Rent vs Buy — 8.71 Rule — Mindfuldiscoveries
Are you caught in a conundrum, unsure whether to rent or buy a home? Look no further! In this Rent Vs Buy, let me take you on a deep dive into the world of renting and buying, equipping you with the knowledge to make a well-informed decision about your housing situation. Prepare to unravel the pros and cons, explore the financial implications, weigh the long-term benefits, and consider the lifestyle factors associated with each option. Backed by expert analysis and concrete data, this essential guide will provide you with actionable insights to navigate the renting vs. buying dilemma. So, whether you’re seeking stability, flexibility, or wealth accumulation, we’re here to help you discover the ideal path for your future. Get ready to embark on a journey that will empower you to find your perfect housing solution. Let’s dive in!
The Numbers Game:
Let’s kick off with a simple example. Imagine you stumble upon your dream home, priced at 60 lakhs, and decide to take the plunge. Your annual expenses will include property tax and maintenance costs, each amounting to approximately 1%. Additionally, you’ll need to make a 20% down payment, with an opportunity cost of 8% to consider.
Opportunity cost refers to the value of your down payment if invested elsewhere. With an assumed 8% rate, this opportunity cost comes to 96,000 per year. Furthermore, assuming a mortgage loan rate of 8% on a loan amount of 48 lakhs, your yearly repayment will be around 3,84,000.
Reaching the Break-Even Point:
Based on these calculations, your break-even point is 10,550 per month. If you can find a rental home for less than this amount, it would be more cost-effective to rent than to buy. However, in reality, finding rentals at such affordable prices, particularly in cities like Mumbai or Delhi, can be quite challenging.
The Rental Alternative:
Now, let’s examine the scenario of renting a similar home at 18,000 per month. Here’s where it gets interesting. After subtracting your rent and EMI costs, you could potentially save around 40,000 per month. If you wisely invest this surplus amount in mutual funds or stocks, assuming an 8% return rate, your savings could grow significantly over the years.
Suppose you maintain this investment strategy for 10 years. In that case, you could amass a handsome return of approximately 73,61,000 after-tax. Undeniably, this is a substantial sum. However, it’s crucial to consider whether you’d be able to buy a new home at the same price you initially paid. If property prices have surged, your savings might fall short of the mark.
Proceed with Caution:
Given these considerations, careful contemplation is paramount. Buying a home can be a rewarding investment if you possess discipline and budgeting skills. However, if you lack in these areas, renting may be a more suitable option.
Remember to meticulously plan your home purchase within a well-defined budget, ensuring your EMI costs do not exceed 25% of your salary. Additionally, aim to invest at least 50% of your EMI amount to mitigate the losses incurred through interest rates.
Conclusion:
In the grand debate of buying versus renting, each path offers its fair share of advantages and disadvantages. Ultimately, the decision hinges on your personal financial circumstances and your ability to adhere to a budget. Prioritize thoughtful consideration, ponder all relevant factors, and always keep in mind the significance of mindful finance. By carefully tracking and accounting for every penny spent, you’ll be well on your way to achieving your financial aspirations.
So, whether you opt for the joys of homeownership or choose the freedom of renting, may your decision be a well-informed and prosperous one. Happy house hunting!
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Originally published at https://mindfuldiscoveries.in on June 18, 2023.
