Buying a house V/s Renting a house – The difference can cost you Rs 100 Crores!

Recently I had represented Gulakh to an event where a widely popular and reputed fund manager claimed that he stays on rent and has invested all his money in the markets. And mind you, he is married! 😛
It was quite a brave call to make especially when one has earned enough to not only afford an house but also earn substantial income from a job as well as from the markets.

Buying a house has always carried sentimental value. Many dream about getting that right job which can enable them to take an EMI and book a house. Even if it is located in the outskirts. As a Mumbaikar, most of us would know somebody or the other who travels atleast four hours a day.

I have always espoused the idea of renting a house rather than buying one.

Let us try to compare both the scenarios:

Scenario A

Consider Mr H who wants to buy a house worth a crore.
For this amount, he is able to afford a 2 BHK in Borivali.
He is earning Rs 90,000 per month and his wife is earning Rs 50,000 per month.
He avails of a loan worth Rs 83,00,000 and together they can comfortably pay an EMI of Rs 75,000 to buy a flat priced at a crore.
I used this to calculate.

Suppose they have to start paying EMI from Dec 2016, I have considered the following assumptions which seem fair:

a) As mentioned earlier, 54% of their incomes is spent on home loan EMI
b) They are able to invest 20% of their income in mutual funds viz is around Rs 28,000. Every year this amount increases by 10%.
c) Their salaries increase year on year by 15% (considering promotions/job changes)

d) The rest is for all their other expenses

Now how will their investment corpus through SIPs look like in December 2026?

Year
SIP/month
2017
28000
2018
30800
2019
33880
2020
37268
2021
40995
2022
45094
2023
49604
2024
54564
2025
60020
2026
66023

Assuming a CAGR of 15% and average SIP/month as Rs 44,624 one may expect this corpus to grow to around Rs 1.24 crores by Dec 2026.

If we are being very favourable, the value of the property could grow by 15% CAGR, which means in Dec 2026 it would be worth Rs 4.045 Crore.
By Dec 2026, close to 75 lakhs still remains to be paid off.

So their networth could be: Rs 4.05 crore + Rs 1.24 crore – Rs 0.75 Crore =  Rs 4.53 crore.
Which would be worth around Rs 2.73 crores as of today considering an inflation rate of  little less than 8%.

QUITE IMPRESSIVE RIGHT?

Scenario B

Mr H and his wife rent a 2 BHK in Chembur (Tilak Nagar).
They pay a rent of close to Rs 35,000.
Since they are paying rent instead of EMI, they not only invest the difference between the EMI and rent (75000 – 35000 = 40,000), but they also invest 20% of their combined salaries.
Now let us assume their increase in salary also takes care of the increase in rent (about 5% year on year. And after a point it will remain stagnant)

Now how will their investment corpus through SIPs look like in December 2026?

Year
SIP/month
SIP/month
Total
2017
28000
40000
68000
2018
30800
40000
70800
2019
33880
40000
73880
2020
37268
40000
77268
2021
40995
40000
80995
2022
45094
40000
85094
2023
49604
40000
89604
2024
54564
40000
94564
2025
60020
40000
100020
2026
66023
40000
106023

The average SIP is Rs 84625.

Now since they were young and didn’t buy a house, they decided to be aggressive and invest in a mid cap mutual fund like Birla Sun Life Mid Cap Fund. Since its launch in Oct 2002, it has offered a CAGR of 24.58%.

Now let us assume even a CAGR of 18% to be most conservative.
Over a period of 10 years at a CAGR of 18%, this works out to be Rs 2.84 crores
Over 10 years, Networth in the case of Scenario A = Rs 4.53 Crores
Over 10 years, Networth in the case of Scenario B =.Rs 2.84 Crores

Now let us look at what will happen over a 20 year period in the case of Scenario A.

Year
SIP/month
2017
28000
2018
30800
2019
33880
2020
37268
2021
40995
2022
45094
2023
49604
2024
54564
2025
60020
2026
66023
2027
72625
2028
79887
2029
87876
2030
96664
2031
106330
2032
116963
2033
128659
2034
141525
2035
155678
2036
171245

In 2036 Dec, another Rs 55 lakhs would be outstanding to be paid
At a very optimistic growth of 15%, the flat would be worth Rs 16 crores.
Average SIP would be worth Rs 80,184
Mutual Fund corpus would be worth Rs 12.1 Crores.

The networth is an impressive 16+12.1 = 28.1 – 0.55 = Rs 27.56 Crores.

Now let us look at what will happen over a 20 year period in the case of Scenario B.

Year
SIP/month
SIP/month
Total
2017
28000
40000
68000
2018
30800
40000
70800
2019
33880
40000
73880
2020
37268
40000
77268
2021
40995
40000
80995
2022
45094
40000
85094
2023
49604
40000
89604
2024
54564
40000
94564
2025
60020
40000
100020
2026
66023
40000
106023
2027
72625
40000
112625
2028
79887
40000
119887
2029
87876
40000
127876
2030
96664
40000
136664
2031
106330
40000
146330
2032
116963
40000
156963
2033
128659
40000
168659
2034
141525
40000
181525
2035
155678
40000
195678
2036
171245
40000
211245

Average SIP would be worth Rs 1,24,814
CAGR would be 18% over 20 years (Quite possible as Birla Sun Life Mid Cap Fund has delivered close to Rs 24% during a 20 year old period)
The corpus would be worth Rs 29 Crores.

Over 20 years, Networth in the case of Scenario A = Rs 27.56 Crores

Over 20 years, Networth in the case of Scenario B =.Rs 29 Crores


Now let us look at what will happen over a 30 year period in the case of Scenario A.

Year
SIP/month
2017
28000
2018
30800
2019
33880
2020
37268
2021
40995
2022
45094
2023
49604
2024
54564
2025
60020
2026
66023
2027
72625
2028
79887
2029
87876
2030
96664
2031
106330
2032
116963
2033
128659
2034
141525
2035
155678
2036
171245
2037
188370
2038
207207
2039
227928
2040
250720
2041
275793
2042
303372
2043
333709
2044
367080
2045
403788
2046
444167


In 2046 Dec, the home loan would have been paid for.
At a very optimistic growth of 15%, the flat would be worth Rs 64 crores.
Average SIP would be worth Rs 1,53,527
Mutual Fund corpus would be worth Rs 107 Crores.
Total networth = Rs 64 Cr + Rs 107 Cr = Rs 171 Cr.

Now let us look at what will happen over a 30 year period in the case of Scenario B.

Year
SIP/month
SIP/month
Total
2017
28000
40000
68000
2018
30800
40000
70800
2019
33880
40000
73880
2020
37268
40000
77268
2021
40995
40000
80995
2022
45094
40000
85094
2023
49604
40000
89604
2024
54564
40000
94564
2025
60020
40000
100020
2026
66023
40000
106023
2027
72625
40000
112625
2028
79887
40000
119887
2029
87876
40000
127876
2030
96664
40000
136664
2031
106330
40000
146330
2032
116963
40000
156963
2033
128659
40000
168659
2034
141525
40000
181525
2035
155678
40000
195678
2036
171245
40000
211245
2037
188370
40000
228370
2038
207207
40000
247207
2039
227928
40000
267928
2040
250720
40000
290720
2041
275793
40000
315793
2042
303372
40000
343372
2043
333709
40000
373709
2044
367080
40000
407080
2045
403788
40000
443788
2046
444167
40000
484167

Average SIP would be worth Rs 1,93,528
CAGR would be 18% over 30 years.
The corpus would be worth Rs 277 Crores.

Over 30 years, Networth in the case of Scenario A = Rs 171 Crores

Over 30 years, Networth in the case of Scenario B =.Rs 277 Crores
A GRAND DIFFERENCE OF MORE THAN RS 100 CRORES
So what would you like to do? Rent or buy?

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