Renting versus buying: What you can learn from Shah Rukh Khan

The renting and investing versus buying and paying an EMI debate is very popular on social media. It really gets people involved and taking sides. And that perhaps happens because we are brought up writing exams in which every question has one right answer, especially for those who major in disciplines like finance and engineering. So, either renting and investing is the right answer, or buying a house and paying an EMI is the right answer. Both can’t be right.

But that’s not how real life works. In real life, both answers can be right. It depends on the context. It depends on you. Or as they say: to each her own.

And that’s the number one reason for buying a house to live in: to provide a stable abode for the family. And making a financial comparison on that is quite a stupid thing to do. I say this after having been a part of the renting and investing versus EMI and buying game on social media for many years. Honestly, it does help drive up the number of followers like no other topic on personal finance does.

Now, buying a house to live in has its advantages. First, as I said, the family, children and parents, get some stability in life, particularly children who are in school. They don’t need to make a new set of friends every few years after the rental agreement ends. Second, the tension that comes with having to find a new house to rent every few years—dealing with prospective landlords and agents—goes away. Third, you don’t have to keep updating your address proofs (believe me that can be a real pain). These are the few main advantages of buying a house to live in. Over and above this, someone might have always dreamt about owning a house and staying in its with their parents. How do you put a cost on something like that? And indeed, why do you?

At the same time, renting a house also has its advantages. First, rents give you flexibility on the financial front. You can pretty much continue to do what you want to do with your money, something buying a house doesn’t allow most people to do. For those buying a house, a good portion of the income/salary goes towards paying the EMI on the home loan. So, a lot more financial discipline becomes necessary.

Second, living on rent doesn’t dent the accumulated financial savings, unless of course, someone chooses to lead a lavish life and spend much more than they earn. If you choose to buy a house a good portion of the accumulated financial savings go towards making the downpayment. In some cases that can impact the ability to deal with a financial emergency, loss of job etc.

Third, living on rent is a cheaper proposition, on average. The rental yield or the annual rent as a proportion of the price of the house, typically tends to be around 1.5-2%. The interest on a home loan is 9% and upwards.

This means multiple things.

One, those who rent can save more money through investing. This is the point those who favour renting and investing over buying and paying an EMI typically tend to make. And it’s a fair point. If you are buying a house and paying an EMI, your ability to build a higher corpus of financial savings does go down.

Two, if you rent, you can stay in a much better locality vis a vis if you want to buy and stay in that same place. And this is because the rental yield is 2% and the interest on a home loan is 9%. So, you may not have the ability to pay an EMI on a house but you may have the ability to rent it.

Hence, there are advantages and disadvantages on both sides. It depends on which side you are on. What are your desires and goals in life?

Do you want to travel the world? Do you want to keep taking sabbaticals from working? Are you the kind who cannot suffer stupid and toxic bosses? Are you a freelancer like me whose future income stream can be unpredictable? Then you are better not buying a house, unless you have made a large amount of money already.

On the other hand, do you want your children to go to the same school? Does your parents’ opinion of you being settled in life really matter to you? Does your spouse like the idea of owning a house and not renting it? Do you hate the idea of moving to a new flat every few years? Then you should definitely be buying a house.

Finally, don’t waste your time on renting versus buying debates. Do what you think is right for the situation that you are in. No expert or financial influencer can answer that question for you.