10 Benefits of Staying on Rent, an offbeat post for website on Home Loan and Real Estate. Today morning i decided to write something different. I always try to share neutral perspective i.e. both sides of story for the benefit of readers. You might have come across many people who prefer staying on rent because of unaffordable & increasing property rates. I highlighted this in my post, Endless Wait for Property Prices to Fall. In Indian society, staying on rent is a social stigma. It is linked to financial instability. On internet, you will find lot of financial data whether you should be staying on rent or buy own house. There is no right or wrong answer to this question. In my opinion, It makes more sense staying on rent if you are not expecting double digit returns from property appreciation.
Now you must be wondering what inspired me to write this post on Benefits of Staying on Rent. Recently, one of my client started his own business. His main clientele base is in Mumbai but he cannot shift to Mumbai from Hyderabad. Currently Hyderabad real estate market is depressed. There are NO Buyers in market. Also the rental value is at all time low due to turmoil in IT industry. Now my client is immovable because of his property in Hyderabad. Though logical solution is to put the property on Rent but he has valid concern. A property worth 80 lakh in Hyderabad is fetching a rent of Rs 20,000 whereas in Mumbai he has to shell out Min rent of Rs 45,000. I suggested him to sell the property and deposit the proceeds in debt funds with expected return of min 10%. Through SWP he can earn approx Rs 45,000 to Rs 50,000 per month post tax. In short, he need not to worry on rent part in Mumbai. Now due to depressed market, he is stuck. Taking a cue from his case, staying on rent has its own advantages. Let’s check out 10 Benefits of Staying on Rent.
Benefits of Staying on Rent
1. Job / Employment is Mobile: Before economic liberalization, jobs were not mobile therefore people were not mobile. My parents stayed in same city for 50 years. In current scenario, if your job is mobile / transferable then it doesn’t make sense to buy a house. I would like to take example of defense personnel’s. As their job is mobile therefore i observed that they buy a property only towards the end or after retirement. Maintaining a house in different city is also hassle therefore you can enjoy while staying on rent with commitment of just 1 month’s notice.
2. Career Opportunities: Personally i observed that people who stay in own house tend to miss more career opportunities compared to people staying on rent. We tend to develop emotional attachment with own house. Secondly House Furnishing is done more tastefully and according to daily needs and requirements. Lastly, people feel more comfortable and secure in own house compared to staying on rent. In short, we get used to staying in own house. We develop comfort zone therefore tend to ignore or miss career opportunities which comes our way. Though simple excuses to miss these opportunities are children’s school, friends and relatives staying in same city etc.
3. EMI v/s Rent: On rent you can stay in better complex and at better/central location compared to own house. For example, if you can spend / have disposable income of Rs 40k for housing i.e. you can afford either EMI or Rent of Rs 40,000 per month. In this case, considering ROI of 10% for home loan you can buy a house of max 50 Lakh. Whereas considering the rental yield of 3%, you can afford a property worth Rs 1.5 Cr on rent. If cost of property is criterion of luxury then by staying on rent you can afford 3 times more luxurious property compared to what you can own in Rs 40,000 per month.
4. Maintenance of House: Currently we don’t include cost of house maintenance in cost of property which eats into return from the property. Costs like Property Tax, Regular Repairs, Labour Cost, Painting, Society Maintenance Charges etc are recurring and regular costs. If you are staying on rent, you need not to worry about these cost heads. Besides cost, getting this work done is a major headache as you cannot get labor so easily.
5. Locked Investment: I realized this during my stay in Mumbai. One of my friend was hard core Mumbaikar. One of the common friend told me that he stays in Worli and his flat is worth Rs 3 Cr. I could not make out from his lifestyle as he & his family were living very simple lifestyle. One day, i asked him. He laughed away and told me “Bro, My flat is worth 3 Cr but our monthly household income is limited”. 3 Cr flat is not generating any income. It only help to save rent. In Short, the lifetime investment is locked. Imagine if someone invest this in debt instrument with return of 10%, he can generate monthly income of Rs 1,75,000. Even if he is staying on rent of Rs 75,000 then also he can get Rs 1 lakh incremental per month.
6. Financial Flexibility: While staying on rent, you have flexibility in terms of rent outflow. If you feel that rent is high then you can shift to house with lower rent. This way you can control your budget depending on current financial condition. For example, when wife of my friend took break from career they shifted to flat with rent of Rs 20,000. Earlier they were staying on rent of Rs 40,000. This flexibility is missing if you own a house on Home Loan. EMI is fixed until unless you prepay Home Loan. Any financial uncertainty or unforeseen circumstances can create havoc in your life.
7. Not easy to sell house: If you decide to sell your house then it can easily take 9 -12 months time horizon. It is not that easy to sell a property as it appears. While staying on rent, you are spared from this headache. If you wish to move out, you can give a notice of just 1 month and you are a free bird. In all metro’s & mini metro’s, current inventory levels are 3-4 years i.e. supply is more than demand therefore disposing a property is tedious and time consuming task.
8. Opportunity Cost/Difficult to find good tenants: If you have flat then monthly cost is fixed in terms of maintenance charges etc. Its another headache to find good tenants. If flat is vacant even for 1-2 months, there is an opportunity cost equivalent to monthly rent.
9. You don’t need to LIVE with Limitations: If you are staying on rent and you are facing some issues in society e.g. irregular water supply or too much noise. In this case, you can simply move out. Assuming you own same house therefore you have to live with all such problems and limitations.
10. Income Tax: Last but not the least, If you are staying on rent you can claim House Rent Allowance. HRA is 40% of Basic Salary for non-metro cities and 50% of Basic Salary for Metro cities. In self occupied property without Home loan, you will not get any tax dedcution therefore your tax outflow will be high. Besides this, interest on home loan eats into income tax benefits.
Hope you will agree that Staying on Rent is also cool. It has its own advantages and disadvantages. Depending on your situation, job profile and financial comfort, you can decide between staying on rent or own Home Sweet Home.
Copyright © Nitin Bhatia. All Rights Reserved.
A good post. This was my experience in the recent past. This is a happy message for those who are not able to own a property. Keep writing!
Your friend in Worli is Mr Smart Pants. He can sell the flat in Worli and invest 50% in debt and use balance 50% to buy a house in a far off place. So working on Rs 100 as base…inflation @ 8% (highly optimistic real return of 2% pa)let us review his decision and 15 years as time period assuming house in a far off place will cost Rs 50.
Option 1 – Invest Rs 100 in debt and spend all income
Real value of Rs 100 @ 8% inflation in 15 years = 28.62 (basically equal to what Rs 100 can buy today). Will not be able to buy a house and will be left with Rs 28.62 lacs
Option 2 – Invest Rs 100 in debt/spend 4.29% on rent (75/175) and reinvest balance.
Real value of Rs 100 @ 2.29% = 70 at today prices. Can buy a house @ Rs 50 and left with Rs 20.
10% return – 4.29%spent = 5.71 available for reinvestment.
Actual impact of inflation = 8 -5.71 = 2.29%
Option 3 – Do nothing
After 15 years, even if the house keeps up with the 8% inflation (maintain real value), he can sell the house @ 100, buy another house @ 50 and have retirement funds of 50 and spend 100% of his income today.
Mind you the actual returns in Option 1 and 2 will be lower if you factor in tax @ 20%. In such a case you will left with 0.29% (rs 51 lacs) in Option 2. Or settle for tax efficient mutual funds.
1. New house will not be Rs 50 after 15 years as rate of appreciation is high initially and then stagnates. Same holds true for house in worli.
2. Real Estate returns are either single digit or negative
3. When interest rate drop, long term debt funds deliver double digit return. This will be scenario atleast next 3 years.
4. Rent will be paid from returns not from principal…If returns from debt > return from existing property then it makes sense.
5. Option 1 you have considered NIL return
1: The new house price variation is hedged by the “old house” minimising the impact of either a rise or a fall.
2: I have assumed the rate of return on the new house @ 8% (single digit). Over a longer period of time, this seems a reasonable rate.
3: Over 15 years we are likely to see periods of outperformance as well as underperformance for ALL assets..whether it be bonds, RE or equity. Unless retail investors or for that matter professionals move across asset classes, with 100% right calls, I rather not take timing into account. The 10% long term return over a long period suggested by you seems reasonable.
4:Net Returns from Debt per your calculation (Rs 175,000 per month) is @ 7%. Out of this Rs 75,000 is spent (Option 2) and balance is invested (Rs 100,000) which partially offsets the inflation impact. However I have assumed 8% tax free appreciation. If the property appreciates at the rate of inflation, indexation will ensure zero tax. The investment returns/rent figures are per your suggestion.
However if a tax efficient instrument like Debt Mutual fund is used, the scenario changes.
5: Option 1 As stated..I have assumed all money is spent..no reinvestment. So the real value of Rs 100 decreases.