The rent-versus-buy decision is often presented as a straightforward question of whether to own a home or keep renting. In reality, the financially sensible choice depends on income, location, property prices, loan rates, investment returns, expected tenure and the opportunity cost of the down payment. According to Sarika Shetty, CEO and co-founder of RentenPe, the right approach is to compare the total cost of ownership against the total cost of renting plus the potential investment of the difference.
Let’s understand this with an example
Consider a Rs 1 crore home. Assuming a 20 per cent down payment of Rs 20 lakh and a Rs 80 lakh home loan for 20 years at an illustrative interest rate of 8.5 per cent, the EMI would be approximately Rs 69,400 per month. Over 20 years, the borrower would pay around Rs 1.67 crore in EMIs, including approximately Rs 87 lakh in interest.
Adding the Rs 20 lakh down payment takes the direct acquisition cost to nearly Rs 1.87 crore, even before accounting for registration, stamp duty, maintenance, property tax and other ownership costs.
“Now consider the same property as a rental. If the initial annual rent is Rs 3.0 lakh, equivalent to a 3 per cent rental yield, the starting monthly rent would be Rs 25,000. Even assuming rent rises by 5 per cent annually, the cumulative rent paid over 20 years would be roughly Rs 99 lakh. This is significantly lower than the Rs 1.87 crore paid towards the purchase through the down payment and loan,” Shetty said.
Value of property appreciates
However, this calculation alone does not make renting the clear winner. The buyer ultimately owns an asset. If the Rs 1 crore property appreciates at 5 per cent annually, its value after 20 years could reach approximately Rs 2.65 crore. The renter, meanwhile, retains the flexibility to invest the Rs 20 lakh that would otherwise have gone towards the down payment, along with the monthly savings between rent and EMI.
“For example, if the renter invests the Rs 20 lakh upfront at an illustrative 10 per cent annual return, it could grow to approximately Rs 1.35 crore over 20 years. Investing even part of the monthly difference between the initial EMI of Rs 69,400 and rent of Rs 25,000 could further increase the accumulated corpus,” she explained. (These returns are illustrative and market-linked, not guaranteed.)
When does buying make sense?
The comparison therefore changes depending on the individual’s circumstances. Buying can make greater financial sense when a person has stable income, sufficient funds for the down payment and transaction costs, plans to stay in the property for a long period, and buys at a reasonable price relative to local rents. A long holding period also helps spread transaction costs and allows the owner to benefit from potential property appreciation.
When does renting make sense?
Renting can be financially preferable when property prices are very high relative to rents, the individual expects to relocate, income is uncertain, or the down payment and associated purchase costs can be deployed more productively elsewhere. Renting can also preserve liquidity and reduce exposure to property-specific risks.
This flexibility also has an important financial dimension. Instead of putting Rs 20 lakh into a down payment, a renter could potentially deploy that capital through strategic investments suited to their risk profile and financial goals. Retaining and investing this capital while renting in the location that best suits their needs can be particularly valuable for people who prioritise liquidity and flexibility.
The decision should therefore not be reduced to “rent is an expense, while EMI creates an asset.” An EMI also includes a substantial interest component, while ownership comes with maintenance, taxes and transaction costs. Similarly, rent is not necessarily “money wasted” if it provides flexibility and allows the tenant to invest the capital that would otherwise be locked into a property,” said Shetty.
Individuals should consider their expected stay, rent-to-property-price ratio, loan cost, expected investment returns, property appreciation and cash-flow capacity before deciding.
ALSO READ:
Planning to buy home with a sibling? Here are 6 must-consider factors to decide before you sign
