Friday, 3 February 2012

Is Renting Better than Buying for Young Professionals?

Is Renting Better than Buying?
Suvro Datta

Conduct a survey “The survey results for “Is Renting a better option”, you can get only two types of response “YES” or “NO”, however the reasons for choosing either “YES” or “NO” would vary from person to person or family to family.
Debates like Renting VS Buying, Vastu Compliance, etc were always in there from ages but only off late it has gained more popularity.  GEN X is one of the primary reasons for popularity of Renting VS Buying debate.  One can argue there are sophisticated calculators that help you in arriving at the decision.
One thing that the calculators fail is catching the emotional factor, “Daddy Power” factor. We are in land where relationship matter the most.  Professionally you might be a Financial Guru but when it comes to your own decisions, your parents or your Dad’s decision might be the final one. Try to debate it or challenge it, you get to hear “I am your father; I have seen more world than you”.  This is “Daddy Power”.   Let us leave Daddy aside for now and look into more facts.

If I am asked a question “Do you want to buy a house”. My answer would be “YES”. I don’t want to spend my entire life in rented apartment. For me it’s all about timing and pricing.  Timing is more in terms of your age; Pricing is in terms of amount you would pay to rent and the amount you would pay to buy the same house.  Comparing the amount you pay for renting and buying property prices appears to be artificially inflated.
For example: In my area, the rent paid is less than 3% of buying price. This shows that property prices are overpriced. Price of flat is 50 lakh and the same flat is available for rent at 12 to 15 K. There is scope for correction.

There are many who claim Property prices will never correct. I don’t buy this idea. It is about demand and supply. If you see some of the historical data: 
·    Mobile Phones – Out Going Call charges have reduced from 15 Rs/min to less than 50 Paisa /min
·    LED/LCD TV – Have come down from 2 lakh Rupees to 20 Thousand Rupees.
·    Air Fare Prices- A decade ago, travelling by air was dream. Now it is within reach of common man.
Well it’s about competition, Demand and Supply.  If the prices in above segment could soften, I don’t see a reason why it cannot happen in real estate.
Let us take case study of young Couple or Young professionals: Young according to me you are young, if you are less than 40J. 
Careering aspiring professionals want to do everything that keeps them ahead in the race. Career is the top most priority for Young Couples. They think Monthly Paycheck is the measure of Success or performance.  All that contributes towards your paycheck are given more importance.  Their main motto is to prove themselves in this competitive world.   
Hopping Jobs is the most common thing and is one of the easiest ways to see a big change in your salary. If a change in Job can get them 30 to 40% hike, they don’t mind going the extra mile, taking additional risk. They are least bothered about the location of the company. All that they are interested is the change in the salary and the opportunities in the new Job. They don’t mind shifting to different place or state all together.

This attitude is not rare, it is very common and is very much needed if you want to climb success/career ladder.  At any given point of time you can only have one TOP Priority Goal. Everything else is secondary. For now it is the Career, it is the Paycheck. 
Well let us see how decision of Buying a house or Renting can be obstacle in your Top Priority Goal.
In Real Estate world, when you decided to buy a house or property there are 3 important things that you need to consider. 3 Important things are LOCATION, LOCATION AND LOCATION. Once this is finalized secondary thing is LOAN.
Let us see if LOAN and LOCATION can cause any harm to your Goal:

Location: Trust me Location of your home can be one of the biggest obstacle in your Career path.  Your commitment with the house will restrict you look out for companies that are in your vicinity. You might end up losing an opportunity just because you will have to travel for 2 hours to reach your office. Spending 4 hours in day is spent in travelling is not going to help your cause. No way this is help or contributes in your career path.
Loan: When you commit yourself for a house, you also commit yourself for 25 year home loan. This means you cannot default your payment to your bank for next 25 years.   The loan commitment will tune your mind to look out for stable Jobs. In turn these stable companies might not be high pay master.  Is it not the Loan commitment that is making you compromise?

Let us see advantage of postponing the decision of buying till you are 40 or till you succeed in your Top Priority Goal.
·    As Young Professional, you might not afford to buy an apartment with Luxuries but with low rental prices you can always rent one and use all the facilities like Nice Pool, GYM etc. You need these when you are young.
·    Your rented house will not obstacle when you think of looking for new job.  You can always rent a place close to your office.
·    Staying Close to your Office will reduce your travel time and allow you to devote more time towards your career.
·    Commitments towards house maintenance, Property Tax, etc are not your headache.
·    With No EMI commitment you have more freedom to plan your money/retirement.
A decision of buying a house, commitment of loan for sure will have an impact on your Top Priority Goal. By the time you turn 40, you would have kind of settled in your career and you no more would be keen on hopping jobs. In reality you would not have too many openings at this age.   With your kids in school, some good amount of wealth accumulated, you would have better position to go for your dream house.
The views/observations expressed are not meant to be taken as suggestion/recommendations. Readers are advised to take their own decision.
Do you think Renting is better option for young professionals?


Sujatha Sathya said...

wow loved this piece. very sure of yourself. and quite logical too. made a lot of financial sense.
very different from what i "felt" when i wrote on the same topic some time back.

WealthUCreate said...

Hmmm... i read your article. You leave emotional touch and probably that is important and missing in my articles. Am still new baby in blogging....

Thiruvengadam said...

Good One......I'm putting a question about location like India...chennai...Mumbai...where Demand will never end.
Say i'm 27 now, the demand is more so the price is 50L for 1200 7 @ my age of 40 i may still find demand is more so the price may be 3cr for the same 1200 was the same happened in Real estate..belive me..Own a house & pay EMI as rent

WealthUCreate said...


R.E is already sitting on big bubble. You never know when it will bust. If R.E can bust in other countries, it can happen in India too. Yes for time being let us assume that RE will continue to grow and the bubble will go bigger. The point here is the growth here after will not be at a pace that use to happen in the past. Earlier, invest and double your money in 3 years. Now it might grow at 12 to 15% CAGR. i am from bangalore, i see not much of increase in price offlate. it is almost stable now.

Yes one must buy a home, its all about timing. Your home should not stop your career growth. Think and Invest smartly

Shankarraju said...

Different view on owning house. But in reality (atleast for me) it is different. I had some personal commitments during my early years hence I did not think about owning house. But when I want to buy house, the prices were kept on increasing(in Chennai, in 5 years price increased 300% +) .. I waited for two years, then decided to buy it at the current price.

Regarding the bubble, in western countries it happened because of substandard loans and borrowing culture. Here, I believe many persons(business men) can afford the prices and mostly black money is at large. Regarding the demand from Salaried persons(particularly IT) might play a big role. So, unless IT job gets hit severely there won't be any bubble burst. Atleast in the next 10 years I don't think IT will suffer that much, though the growth will be stabilized. Also consider the foreign remittances to India kept on increasing every year. So, I think for atleast next 10 years R.E price will not come down, not even 30%. This is my humble opinion.

WealthUCreate said...

Yes, having a own house gives you emotional satisfaction. I would for sure buy one for myself. I dont recommend to live lifelong in rented house. The only point i wanted to highlight is, when you are running behind your career, your house or it location should not be the barrier.

Once you think you have reached a point in your career, look out for house. More over offlate R.E prices are not increasing as it did few year back. The registrations have dried up. This is atleast the case in bangalore. Lets keep our fingers crossed.

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