American billionaire J Paul Getty, had a fairly simple solution to the rent-versus-buy debate: “If it appreciates, buy it. If it depreciates, ease it.” However, the decision is not that simple these days with lenders offering attractive offers, especially on household electronics & furnishing. To boot, many argue that nothing compares to the feeling of ownership of, say, a car or a house. It could even be a status symbol. But from a purely financial angle, Bengalureans, primarily the floating population which changes job and city every three to four years, are just better off renting. Read on for us the math behind the argument.
A recent report from ArthaYantra, an on line personal wealth management firm, says buying a 1,000 square feet ready-to occupy flat in Bengaluru is only affordable if you have an annual income of over Rs 15 lakh a year. The study looks at the affordability to-buy or rent for various income groups by considering the average price of residential property, rental value and years needed to accumulate the down payment (20% of property price) and the purchasable area per Rs 1 lakh.
Even though average property rents have increased continuously over the last four years and the city has a 10-month security deposit rule, the calculations say Bengaluru to be favourable for renting rather than buying. If you save 25% of your annual income and accumulate the down payment over 5.7 years, it would be unwise to buy a property if you have an annual income less than Rs 15 lakh.
This is despite an overall drop in property prices by 2.55% from last year’s levels and a spurt in rentals by 10.08%. The average out-of pocket cost to rent an apartment in Bengaluru is Rs 19,000 whereas the average EMI to own such a house is Rs 51,582. Therefore, the city has a rent to-buy ratio of 0.37.
FURNITURE & HOME DECOR
The average cost of buying basic furnishing that includes a queen size bed, a dining table, a sofa set, coffee table, side tables, mattresses and basic home decor comes to about Rs 1.52 lakh (see calcula tions). If the items are bought on credit (14% interest for 12 months), you have to pay an interest of Rs 11,772 and your total cost comes to around Rs 1.84 lakh. The yearly cost of renting all this is Rs 62,400. So, the renting cost for three years is Rs 1.64 lakh. However, there is a relocation cost if you purchase the items.
“Our research shows that urban millennials in cities like Bangalore and Mumbai either switch job and move cities on an average every 3 to 3.5 years, or, move within the city every 1 to 1.5 years,” says Ajith Mohan Karimpana, founder and CEO of Furlenco, an online furniture and decor renting start-up. “This is because most rent agreements are for a duration of 11 months to a year and owners generally don’t let the same tenants stay beyond that period,” explains Karimpana The approximate cost of moving within the city is around Rs 7,000 to Rs 8,000. If you move to another city , the cost is around Rs 20,000 to Rs 25,000. So, on an average you are spending about Rs 10,000 yearly on relocation. “Reselling furniture is not a great idea as the price comes down to as low as 10% of the original cost in just three to four years. I myself have made 90% loses twice in distress sale,” says Karimpana.
Also, there is cost of maintenance–cleaning and some soft furnishings that need replacement-at least another Rs 5,000 yearly . The total cost comes to about Rs 15,000 annually , which is nil in case you rent.Then there is an opportunity cost, the money you could have earned by investing rather than spending it. Here is why renting makes more sense in the short-term, that is, if you plan to relocate in next three to four years.