What’s better renting or buying? Real estate offers low rental yields in India

Renting or subletting a home, is a common practice across the globe. A majority of the population, which has migrated on account of work to the metros, lives in a rented house or on a sharing basis.

Number of people who live in rented houses is highlighted in the table below:

  Absolute number  Percentage 
Total16,78,26,7307,88,65,93724,66,92,667100100100
RuralUrbanTotalRuralUrbanTotal
Owned15,89,83,9565,45,42,32721,35,26,28394.769.286.6
Rented56,44,5812,17,23,72327,36,8043.427.511.1
Others31,98,19325,99,88757,98,0801.93.32.4

Source: Census of India 2011 Household, Household Amenities, and Assets

The debate over renting a house or buying one has raged on from time immemorial.

In India owning a house is deemed a milestone of a settled life.

Home buyers find the market attractive due to stabilized property prices, low home loan interest rates, government sops, and subsidies. With some research and valuation tools such as RESSEX, Desktop Feasibility Solution and CRYSTAL a buyer can find out prevailing rates in a certain market.

Advantages of renting

Renting a place is convenient due to quite many factors. Instead of paying a large amount upfront, a person has to part with a much lesser amount every month. In case of relocation due to work or a job change, it is easy to uproot and move to another city. Also, there is no additional burden of EMIs for house loans. The owner takes care of maintenance, overhead costs as well as taxes. In metropolitan areas, where these costs are significant it reduces the monetary stress on the tenant.

Call it culture or a societal obligation, ‘owning a house’ is a top priority of almost every other individual. People associate owning a house with safety, security, and satisfaction. Owning a house is deemed like having insurance against any financial setback.

Property prices tend to appreciate significantly over time. Often, people invest in real estate with such a mindset. At times buyers invest in the property only to pocket rent earned on it. The rent paid monthly adds to the income of the home buyer. Globally ‘Gross rental yield’ is used to determine whether rental income is proportional to the value of the asset. Rental yield is also used to predict market trends.

Sample calculation of Gross rental yield

For instance, say Mr. Kumar bought a flat in National Capital Region having paid Rs 50 lakh. He rented out the property to some people. Every month Mr. Kumar receives Rs 15,000 as rent.

Rental yield of Mr Kumar’s flat can be calculated like this:

Monthly rent is Rs 15,000

Annual rent is Rs 15,000 multiplied by 12 = Rs 1,80,000

Gross rental yield equals annual rent divided by property value into 100

Rs 50,00,000 divided by Rs 1,80,000 into 100 is 3.6 (explained in detail below)

Monthly rent Rs 15,000
Annual rent Rs 1,80,000
Property value Rs 50,00,000
Gross rental yield (Rs 1,80,000 / Rs 50,00,000) * 100 = 3.6

Clearly the rental yield Mr Kumar draws from the flat is quite low. But chances of appreciation on the capital he invested in the flat are high. That is the reason which compels many like Mr Kumar to invest in a property.

Table below shows rental yields in some of the major cities across the world. Rental yield of more than 5.5% to 6% is considered healthy.

Country, CityGross Rental yield
US, New York2.91%
Australia, Sydney2.52%
Canada, Toronto3.95%
China, Shanghai2.10%
France, Paris2.79%
Germany, Berlin2.95%
India, Mumbai2.32%
Japan, Tokyo2.66%
Singapore2.54%
UAE, Dubai5.19%
UK, London2.71%

Source – Global Property Guide

Renting and buying both have their disadvantages.

Living as a tenant comes with a certain amount of limitations. The first one is you can never call the house as your own house. You have to abide by the rules set by the landlord/landlady, which at times could be ludicrous. You need to have a steady source of income to ensure you pay the rent on time.

The fact, in particular, requires meticulous planning and careful spending. People used to lead an extravagant life might not find this exactly up their alley. Besides, you are always at the mercy of the owner. In case of a dispute or better rental payout, there is always a risk of losing the house.

Owning a house comes with its own drawbacks. Quoted prices are usually lower than what buyers end up paying. Add to it, the registry charges, the legal fees, and the necessary taxes and dent caused by the decision to buy the property, raises significantly.

Also, the amount you repay to the bank once the tenure is complete is usually more than the principal itself. Stress overpaying EMIs on time in case of upheavals in professional life often lead to health complications. Defaulting on EMIs can lead to severe penalties.

Once you get possession, you have to pay monthly maintenance charges, property taxes, and other expenses as well. And at times families go overboard with furnishing options and end up paying through the nose.

Takeaway

Hence, it is safe to conclude that both renting and buying come with their own set of risk factors. Tenancy is suitable for individuals who are at the initial stages of their career. If you are someone who has just started working or still undecided about the future, renting a home is a better option. It makes sense to continue saving for a period of time and then deciding whether to buy a home.

The tricky question to answer is what is better for you in the given phase of your life.

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