Just started your career? Here's why it is better to rent a house instead of buying one

Real estate is an emotive subject the world over. Owning a home is very important for people in that it gives them a sense of security as well as a certain respectability and status among their family and friends and even in the society at large.

But real estate is a very big investment and is difficult to pull off early in life. Let us examine real estate purchase in a bit more detail.

Buying property – When people buy property, there is a huge loan component. Also, even coming up with the initial 20% down payment is difficult for many.

Having a huge loan is not very desirable at the start of one’s career as one may want to be nimble footed and move from one to another job in pursuit of better career prospects. Also, one may want to indulge in entrepreneurship which would mean that a steady income may not be there. There may be a lack of a good investment backup at the early stages of one’s career and any job losses at this stage can be hugely problematic. Servicing a loan in such situations can become challenging.

Investing in property to save taxes is a seriously flawed logic. One takes on so much loan to save a small amount in taxes – not worth. Others invest in a home just so that their surpluses are channelized into EMIs and does not get spent! This is again lazy planning at best that can bring a lot of problems in its wake!

Property is not yours! We keep saying all the time that we have bought the property. That statement itself is not true for it is nominally ours and for a major part it is that of the agency that has given us the loan, for a long time to come. Even the property papers are with the loan agency!

Is the property suitable for you? People want a property to their name. They somehow stretch and buy what best they can. However, the property they may end up buying based on this affordability may not be most suited to them.

For instance, their requirement may be for a 3BHK home; whereas what they can afford may just be a 2BHK home. Also, due to budget constraints, they may end up buying at locations which are far from the business districts due to which they end up travelling a long time to work.

A better strategy would have been renting a home suited to their needs somewhat closer to their place of work.

Focus on wealth creation

At the beginning of one’s career, it makes sense to create a good liquidity, provisions for meeting major expenses and goals as also a contingency provision. Such a move will ensure that one is financially well covered for all situations one may face in life. Investing prudently and allowing it to compound will ensure a good wealth buildup overtime, which can come in handy for purchase of a home in the future.

The good part about annual home rentals in India is that it is just 3-3.5% pa of the property price. This means that the property owner is willing to earn just this much at a gross level and under 2% at the net level (after society charges, property and income taxes ) and is actually subsidizing the person on rent! Why not take advantage of this benevolence?

Mobility in the career

At the start of one’s career, we tend to move cities (and countries) in pursuit of better opportunities. Hence, if one buys a home in one place, there is a chance that one may have to move to another place and rent a home there. And give their home on rent, while paying EMIs! This happens quite a lot.

When should one buy the home? One should buy the home only when one is sure that one wants to settle down in that city. Many people have a home in a city and their family stays put, even if their career takes them to different cities. This happens when people have children in middle school or higher and the person is in the forties.

Late thirties or early to mid-forties may be a good time to buy a home as clarity emerges about whether they want to settle in a particular city. At that time, one is also clear about the fact that the family will not be disturbed and only one person will move around on work.

People give multiple reasons to buy a home early in life. But most don’t pass scrutiny. Buying a home somewhat later in life is the sane thing to do – unless one has permanent work from home as an option!

Suresh Sadagopan is the MD & Principal Officer at Ladder7 Wealth Planners and is the author of the book If God was your Financial Planner