustle
    paying up approx 40% salary towards EMI for 10 years
    Annual prepayments (from bonuses)reducing term from 20 to 10 years
    Rental for similar property 20k, maintenance charges as per actual
    Tax savings -20% tax bracket today..soon going into 30%
    Based on current trends the home loan interest rates will only reduce which also means reduction of interest in other instruments (FD etc.)as well

    Hands down staying on rent makes you end up with a huge LIQUID corpus in the end
    BUT
    1. You cant enjoy that corpus ever without eating out some of it which will cause it not to be huge (it is liquid but not there to enjoy..just like the home in which you stay)
    2.You can’t spend on a rented property based on your needs..no major modification to suit your individual needs
    3.Going jobless is a stupid argument as it affects both rental or EMI.. moreover jobless doesn’t mean broke..you can eventually find another one.If you are wise you would have Maintained a 6-12 month corpus in any case.
    4. Moving places won’t affect either ,you only move for good(promotion,higher pay etc.)..your home can generate some rental so you could still offset EMI ,plus consider now claiming both HRA and Tax benefits on home loan – (rental income-property expenses)
    5. Worst scenario…You drop dead…If your Spouse/Family isn’t financially wise they will in no time eat up no matter how huge corpus you leave …if you leave them a house(expecting you not to die before you pay off i.e. 10 years from now+ buy term insurance for self to offset) at least they only have to work towards living expenses..and you also leave them wiser (they get into good habits of financial planning)

    To summarise…save in your initial years…wait for your time…seize the opportunity when you get one which is meant for you..
    Hope this helps..

    Knowledgeable Comments welcome..

    Reply

  7. Story was very good but some people has missed one thing that if james pay 15k still he has more 20k to do business or to invest, their are many more way to use that more and double triple it. If james is enough educated in terms of money n business then i bet he is going to make his income 3 fold more then jacob. All the matter is about knowledge skill and experience how to make money to work for you if you know then people will sure not going to buy home people will save more money on rent as compare to buying additionally their are many more aspects of life that has to live and enjoy untill we are living so still its all matter of understanding tha money and ways, how to use it

    Reply

  8. According to me, Financial Freedom (the two words you keep repeating in your description) is attained when a person has an answer for all the ‘What-Ifs’ that are a result of his financial decisions including buying a house on loan. We cannot compare the living conditions of our past generation and take our financial decisions i.e. when you decide to buy a house just because our parents never stayed in rental houses. Most of them worked for a single employer for years together mostly in a single place, unlike bank managers who were on a transferrable job but most banks had their own living quarters. If one buys a home today,
    1. What-If the job transfers to a new place
    2. What-If, even within the city he is moved to another branch which is 40-50 km from his home
    3. What-If, the place he narrowed down, after a detailed research, as a place with great growth potential is not in the same city he works or in the same city but far away from work
    4. What-If, the growth potential he saw in spite of making a compromise of travelling 40-50 km to work, did not become true because government policies changed or the government itself changed.
    5. What-If, there is a loss of job, say for a period of 6 months. If he is on rental, he can move to a cheaper/smaller place temporarily.
    6. What-If, there is a better job opportunity in another city or country. Letting out is an option but depends upon the comfort level to accept that another family would be using the same home space which he will be using it at a later point of time once he comes back to the city.

    Like these, there are many What-Ifs in both the cases i.e. staying on rental and moving to own property. (since you support buying a house, I have presented only those What-Ifs against your opinion) And one must have the answer to at least the What-Ifs that is in his control before he decides.

    Being a wealth manager myself, I strongly believe that not all financial decisions are made based on just excel sheets and colorful flow charts. Certain decisions are beyond numbers because the numbers are just an estimate. Your calculations would make us look like a fool if the real estate grows by only 3% p.a. and the chosen mid-cap stock to invest instead of EMI grow by 20% p.a. The numbers get disturbed if you include the long-term capital gains tax and if the cost inflation index did not budge at all over 15-20 years. Because, when you include numbers, it works on certain assumptions and assumptions do not work when you consider emotional and practical reasons.

    And lastly, you wrote “When these people meet their friends and relative who own their own home, the demon of living in a rented house becomes even bigger.”. Financial freedom does not work this way. Each individual must define the financial freedom in his OWN way. And not based on proving a point to the peers.

    And yes, I agree with your calculations if the real estate grows by 10% p.a., if the person does not have to move out for other job/assignments, if the person always carry a contingency for a year or so, if he holds a collateral for his loan etc.,

    And a humble suggestion, since you are writing in an open forum, I believe you are open to suggestions. When you write a blog, please present both the sides of an issue with pros and cons and leave the decision to the reader. Because, it is the reader who decides as it is his life where your opinion or mine doesn’t stand a chance.

    Reply

    1. Answer to all if and but’s lies in the way a person estimates his/her affordability and based on which the buy decision is taken. A person earning Rs.2 per month, when decides to buy a house of Rs.150 (example) is the root cause of future misery. According to me, once-monthly EMI should never cross 35% of take-home salary. If your city does not allow you to buy a property within your affordability, buy on the outskirts, or in another city (which is both know & affordable).

      Reply

      1. The issue is not just affordability. One must stay within his limits while buying an asset is but obvious. And rental house or own house is not one stop solution for financial freedom. One must decide based on his living conditions, work conditions and lot of other factors. I am not sure which city you belong to, but since you have given the example of Bangalore. According to your calculation, one who cannot afford within the city must buy a home in outskirts and also at the same time has growth potential too. Right? In Bangalore, one such place is Devanahalli (supposedly). If a person working in Mysuru Road buys a home in Devanahalli just because he must OWN a house whatsoever, will be spending 3hours in the morning and 3hours in the evening in travel, till he finds a suitable job in Yelahanka or Hebbal or worst case Manyata Tech Park. And what if he is transferred to Gurgaon. He will be paying EMI, getting rent (if at all he gets) as per Devanahalli rates but paying rent as per Gurgaon rates. My point is buying a house or not is based on an individual’s conditions and there is no book rule or a generic calculation that decides it.

        Let us leave that decision to the individual.

        If a person owns a property, he will be rich in physical assets and if he doesn’t own one, he will be rich in cash assets. Either way, he will have assets.

        For argument sake, we can question investing the diferential amount needs lot of discipline. If a person is serious about his future, he will definitely stay invested. But for the reason of lack of discipline, one cannot buy a house and increase the loan burden and other associated negative aspects as mentioned above in my comment.

        I reiterate… Buying a house against rental house or vice versa is an individual decision and not a generic rule.

      2. If one’s personal situation does not allow him/her to self-occupy the property, then it can be put on rent. While self can continue to live on rent (though this will again alter one’s affordability).

        “…he will be rich in cash assets.” Practically it seldom happens. People do end-up consuming cash. Better is to lock the cash in assets that people detest to liquidate.

  9. Please stick to your IT job. Its bad financial advice. You make many assumptions which turn out to be untrue. Personal finance is personal after all. Your perspective on why buying is better will make others not reach their financial independence goals quickly because they will be stuck in a debt trap. Your assumptions of 10% returns are baseless. its more around 4%-8% returns on an average. Realistically more like 5% considering different geographies across India. Plus who would consider the loan interest amounts or opportunities lost due to flexibility of location? Please stick to engineering. If you want I will give you an IT job, than misleading loads of poor people. I have seen houses of 1.4 crores selling now at just 88 lacs in Gurgoan, after 5 years. I hate it when the landlords are paying huge EMIs while just getting rental returns of 1-2% in dreams of property appreciation. You would do better by compounding money in FD than gambling your hard earned assets in property.

    Reply

    1. Thanks for taking time to post your comment.
      By the way I’m not an IT guy 🙂
      Thanks also for offering me IT Job.
      You’ve made your point LOUD and clear.
      Good luck to you for achieving financial independence without a house of your own.

      [P.Note: (1) Self occupied property shall not be seen through the blinds of investment. (2) Buying an overvalued asset will never guarantee good returns. There is process to research and buy a real estate property. People who just go ahead and buy any home may fall in trap of “overvaluation”. (3) While buying a home, people often overspend. A combination of 2 & 3 often creates ones own quarry in which people fall and can never rise-up]

      Reply

    2. Very true , as I am experiencing the same as a landlord of multiple properties (commercial & residential) I am hardly getting 1 to 2 % per annum of the property value , from which I have to pay monthly outgoing towards the property and heavy property taxes . Now I want to sell the same and invest in mutual funds , but not getting buyers due to current market situation .
      In my view buying a constructed property is foolishness as the property rates are exorbitant, its better to live in a rented house with limited liability , as one can leave the same whenever he wants and shift to other affordable rental house .

      Reply

  10. You did not consider the home registry charges, Home maintenance charges, interior charges. For a person who is in a 30% tax slab, will save 6.6 lakhs in 10 years but will end up paying the whole amount in registry in the first year. So the down payment amount is not 10 but 16.6.

    When you are saying that the EMI is less than the rent, then you should also increase salary and savings. These extra savings will also increase income and hence more savings. The house will also get old and will require more and more maintenance.If you consider everything you will have more money when you retire if you don’t buy a house. And after 12 years for two people a 1 bhk is a good enough choice. Also, house is useless after I die money is not.

    Reply

    1. A lot of assumptions are not appropriate. People just do not save and invest the way its planned. The money will get spent. But it the same thing is locked in a home, people will never think of selling it (or at least a part of it) to suffice their temptation to buy a nice car, gadget, vacation etc.

      Reply

  11. Thanks for saying how a newly married couple will do better off renting a house in order to have a more lavish lifestyle. My wife and I just got married about a month ago. I’ll talk to her about renting a house now and then buying one later on after we’ve saved up.

    Reply

  12. From a pure investment vs the ROI perspective, you forgot that the EMI is the investment that have gone for 20years something (loan tenure). You missed that by the time you, end up the loan tenure, you have paid 2 times the original loan amount. Moreover, the amount invested in SIP/Mutual funds is pure returns, however, all investments (including home loans) need active watch for ups and downs to make a shift (sellout and buy more depending on market conditions).
    I feel assets are those which make money for you. What’s the point of value of the house if you don’t Cash it.

    My pov is if you are staying in the house that’s on a loan is a liability vs an asset.
    Thoughts?

    Reply

    1. Buying a house on loan and staying with EMI’s for 20 years is not advisable. Prepayment of loan must be considers. The idea should be to at least reduce the tenure by 5 years. Till the loan balance is zero, a house is not an asset.

      Reply

  13. I feel that this article is biased, not used practical numbers and real life scenarios.
    Owning house great for anyone but the downsides such as high EMI’s should not bother ones life and needs.
    EMIs should not be greater than 40-50% of ones monthly salary, if any excess could burden the middle class family.

    Reply

    1. I truly believe that having a house is an essential part of attaining financial independence. I’ve left my job at 40. Had I been still living on a rented property (or paying EMI’s), life post achievement of this milestone would not have been as seamless.

      Reply

  14. Hi the way you have expressed the article is really great. Super easy to understand. But i would like to address few points here.

    1. The rate of price appreciation you have assumed is quite high i believe. It should have been 7-8 percent.

    2. Also the property value at the end is on paper. I mean when you are going to sell the property, first of all there is a high chance that you are not going to get that price mentioned on paper (reason explained below). There would be other costs involved like costs of advertisement, brokerages etc.

    3. Generally people sell their investment when they are in the need of money. So in case of mutual funds, it takes one click and the money gets transferred within 2-3 days. But in case of selling the property when you are really in need, it’s really difficult to get the price quoted on paper.

    4. If you live in a different city you have visit the place where you have the property. This costs time and money.

    5. Taxes are on higher side. As when you sell the property, it will be treated as your income and taxes would be as per income tax slab. While in MF, taxes would be lower.

    So my friend, buy buying the house early you are not only reducing your effective income, you are also adding a burden because of its liquidity.

    Having said that, i am not saying we should not buy a home. What i am trying to say is buying a home for investment is not a great idea.

    Reply

  15. The article is heavily biased towards buying. Points to ponder

    1. We speak of capital appreciation. If i am buying a house and i am going to live in it is capital appreciation a point to consider? Like a equity stock i am not going to sell it as i live in it so the figure of 3cr odd is pointless

    2. What about opportunity cost of downpayment? Also assumption is house cose of 50lakh. A house in even outskirt of mumbai like thane of navi mumbai cost nothing less that 1.3cr

    3. What about costs of maintainence, and other repair costs time to time

    4. What about unforseen events like some1 loses a job atleast i am hedged againts a long term emi burden.

    5. Y not stay on rent and invest that additional saving which would have gone into emi to invest in a mutual fund. Just because we have lived all our life as a kid in a own house doesnt mean it makes sense now. Also the narrative on landlords being bossy etc is little too melodramatic. I have lived under multiple landlords and all have been amicable as long as rents are paid on time and property is taken care off.

    Its like fools build homes for smart people to live in it. Happy to have a discussion on this.

    Reply

    1. I hope you will walk the talk (..”stay on rent and invest that additional saving which would have gone into emi to invest in a mutual fund…”). In long term this strategy will build good wealth. But there are several if’s and but’s in this strategy (practically).

      I wish you good luck.

      Reply

  17. Hi,

    Buying a house with your own money (not loans) is the best thing to do.However in todays world its not practical and hence people take loans.

    The second best thing would be to save enough over a period of time so that we can close out the loans early there by saving interest.

    Regards,
    Mahesh.
    the

    Reply

  18. Suppose I take a loan amount 25 lakhs for twenty years. After twenty years I will pay principal plus interest =50lakhs. Is it possible after 20 years that property value will refund me 50 lakhs? It is easy to spend a rental life. And if anybody invest little amount to gold, then gold will fulfill all dream.

    Reply

    1. If the person invests judiciously for life, probably living on rent may look be profitable. But I personally do not agree that buying a home is less convenient.

      Reply

  19. I have read this article very carefully.And after that I realized that buying a home is one kind of invest and above all a security for living.But on the other hand there is a question that is EMI. Actually it is said that what amount will you take the same will repay to bank as interest.So,if you have no roof then you have to invest but if you have home and you living another state for your job then it is wrong idea.You can invest your money for gold. you can easily sell this gold,and gold will give you better refund than land.

    Reply

    1. Your idea has weight. But reconsider “gold” as an investment option.
      Thanks for your deep comment.

      Reply

  20. Everyone wants to buy a house but you need crores to buy a good flat in a decent locality in Mumbai therefore I feel renting is wiser and it has become very difficult to sell flats today.

    Reply

  21. I want to elaborate, I didn’t mean to say that you missed the point. You make many good points in your article, I just wanted to add a few more on why renting may be a better option. Good stuff tho!

    Reply

  22. I think you completely miss the point on how much of a financial burden this creates on an individual. Rather, you can acquire multiple assets at various levels of risks and could possibly meet the same net worth. By renting, you are so much more financially free, where you can enjoy the luxuries around you and be happy. I know people who have taken loans and are super depressed because, 80% of their income goes towards paying a loan for the next 20 to 30 years (provided their salary hikes, but the net effect of inflation would probably match the ratio anyways, due to floating rate loans).

    By Renting a house, you also have the freedom and power to change your house at any time, whereas by buying the house with a loan, you might not be able to quickly find a tenant and, if found you would typically always get an amount lower than your EMI and plus have to shell out more money on renting another place. By renting you are also able to control all the legal risks associated with the property.

    There is also the question about liquidity. It is not easy to sell many properties. The higher the market value of your property, the more difficult it is for you to sell. I know many people who put up their properties for sale, but the sale ends up happening after 2 to 3 years. If it does happen within a year, then great! and typically the amount realized would be lower than the market value.

    There are many more reasons, but according to me people should only buy a property loan-free, or their EMI’s are not more than 20- 30% of their incomes.

    Reply

    1. You are right, buying a home which does not compliment income will create a financial burden.

      Reply

  23. Nicely presented – most of things in this article are covered, but i like to mention some missing things in calculation part such as monthly society maintenance charges & yearly corporation tax which landlord have to bear. Also the fact that most of metro cities property prices are not growing @ 10% p.a. or you can that this type of growth in Affordable housing sector 50-60 lacs & not in mid size segment where property prices are beyond 1 Cr

    Reply

    1. You are right, maintenance and property tax charges are additional for the owners.

      I think, property price growth @10% in long term is not a bad guess. You are right, prices may not be growing now, but as the Indian economy evolves, the price will catch up. This is an estimate for ‘very long term horizon’.

      But leaving aside the mathematics, I hope you would not like to miss the bigger point of “the necessity to buy a house for self – as early in life as possible”.

      Reply

      1. If some age is touching 50 and EMI is around 50 percent of monthly income than should he go for buy. Secondly initially buy it and during possession or after some time say 5 user sell it and enjoy the difference. Please advise.

  24. Hi Mani, thanks for the article but the numbers are far from reality. Firstly let’s talk about metro cities, a decent 2 BHK house today cost 1cr which entails down payment of 20 lakh and EMI of ~75k-80k, now what do you expect a person in early 25 year old to earn, max 1.5- 1.75lakh per month, so first of all from where he will bring 20 lakh down and how he will afford 80k EMI

    Reply

    1. You are right, this is one of the big disadvantage of living in a city like Mumbai. But the point that this blog is trying to make is that, ‘buying a home for self early in life is better than living on rent’. Why? Because the price of houses will probably rise faster than our income.

      The matter of affordability is a separate issue. If one cannot afford buying a house for self in their city – as there it is too expensive, then I think following can be done:
      – Buying a rental property in other city (affordable) can be a good compromise.
      – Buying a rental property in the same city but of smaller size.
      – Buying a house for self on the outskirts of city (with decent connectivity to work etc).

      I’m sure theorists can put forth many such ideas. These ideas may work for some, and may not for others. Keep thinking of your own new ideas and you’ll surely come out with something.

      Reply

  25. HI thats a good read. I have one query.
    I have just done the math and found out that, if I borrow loan of say ₹33Lakh at an interest rate of 8.85%, for 20 years, the EMI I have to pay is ₹29,373. which means after 20 years I would have had paid ₹7049520 to the bank despite the loan amount of ₹33Lakh. So here I paid more than double the loan amount. So I am feeling skeptical about borrowing a loan. I also learned that the whole home loan banking works on this very system. So If people took a loan for 20 years they are paying twice the amount, how this is profitable.
    Also If I reduced my loan tenure to half i.e., 10 years still the total amount comes to around ₹49Lakh which is still far more than what i had borrowed.
    Please can you throw some light on my question and explain your thoughts. Thanking you in anticipation 🙂

    Reply

    1. Buying house is a necessity of life. One can delay it today to buy it tomorrow at a higher cost. Now the question is that, is it worth a delay? Try to answer the following questions for self, and I think you will see the point. For me, buying house as early in life is beneficial (financially):
      – What is the cost of loan for next 20 years? 8.85%.
      – What is the assumed growth rate for next 20 years? 6-10% (say).
      – What is the expected growth rate of price of a residential property? 8-12%.

      What does these numbers? If a house is not bought today, it will be prove more expensive tomorrow.

      Reply

      1. Good article, I see a fundamental flaw in the calculation, Assuming both Jacob and James are equally intelligent, James would invest the initial down payment amount and the remaining amount after paying rent in an oridinary mf with 10 percent returns, he is better off after 20 years.

      2. Thanks for your deep comment. I can understand your point. I’ve reinvented the whole article based on your comment. I hope now the conclusion has more clarity.

  26. Hi,
    Its great to go through the article. But I have a little different view. If James put the down payment in the index fund and do a SIP in the same for the amount he saves instead of paying EMI, he will have more wealth than Jacob. Because the return of index in long term is 14% and it will continue to give the same in long term. Secondly the rents will not go beyond certain limits as you are projecting 8% YOY. For the last 6 years I am paying the same rent and no increase. So I feel this assumption is not correct. It may increase and may be doubled over this period of 20 years. Request your views on the same.

    Reply

    1. Your are right, but picking investments based only on returns is not always correct. A real estate investor (or a home buyer) thinks differently than an equity investor.

      Regarding same rent for last 6 years, I must say you are very lucky 🙂

      Reply

      2. Good question. The concept of investment is same, the only difference is in the asset. Equity as an asset needs to handled differently than a real estate property. Though the concept of intrinsic valuation can be applied to both.

  27. Hi..what is your opinion on someone buying a smaller apartment and renting it out while staying in a bigger apartment on rent for convenience?

    Reply

    1. If goal is income generation, buy a property and put it on rent.
      If goal is protection, buy a home for self.

      Alternative, do your math. The option which is yielding better returns should be preferred.

      Yield:
      – Income Generation – (Annual Rent / Investment).
      – Protection – (Rent Saved / Cost of Home).

      Reply

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