Rent vs Buy: A guide to making the right choice at the right time

A roof above the head is a primal need that screams for fulfilment. That is one of the first things most want to address as soon as possible.

When one starts working, there is pressure from parents and others to buy a house. Parents often think that children fritter away  their earnings and want them to utilise it productively. As per them, there is no better way to do so than taking a loan, buying a property, and paying EMIs, thereby channeling the surpluses into a productive asset.

Rent = EMI: a false equivalence?

There is a false equivalence in the minds of people regarding the rent one pays for a property and the EMI if one were to buy the same. Typically, the EMI would be three times the rent, if not more. Hence, one cannot simply buy a property and pay EMI instead of rent, unless one has the capacity to pay that EMI.

We need to understand that a home is meant to be lived in. It should be a comfortable space for everyone. When one is forced into buying a home, one has to go with the budget one has. The house one can afford may not be in a location of one’s choice, may not have the area or the number of rooms the family needs, maybe far from the place of work, and be inconvenient in other ways. Therefore, renting a house may make sense for a lot of people, at least in the early part of one’s career.

Regardless, many people derive comfort from the fact that they have a roof over their heads and it is their own, even though it’s actually the bank that owns it till the loan is paid off. The only positive is that one need not shift houses so long as one pays the EMIs on time.

Sometimes, people buy a small, affordable home in some town not with the intention of staying there, but so that they have a roof over their head somewhere at least. This is justified with the argument that if one loses one’s job, there will be some place to stay at.

Others justify the decision saying that they would first buy a home they can afford and then flip it later for a bigger one. This argument has some legs. But if the idea is to buy a suitable home later in the city of their choice, they can easily save the money in financial assets instead of a property where there is registration, stamp duty, and other sunk costs that are not recoverable.

Also read: What’s the smarter choice — to buy a flat or rent one?

Assess needs before taking a call

The other important thing to assess before buying a home is whether the family has decided to drop anchor and is comfortable buying a home and staying in it for a long time. Many people buy a home without thinking this through properly.

In the course of their careers, it is possible that they may be asked to take up an assignment in a different city or even a different country.  Or they may  change jobs,  which may take them to other cities / countries. In such cases, had they bought a house they would still have to rent one at their new place of work.

Hence, they may end up paying the EMI and rent. Even if they let out the property they own, the rent may be far less than the EMI.

Also read: Why Dubai property market is hot among Indians?

A better idea would be to wait till they have clarity regarding their career. Once they have decided that they will be working in a certain city or at least they will not move their family, then buying a house there makes sense.

Therefore, buying a house is something that should be carefully thought through, for it is an asset which involves a lot of money, there are lots of sunk costs, and it is not very liquid.