Hey folks,

Indians love real estate. That’s a fact. A Jefferies report from 2023 pointed out that over 50% of India’s household wealth is tied up in property.

That means, if you’re around the age of 30, you’ll probably hear the inevitable question from your extended family, “When are you going to buy a home?”

Ufff. That’s a loaded question.

So in Edition #2 of Money Milestones, we’re going to try and answer that. We’ll wade into the most controversial personal finance debate in the world — Buy vs Rent. And we’ll simply have a conversation about it and throw in our thoughts.

We’ll assume you’re leaning towards being a Renter. And let’s see how it pans out, okay?

The italicized font you'll see within [...] will be our thoughts on the conversation.

Alright. Back to the question.

Nosy Uncle/Aunty: When are you going to buy a home?

You: We’ll see, uncle/aunty. I don’t think I’m ready for such a big financial commitment. I don’t want to worry about paying a massive EMI for the next 30 years. I have more peace of mind without the burden.”

[Well, you realize that a massive loan will hang over your head like the sword of Damocles. And every decision you make in life will be centred around that — if you want to take the plunge into entrepreneurship. Or take a break from work and enjoy what life has to offer. Maybe even study further.]

(Let’s drop the nosy adjective now) Uncle/Aunty: But, it’s a matter of pride! How else can you show the world that you’ve made it in life? This is the biggest thing. It shows you’re climbing the ladder. Look at your friends. They’re already buying such nice homes.

You: But I’ve already set goals for myself. And I want to live as per my timelines. It doesn’t bother me what others are doing.

[Ouch, the jibe about friends buying homes can be hard to swallow. Peer pressure is real after all. And the only way to not fall prey to this is to take some time out and write down your goals first. Figure out what matters most to you. And then use that as your guiding light to forge ahead.]

Uncle/Aunty: Okay. But you’re throwing away 100% of your money on rent. You not building an asset by staying on rent. So think of a house as an investment. Remember, land is finite but people will always want houses. So prices will never go down. Look at Uncle J or Aunty D. They all bought land in the 90s and look how much it’s worth now!

You: But what if I buy a house and then I change jobs? My new office could be at the other end of Bengaluru. I might have to spend 2 hours in traffic just to get there. If I’m renting, I can just pack up my things and move. Easy.

[See what you did there. You sidestepped the ‘investment’ argument. And that usually happens because most of us don’t know folks who’ve ‘lost’ money buying real estate. But next time someone says, “I bought a house for ₹10 lakh in 1990 and now it’s worth ₹1.5 crores,” just do the maths. You’ll find that the annual return in this case is only 8.30%.]

Uncle/Aunty: But if you love flexibility so much, you can let it out on rent, no? It’s still an investment.

You: But if I spend ₹1 crore on a house, what do you think my monthly rent will be? Around ₹30,000? Firstly, my ‘return’ or rental yield is only around 3.5%! Secondly, it won’t even cover my EMI amount. So I’ll have to pay rent at the new place. And pay an EMI too. Seems pretty pointless to me.

[Your property should still hopefully appreciate in value over time. So you can make a decent chunk of money when you sell.]

Uncle/Aunty: But, but…

You: Oh, and one more thing. If I buy a house now and eventually decide to retire in it after 15–20 years, I will have to renovate it, no? Styles will change and everything will be outdated. I’ll need new tiles, new bathroom fittings, and a new kitchen!!! That’ll cost a bomb again.

You: But I’m not saying I’ll never take your advice. Maybe one day. So let me save up and buy a home when I’m well and truly ready for it! What do you think Uncle/Aunty?

Uncle/Aunty: *Dumstruck by all your arguments*

And that folks, is how you won the debate.

But hold on…you’ve obviously sensed a bit of my bias coming in here, haven’t you? You can sense that I’m camping with the Renters. And you’re now thinking Finshots isn’t giving the true picture.

So let’s crunch some numbers, shall we? After all, numbers don’t lie…

Let’s start with Maya and Tara who live in Bengaluru.

Maya’s got her eyes on a 2-bedroom apartment in a good locality. It’s ready to occupy and it’ll set her back ₹1 crore. It’s a reasonable distance from her workplace as well so she’s happy about that.

She has saved up ₹20 lakhs which will be put towards the downpayment. And she heads to the bank to choose a loan.

Now she is given two options.

1. Floating Rate of 8% — This fluctuates based on the rates set by the central bank. If it slashes, Maya benefits because her EMI can drop. But if the central bank raises rates, Maya will have to shell out more. It’s dynamic.
   
2. Fixed Rate of 12% — This remains fixed for the entire term. It’s usually higher than floating because the bank believes it’s taking a risk by giving you a static rate. Anything can change in the economy over time, no?

Anyway, Maya thinks the 12% rate is too high. So she picks the 8% floating rate. She thinks over 20 years (the home loan tenure), it might go up and down but she’ll get an average of 8%. That works for her. The bank tells her the EMI works out to nearly ₹67,000 a month. She thinks that’s manageable.

Meanwhile, her friend Tara finds a 2-bedroom apartment in the same complex. And she decides to rent it. She pays ₹30,000 including maintenance for the society. Tara’s game plan is simple — she’ll invest the difference between what an EMI would cost her and the rent she pays. She’ll watch that money grow. And she’ll use that to finally buy a home for retirement.

Who do you think will fare better?

Okay, wait. We’ll give you some more assumptions.

1. The value of Maya’s home grows at 6% every year for 20 years. (We took 6% since that seems to be the average growth of housing in India over two decades as per CRISIL)
2. Tara’s landlord increases the rent by 5% every year.
3. Tara earns 12% returns on her investment.

And guess what…. Tara’s Renting strategy seems to win!!!

That is, if you make a simple comparison.

You take the growth in the value of Tara's investments and adjust it against the rent she has paid and amount invested over the 20 years. And in Maya's case, you take the appreciation in the value of her house and adjust it against the loan repayment over 20 years to the bank.

But hey, these are just based on our assumptions.

You’ll get different answers if you run the numbers yourself. And we’ve created a spreadsheet just for you. Play around with it and as long as your assumptions aren’t wild, you’ll get a fairly accurate answer to your burning question — Rent or Buy!

Thumb rules FTW?

If the rent you pay is almost the same as the EMI, it’s time to buy a house.

Seems like a sensible thumb rule, right? And if you simply look at the numbers, it’s likely to be true. Because it doesn’t leave any room for investing any surplus.

But just think about this based on the Maya vs Tara debate.

If Tara were to pay nearly ₹67,000 as rent for a 2-bedroom apartment, she’d probably get a much bigger and swankier house than Maya. In a better locality even. So her quality of life could be higher. And maybe much more enjoyable.

That’s something the thumb rule won’t take into account.

Bonus Tip

Forget what the spreadsheet says. Here’s one reason to buy a house as Morgan Housel put it,

“Housing isn’t a great investment but for most people, it’s the best investment they will ever make because it’s the only asset they will leave alone and let compound for 10, 20, 30 years.”

Basically, if you don’t have the discipline to actually invest the amount you save by not paying an EMI and if have mini heart attacks each time there’s a stock market crash, it’s a problem. Eventually, you’ll panic and withdraw your money and delay investing again. You’ll never create wealth that way. Maybe a house as an investment is a better fit for you in that case.

So yeah, you can see it's not always Black & White when it comes to this important decision. And that’s all that we wanted to tell you in Edition #2 of Money Milestones. We’d love to know where you stand on this Buy vs Rent debate. Tell us by replying to this email (or if you’re reading this on the web, drop us a message: money@finshots.in)!

And don’t forget to tune in for Edition #3 of the Money Milestones next week — We’ll be talking about Raising Kids and Furry Friends!

Oh, and please tell your friends about this Milestone? You can share away on WhatsApp, LinkedIn, and X!

See you!

Finshots’ content is only for informational purposes. Please don’t take it as the gospel truth for financial advice. Always consult a financial expert.