MYTH-12. BUYING A RESIDENTIAL HOUSE IS ALWAYS BETTER THAN RENTING ONE
1. Buying pros & cons
·
Buying a residential house ties you down to a specific location.
·
Buying a residential house
makes sense if property prices are low, but are expected to rise soon, and
capital (home loan) is cheap.
·
However, if you miss the monthly instalments of your home loan, there is a double penalty for you – from the lender as well as your bank.
2. Renting pros & cons
· Leasing is a better option if you do not plan to stay in one location for more than 4-5 years.
·
If property
prices increase by 5% a year and rent by 10%, the cost of renting will be
higher from the second year.
·
If property
prices continue to remain flat for some time, while the rent keeps increasing
by 10%, renting a house will be cheaper for most of the term.
·
If property
prices go down by 5% a year, while rent rises by 10%, renting will be a better
option for the entire term.
3. Investing pros & cons
· One should not invest in real estate too early in life, as it is a big-ticket illiquid investment.
· It does not allow partial withdrawals for your needs.
· It also prevents you from investing in other lucrative investment avenues.
·
If the rental yield is below 4%, the investment in a house
for rental income is not worthwhile, especially if the cost of capital (home loan) is high.
·
What you then pay
as interest on the home loan will neutralize any gain from the property.