SHOULD YOU BUY OR RENT? THAT DEPENDS

Financial influencers on Twitter would like you to rent a house. Their arguments are simplistic

- Vivek Kaul

Where were you?" he asked

“Oh, mummy ji had called," she replied. “The signal here was weak, so I stepped outside to talk to her."

“An early morning call from her is never good news. What did she say?"

“Well, she was saying that we should buy a flat. This living on rent was a waste."

“Ah, the usual."

“Not really," she replied.

“Why?"

“Because this time she offered what she thought was financial logic."

“When emotion stops working," he said. “So, what was this logic?"

“It seems the rent that we pay every month is going waste, given that we are not using that money to create an asset out of it. On the other hand, if we pay an EMI towards a home loan, we will end up owning a flat and create an asset."

“I had never thought about the issue in this way," he said. “Guess for once she makes sense."

“She doesn’t."

“Doesn’t?"

The math

“Take this flat that we live in. We pay a rent of ₹20,000 per month or ₹2.4 lakh a year. The market price of the flat is around a crore. If we were to buy it, we would also have to pay a stamp duty of 6%, which means a price of around ₹1.06 crore."

“Ah, maths early in the morning," he said.

“So, we pay ₹2.4 lakh to live in a flat that would cost at least ₹1.06 crore. This means the rental yield is 2.3% ( ₹2.4 lakh divided by ₹1.06 crore expressed as a percentage)."

“Where are you going with this?"