Buying a house can be an emotional decision, but such emotion can cost you more than required. At the same time, buying a house or property can be seen as an investment. Thou basic calculations are necessary before making such huge investments.
You might have plenty of personal reasons behind the decision to buy or rent. The calculation shows the analytical data behind buying or renting any property. There are a few thumb rules which can help you to get a better insight before deciding.
4% rule
A popular thumb rule used to determine whether buying or renting a property makes more sense is the 4% rule. The rule states that renting may be more cost-effective if the annual cost of owning a home is more than 4% of the purchase price.
It's a straightforward rule for everyone to follow when deciding to Rent or Buy a property. Looking at the financial aspect can be answered with the simplified 4% rule.
1. Annual rate < 4 % Home Value – Rent is good
2. Annual Rate > 4 % Home Value - Buy the Property
Example-
Let's assume the price of Renting a 2-BHK is ₹15,000/-, and the home's actual value is 40 lakhs.
So the rental collection from the property for One year would be (12 X 15,000=1.8 Lakhs)
Again, (1.8/40) X 100= 4.5 %, which is More than 4 % of the Home value, so buying that property would be recommended.
Relying on a single thumb rule might not be smart, so let's look into a few other thumb rules in a similar domain. Here are some essential thumb rules to keep in mind when deciding whether to rent or buy:
30% rule
The 30% rule states that you should not spend more than 30% of your monthly income on housing expenses, which includes mortgage payments, property taxes, insurance, and maintenance costs. This rule is based on the idea that spending more than 30% of your income on housing can lead to financial stress and make it difficult to save for other essential expenses such as retirement or emergencies. By following the 30% rule, you can ensure that you're not overextending yourself financially.
The 5-year rule
Consider buying a home instead of renting if you plan to stay in the property for at least five years. This is because it can take several years for the property's value to appreciate enough to compensate for the transaction costs associated with buying and selling a home.
Additionally, buying a home involves upfront costs such as a down payment, closing costs, and other fees, and it can take several years to recoup these costs through home appreciation.
These thumb rules are to help analyze better. Solely deciding based on any such rule without additional research isn't smart. Deciding whether to rent or buy a home is a personal decision that should be based on individual circumstances, financial situations, and the given thumb rules. By keeping these thumb rules in mind, you can make an informed decision that meets your needs and goals.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
