Renting or Buying a House

First of all, I want to tell, why am I taking this finance topic to discuss in accounting education? Because today morning one person is coming to my house for searching a house on rent. I asked his profession and other financial detail. That was good. But, he was ignorant of finance knowledge. I told him that buying a house is better than renting in your case. I tried to use some financial calculation for telling the logic behind this. All these things, I am sharing with you.



Reasons of Buying a House is Better than Renting a House

1st Reason : Buying a House is better than Renting a House

{ Co-relation of Increasing the Prices of House and Increasing the Rent Rates}

  I take my house's example. My parent bought my house in Rs. 15,000 in 1980 ( India)

Now, Same house's market value is more than Rs. 1 Crore ( 2011 Current Year)

I asked my parent about the rent of same house and it was just Rs. 100 per month or Rs. 1200 per year in 1980. But, now each room's rent is Rs. 1000 and If we have 10 rooms, it means today rent of this house is Rs. 10,000 per month or Rs. 1,20,000 per year. We make 10 new rooms, rent of this house will increase to Rs. 20,000 per month or Rs. 2,40,000 p.a..

Now Co-relate it with rates of buying of house


 1980 2011

(Amount in Rs. )

(Amount in Rs.)

Increase

Increase times

 My House (Buying)
 15,000 1,00,00,000 99,85,000 10,000 times

My House ( Renting)
1200/ per year 120,000/ per year1,18,800100 times

From above table, you can get clear idea. Rent rates is also increasing with increasing house rates. Moreover, if my parent thinks to rent in 1980, then today we have no house and plus, we are still paying Rs. 1,20,000 per year. One more thing, I want to compare it, if payment of 15,000 was 15 times (approximately) more than rent per year in 1980 but now, payment of Rs. 1,00,00,000 is 100 times more than rent per year in 2011.   So, this is better to buying house instead of renting of house.


2nd Reason : Buying a House is better than Renting a House

{Annual Interest Saving and Tax Saving }

Suppose, above person's salary is Rs. 20,000 per month in designing company. He is ready to get house at  rent of Rs. 10,000 per month.

Annual Rent  = 10,000 X 12 = Rs. 1,20,000

Annual Loss of Interest on Saving Bank Account = Rs. 120,000 X 3.5% = Rs. 4200

Means total cost of Rent of Rs. 1,20,000 + Rs. 4200 = Rs. 1,24,200

Still, there is no provision in Income Tax Act 1961 for providing deduction or rebate out of total tax for rent payment of residential house.

On the other side, you can buy different types of houses according to size of land. Means you can buy a land of Rs. 5,00,000 and make small house on it by using your investment of Rs. 5,00,000. Overall cost of your house will be Rs. 10,00,000.

At that time, you will be the plus point that you will need not pay per month investment and you can get interest on this saved interest. Suppose, if you have not full Rs. 10,00,000, you can get home loan from bank. In India, all Govt. and private banks provide home loan. I know SBI's home loan, it is between 8.5% to  9.5% p.a. upto repayment of home loan. Tax benefits on home loan are of two types:

(A) As per section 24(b) of Income Tax law, you can deduct  Rs. 1,50,000 towards the total interest payable on the home loan towards purchase / construction of house property.

 if your loan is of Rs. 5,00,000 and its interest is Rs. 47,500 annually ( approximate).  You need not pay tax on income which is used in interest on home loan because, this interest is less than Rs. 1,50,000.

 (B)  According to new section 80 C and 80 CCE of deduction, you  will get deduction of Rs. 1,00,000 on home loan's actual repayment amount.


Total Tax Saving =  Rs. 100,000 + 1,50,000 = Rs. 2,50,000

That is the reason, buying of a house is better than renting of a house.

3nd Reason : Buying a House is better than Renting a House

{Value of Land is appreciating but Value of Money is depreciating}

House is made on land and we are seeing that value of land is appreciating very fast in real estate market. On the other side, value of money is depreciating in financial market. Because financial market is so connected with international currency market, international economy, crisis and other things. Investment in house will be good gift to children and one of basic need of any human being in the world.

If my parent did not buy my house and deposited in FD bank account in India for 31 years. What does happen? We receive just Rs. 67,500 as interest income without house roof. But today, we are better than this condition.

From this, you can get idea, investment which is in house is appreciating when we are comparing it with investment just in money market.

 Reasons of Renting a House is Better than Buying a House

1st Reason : Renting a House is Better than Buying a House

{ Low resources of Earning}

Sometime, a person takes home loan from bank or other but due to low resources, he can not pay his home loan. At that time, his life may be more stressful. Personally, I am not in the favor of taking any type of loan for any purpose. [ I did not take loan of Rs. 1 from any one in my past 30 years life . With this, I sleep deeply without  any tension of repaying of loan.]

Today, buying a house is long term project. If your resources of earning is low. Renting a house is best option for you. Live an extra 10 years, or buy and die of worry earlier.

2nd Reason : Renting a House is Better than Buying a House

{ Future is Uncertain }

I think, I am living peaceful in my buying house. This is my biggest mistake. Future is totally uncertain. Only one minute earthquake and tsunami may break your house of 100 Billion $. We are all passengers of a train that is called life. Next one second, what will happen, we can not estimate. Then, why are you taking tension for buying a house? Enjoy your happy life on rented a house just like travel in train.

3rd Reason :  Renting a House is Better than Buying a House

{ Relation is Better than a Physical Property}

If you want to make good relation, I will say you renting a house. My father did Govt. service for 37 years. He lived his 37 years in renting house. He rented more than 10 houses and made a peaceful relation with different owners of house. Still, all are our family members. Actually, sometime, situation can decide whether you will live in renting house or in buying house. Remember, no one can carry this physical property.

My Own Thoughts on this Debate

In end, to live in renting house is not bad but bad is thinking of wealthy people. Food, clothes and house are basic need of any human being, animals and birds. If any person, animal and bird  lives without food, cloth and house, it means it is default of society. Wealthy people of the world are playing bad game for increasing their income. One side, they are increasing the prices of land by capturing it for rental purpose. With this, prices of houses will touch sky. On the other side, they take big rent from middle class or poor. I know lots of wealthy people in my area. They made lots of building with their black money. They have captured all most all the land of our area. Now, there is no free land. Now, they are demanding high value of  these residential building.

Not in India, there are lots of capitalists all over the world whose one aim is  to increase surplus value for their multi billion dollar enterprises in real estate industry and to transfer wealth to the top by increasing both rate of land and rent. Their bad politics is just to reach top position of billionaires.

 They are also demanding high rent on these building. Today is earth day ( 22nd April 2011) and we have to promise that we did not do the bad business of  house. Earth is our mother. We are all brothers and sisters due to this relation. Line of Control has been made by bad persons. We did not buy or sell it for exploiting middle or poor. We will distribute our extra house and land to middle and poor as donation. Many years ago, Great saint of India Vinoba Bhave  had started this movement. He took donated land from rich Indians and gave to poor free of cost. He got more than 1000 villages in the form of donation for poor Indians. Out of these, he obtained 175 donated villages in Tamilnadu.  We should start this movement again. We did not take high rent from middle or poor. I know lots of religious and not for profit organisations  who are providing free house to middle and poor.  I am thankful all these organisations. According to my thinking, house is not the name of building but it is the place where we understand other's feeling and other understand our feeling.

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Accounting Education: Renting or Buying a House
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