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Rent Or Buy?

Monday, May 12, 2014

Beyond Financial Issues

With changing demographics, high inflation and ever increasing rising real estate prices, first-time home buyers are struggling to take informed decision on making the biggest investment of their lives.

On most occasions, analysts argue about the choice of going on rent to buying a house. These analysts have their own set of assumptions about interest rates, rental yields, opportunity costs, and inflation in property prices. Their decisions also change with the change in the variables in their set of assumptions. While these are the discussion and thinking points of a few informed individuals, there is a considerable bunch of individuals which give importance to certain other set of variables. These are: how much home loan you would require if you plan to buy a house? Are you eligible for a home loan? Do you have a good CIBIL score? Does your credit report point out to some default in past transactions? Can you afford to pay your equated monthly installment (EMI) through your existing cash flow? These questions are valid and they do play an important role in your decision about going on rent or buying a house.

Interestingly, with changing demographics of cities, rising real estate prices and scarcer employment opportunities due to stiff competition, there are some factors that are crucial than aforementioned variables. Here is a low-down on these:

  • The location: If you like to stay closer to your office, you may have to pay very high rent on an accommodation situated near a business district. These houses are high-priced and most cannot afford it. If you are comfortable travelling an hour in one way, there maybe houses available at a lower price, which are easy to buy and afford.
  • How is your Financial Health, including your Cibil score:  Are you are financially prepared to buy a home? Is your Cibil score good? Do you have the margin money amount to be paid for the property which you plan to buy? Lenders will fund around 85% - 90% on the cost of the property. If you're Cibil score is not good it would be difficult to get approvals for Home loan and you may have to postpone this decision till you build your score. As a rule of thumb your mortgage to income ratio should not exceed 28% of your monthly income.
  • Amenities:  If you are looking for properties that come with some exotic amenities such as Olympic size swimming pool, state of art gyms, it may make sense to have them on rent since they are steeply priced. Of course, there is not much scope for customization in a rented flat. If you want amenities of particular type, say jaguar shower units of particular configuration, better own a flat first. External amenities also include access to malls, banks, gardens and other recreational facilities. There are integrated townships that offer you such amenities. But the prices of such flats are a bit higher than the flats out of integrated townships but the rentals can be low, especially if there are many investors owning flats in the township.
  • Stability:  Owned-flats offer you stability. You need not have to look for one every year. However they also bound you to the property. If you are in a job that leads to transfer at regular interval, say every three or five years, owned home could be a problem as selling a flat is not an easy task.
  • Less responsibility:  Rented flat means you have to pay your rent on time and that is the maximum expected of you. However, if you own a house, you have to pay for the taxes, maintenance charges if you stay in a co-operative housing society or some such similar arrangement. You have to maintain your property and also have to insure it. You are also responsible for the upkeep of the owned property. As a tenant you just have to ensure that you won't damage the property, there is no need to go beyond this.
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