Last Updated on November 23, 2021
Investment in a property is an important financial decision. Most people in this world has a dream to buy his/her own house but the sky touching real-estate prices and the commitment to pay EMI is always a problem. So, it become a million-dollar question i.e. “What is better, rent or buy a house?“. The question is also very important from the personal finance view.
Buying a house is a lifetime decision for a middle class or even for an upper-middle-class person, they can only afford to buy one house in his/her lifetime. While poor live their entire life in paying rents and EMIs.
Many people think that the prices of real estate are always rising. If they will not invest in buying a home today then they will have to pay more later. They also think, if they fall in the circle of EMI then, they cannot live freely.
EMI payments on the house loans can be more than the rent payment or maybe double the amount of rent. So, why should take a decision to rent or buy a house.
To answer that question, it is better to understand the advantages and disadvantages of both rent or buy a house.
There are many advantages and disadvantages of rent or buy a house. It is very important to understand before making any financial decision. A wrong decision can affect the finance and wealth management heavily.
Buy a House
There are many benefits that can not be achieved by renting. These are as follows:
1. Fixed Asset
It is the most valuable and costly asset and a large number of funds is require to buy it. Any property acts as a fixed asset and a profitable investment because its price appreciate with time. The property is attached with the land. So, the particular land parcel is also a part of the fixed asset.
2. Freedom To Modify
When anyone buy a house, it became their property. They hold all the rights to make changes in the house as per their choice. They can also rebuild the house or design it in their own way. Renovating the house can improve the lifestyle and standard. This feature is not available when rent a house.
3. Tax Deduction and Saving
There is a provision for tax deduction in home loan repayment. Apart from this, by paying fixed EMI every month, an expense budget is being prepared. This not only create a good habit of budgeting but also, helps to save a lot of money which can be spend on other necessities.
4. Source of Revenue
Other advantage of buying a house is that an extra stream of revenue can be made with it. When they move or shift to some other place, they can rent the house and generate a passive income every month. Also, they can mortgage the house. Converting the house into a hostel or an office can also help in generate revenue.
5. Pride and Achievement
Some people feel pride when they buy or build a house. Owning a house is not easy for most people. They take it as a lifetime achievement. Having a house can uplift the living standard by many folds as the person do not have to pay rent every month or move from one place to another when the rental term is over.
There are also several disadvantages to buying a house which can make the decision more inclined over renting. These are as follows:
1. High Maintenance Cost
After buying a house, the owner has to pay its maintenance cost which is usually high. Along-with paying the EMI will double the burden. Any repair or maintenance is a lifelong duty of the owner of the house.
2. Burden of Loan
A loan is taken to buy a house and an amount of loan have to repay every month. The downside of buying a home by loan is the amount of interest charged. Sometimes, the value of interest becomes equal or more than the value of the house.
3. Risk of Devaluation
Generally, the price of real estate rises with the passing time, but it can also get depreciated. The investment might end up having a loss when the house is sold. In case, move or shift to some other house or place, then the house have to sell fast which cannot provide enough time to get proper value of the house.
Rent a House
Renting a house also have many benefits which are not available when buy a house. These are as follows:
1. No Burden of Loan
By renting a house a contract is made of using the house for a living but not get the ownership. No loan is require to rent a house. A property can be available for living at a cheap price and take a very small portion of funds than actually buying a house.
2. Low Maintenance Cost
By renting a house the tenant have the obligation to keep the house fully functional, clean and in its original state. Usually, any cost of repair and up-gradation of the house is paid by the owner of the house. The only charge is required to pay by the tenant is for any bills or damage caused in the course of rent period.
3. No risk of Devaluation
As the tenant do not own the house, any fluctuation in the real estate market will not cause any affect. No worry about the devaluation of the property as a tenant do not own the house.
4. Freedom to shift
There is no restriction of changing the house for living. Tenant can shift from one house to another whenever they want. As a tenant, they do not have to worry about selling the house before leaving it. If the tenant have a job require frequent transfers to different places then renting is good option.
Renting a house also have disadvantages. These are as follows:
1. Recurring Payment
The tenant have to pay rent every month or on the basis of agreement with the owner. In the case of owning a house, the payment of loan EMI have to made until all the loan is paid . Paying rent every month can be a burden and can affect the monthly budget.
2. Less Cost
The tenant have to pay only rent cost which is less as compared to home loan EMI. The rent can be increased year to year or even month to month as per the rental agreement.
3. No Freedom to Modify
When somebody own a house, they have full freedom to modify the house as per their choice. But, it is not applicable in renting. The tenant do not get any freedom to renovate or make changes to the house as per their requirements. There are lots of restrictions on renting and no freedom for modification.
4. Investment in asset is not applicable
As we discussed earlier, a house is the most valuable asset of a person. When someone buy a house, the house becomes their asset and makes them financially strong. But, the opportunity of building an asset is not available when the person became a tenant of a house.
After reading the above pros and cons of rent or buy a house. The answer to this question may vary from person to person and also depend upon the financial condition of a person.
If a person is financially strong, sure about his job security, and manage to live in a single city for 15-20 years. Then, buying a house can be a better option. But, if anyone did not fulfill any of this criteria then he/she should rent a house. Let’s take an example to understand this better.
For example- Mr. A lives in a big city where the real estate prices are very high and has a job which require a frequent transfer. He has to move from one city to another and also don’t have enough savings. Then should he buy or rent a house?
The answer is simple, he should definitely rent a house because he moves from one place to another very frequently. Buying a house will be a waste of money, if he not buying it as an investment. Also, he doesn’t have enough savings which is a disadvantage.
For some people buying a house can be an achievement but for some renting is the best option. Hence, it cannot be answered which is best. The decision can only be made depend on the financial capacity and requirement of the person.
When should buy a house?
A person should only buy a house when he/she are financially stable. If they has a job that require frequent job transfers then, there is no need to buy a house. Renting is a good option. Proper financial planning is made before taking any decision.
Is buying house is a good investment?
In most cases, buying a house is a good investment as the price of real estate is always rising. But, there are some cases, when there is devaluation in the prices of real estate which may results in a loss of investment. A house can also be use as a asset to earn passive income by giving it on rent and generating money from it.
How to save money to buy a house, when living on rent?
Saving money can be hard, when you are living on rent. Many people think to buy a house but due to insufficient fund, they have to opt for rent. The best way to buy a house when you are living on rent is to save a portion of income and invest in investment avenues that may help to buy a house in future.
Is renting a waste of money?
No, renting is not a waste of money. If you are not financially strong to buy a house then renting gives you a place to live. So, the money spent on living is not a waste.
He is graduate in M.B.A Finance, and owner of the financial blog “Saifwealth.com“. He started this blog to share his knowdelge in the field of finance and to help people understand and aware about the financial world.