One Finance Rent VS Buy _D1

The transcription explores the debate between buying or renting a home. It presents the perspectives of two couples, one who bought their own home and one who prefers to rent. The show seeks to provide an objective analysis of the financial aspects of this decision. The argument is presented by an expert who explains that renting can be a smarter financial choice in the early years, allowing for investments that can eventually afford the down payment on a house. The expert also discusses the difference between buying a house for personal use and investing in real estate for rental income and capital appreciation. The show concludes by emphasizing the importance of considering individual circumstances and avoiding the decision to buy a house too early in life. The role of behavior and psychological influences in decision-making is also highlighted. I think no matter how welcome you're made to feel anywhere else, home is home. It's like growing roots, I would say. You grow roots in a place and you kind of strengthen the bonds there. I've always led a nomadic life. Dad was in the Air Force. Putting roots to a place and making it your own kind of came naturally. What you've just witnessed are a handful of distinct yet equally captivating viewpoints on the timeless dilemma of whether to purchase or rent a home. Our home is our haven, where our heart resides, and where we create the beautiful fabric of our lives. It's not just a mere structure, but a sanctuary where we nurture our family and craft cherished memories that will last a lifetime. In this episode, we explore a fundamental question regarding home sweet home. Is it more advantageous to buy or rent? Hi, I'm Ashish Chawla, and this is Temperament by OneFinance. The show aims to uncover how psychological influences and biases can impact your financial behavior with the sole objective of assisting you in avoiding costly mistakes and making sounder financial decisions. The idea that owning a home is the ultimate achievement in one's financial life has been ingrained in us for generations. But is this idealized view of home ownership truly reflective of reality? To understand this, I decided to visit two dear friends of mine, Ishita and Manav, who have been married for, well, forever, it seems. They both are in their 40s and live in a swanky condo in Gurgaon. Ishita is a chartered accountant who now owns a successful audit firm, while Manav is an MBA from IIM Bangalore and a finance director at Ericsson India. In short, they are pretty well settled and live happily with two kids in their own house. Let me play the conversation that we had. Hey, Ishita, how are you doing? Hi, Ashish. So nice to have you. Please come in. It is such a pleasure to be here, Ishita and Manav, and thank you for your time. Your house has such a warm vibe. So the first question really I have for you is, what is home for you? A comfort zone. A happy place. It's our world. It's a place, you know, when you have a long, tiring day, you can just come back and relax. I think no matter how welcome you are made to feel anywhere else, home is home. Home is, you know, you just come home, you relax, and you're at peace. That would be the place that I would call home. Well, I couldn't agree more. So Ishita, you moved into your own house a couple of years back. So what were the kind of conversations you used to have with Manav back then? I very strongly feel that Indians are very sentimental. So, you know, your own house is quintessentially built in your DNA. This is how you're conditioned to think that you're going to have your own house. And the conversation was never that, you know, whether to have a house or whether to rent it out. We were very clear that we want to own a house because that checks off an item from our bucket list. But was buying the house that easy? Did you face any problems back then? India, the problem is, I think the process is a bit unstructured. The other problem, I think, and this is something that we struggle with, we are both salaried employees, so it was very hard to arrange for cash. And I think in a lot of cases, you may like the house, but the owner may ask for a certain amount of cash. That was something we could not afford. I think we are lucky in both the times that the people we found were eventually willing to go for all check deals. So that did make the process a little bit easier. Yes, it does take time. It's not easy. But eventually creating anything is not easy, right? And you need to find a house where you are comfortable. I agree. Creating anything is not easy. But a house requires a significant amount of capital, which is often obtained through a home loan. So did paying the EMI cause any burden for you guys? See, fundamentally, I think both of us were in agreement with this, that if we could afford a house for 100, we'd try and take something for 120. So we knew the first two, three years would actually be a lot of problems. We know of foreign locations, et cetera, because the one thing we wanted to do was service the loan. But I genuinely am of the belief that once you take the liability and you are practical and sensible about it, you will start paying it off. So the first two years may have been a bit of a pain, but then slowly the loan gets paid off and you are eventually left with an asset that makes you very happy. You will have to take a loan. I think the criterion that you work out is when you're buying the house, what is it that you can afford as a down payment? What is the loan you can take? Then you sort of map it to your income stream, what is coming in, and how much you can afford to pay without affecting your lifestyle significantly. We don't want a situation where there is something that we need for the kids' school and we say, no, we can't give this. So we were very clear in our mind that we will only stretch to the extent that we can manage without significantly affecting our lifestyles. I do know that a lot of people say that if you take rent and you don't take the loan and you invest the money in a financial instrument or in the share market, you will probably end up with a lot more. Look, to my mind, the house is more emotional than a financial decision. Maybe 100% theoretically, financially, what they're saying is correct. But you will also have to keep in mind that the money that you pay towards the loan eventually services and gives you an asset at the end of the loan period. While the rent that you're paying, it might just be sunk. Yes, it allows you to stay in that particular place for that period of time. But ultimately, at the end of the period, there is no asset that you have in your hand. Here you end up having an asset. This was a persuasive argument, and I find myself agreeing with both. There's no denying that owning your own home brings a tremendous sense of emotional satisfaction. Also, in your own house, not only do you have the freedom to make structural modifications, but you also don't have to worry about the stress of landlord unexpectedly asking you to vacate. However, I wanted to explore another perspective. So I decided to visit another couple who are again dear friends of mine and have been happily living in rented apartments for years. Mayuri is a charity accountant and former finance and planning head of OLX, and her husband Rishi is also a charity accountant and the CFO and founder of Loan Free. They are quite similar to Ishita and Manas as they are in their 40s, have a son and share a similar financial status. This made me curious. Despite this similar background, why have they not yet decided to purchase a house? Let me share the conversation that I had with them too. Brother, please come. Hey, it's always good to be here. Mayuri and Rishi, welcome to the show. The house looks stunning, by the way. Okay, my question to both of you is that have you ever considered purchasing a home for yourself? Can I go for it? Not only did we get a thought, I would admit peer pressure and parental pressure exists. It's the norm to do. It's the norm when you're in your early 30s, you do invest in your house. So we have gone house hunting and we reached a point where we have even given the advance for a house within Greenwoods. And after long conversations with parents, this, that, and then we developed Coldfeet. So we actually came, we backtracked from that transaction. Oh, that's interesting. And why did you do that? We got Coldfeet thinking that we won't be free. And somewhere this idea of being free or being able to take decisions, travel the world, put our roots somewhere else has always been one of our conversations, even during the courtship period. So somewhere I think that also plays a part. I was an equity research guy working at the fund and we used to invest in stocks. So our basic was that the portfolio has to be diversified. It needs to have different sectors, different lot of companies. And I was always of the diversification mindset. And when we thought, oh, we are now putting all our savings as down payment and we're taking loan and we're doing this for one house and anything can go wrong. Maybe something will happen. This market will not do well. And everything can go either it will be up or it will be down. So I could not even get myself to commit all my wealth on a single asset for the next 10 years. But what about the big problem of shifting houses? Does that not bother you that your landlord might ask you to shift anytime? Not so much for me, to be honest. So we have shifted places. I think most often we have shifted when we wanted a better house. And even once when we were asked, the lease had to be cut short because there was a requirement from the landlord. I think we so but I quickly changed my mind to, you know, let me look for something better. You know, let me up it from here, you know, and we started looking and then there was a lot of excitement. For me, I think that is also childhood ingrained. I used to be quite excited when we were like leaving friends, leaving homes and then setting up, going to a new place always came with like a childlike happiness. I think that has continued even now. Wow, that is such a different perspective. So what would you tell someone who is at the brink of making such a decision? So I would say that real estate is a tough asset class and takes a lot from you and it's heavily concentrated with low liquidity. So my take would be to go for, you know, rent and be free. But if somebody is very emotional about house and it is not a financial discussion, then then I have nothing to say. I mean, it's a financially non-financial emotional discussion. After carefully considering both perspectives presented during the argument, I found myself in a state of confusion. Both couples expressed their views with utmost passion and conviction, making it challenging for me to determine a clear winner. So I decided to seek the opinion of someone who emphasizes the importance of objectivity in personal finance choices. Ankur is not only an accomplished entrepreneur, but also a renowned content creator with millions of followers and an esteemed author. Ankur, it is a pleasure to have you on the show. Thank you. Thank you, Ashish. Thank you for having me. It's been a really long time, but thanks for thinking of me again and happy to be here. So, Ankur, there's a common saying that rent is money down the drain. What are your thoughts on this? Yeah, if you look at it from just a rental perspective, of course, that's true, because you are essentially paying somebody what is never going to be yours. But I think that that's only a parochial or a very limited view of the entire structure. When you think about the rent versus buy-debate of a house, the first disclaimer is I understand in the Indian context, having a house is a very emotional decision. And that is why I say before you get the emotions in, you can never take a buy versus rent house decision in India without emotions. Please allow some level of objectivity to come in first. Do the math. Understand those numbers. So rent is not money down the drain. It will be at some point of time if the numbers split. But if you were to do it objectively, you would see that there are enough and more cases, more often than not, where rent is actually a smarter way of living your early life before you recognize towards the end of your 30s that, you know what, I now have both the affordability plus the recognition and awareness of what I specifically want to make that purchase happen. Sure, uncle. So can you break down the argument objectively for us? So there are two parts to it. One, let us assume that you want to buy a house and you are ready with two parts of it. One is the down payment that the banks require, which is usually between 20 to 25 percent. And second is the EMI affordance, which will be for the rest of the amount that you take a loan from. So the understanding or the assumption is that you are able to afford both these two sides. If you are able to afford both these two sides, the comparison then is with going on a rent. The comparison then happens on something called the rental yield. What is the rental yield? The rental yield is the total yearly rental that you pay to rent a place as a function of the total value of the property. So to give you an example, if a house is worth 1 crore and you pay a rent of say 50,000 rupees, you in a year pay 6 lakhs as rent, which over the base of 1 crore makes it 6 percent. So the rental yield of this math, 6 lakhs yearly rental 1 crore house property is 6 percent. Surprisingly, the rental yield in most cities in this country are between 1 and a half to 3 percent, 1 and a half to 3 percent, which means you have to pay far lesser to rent out a place of far higher value. So the same 1 crore house, the rental will be around 15,000 or so, because that will be what the average will be. Of course, there are specifics and nuances which are different. What people mistake is, oh, this 10-15,000 rent is going down the drain, but that is the wrong way of thinking about it. You are comparing it to what you would have paid if you were to pay the entire down payment and also afford BFI. So none of that changes. Here's what you do. You calculate that if you were to not make this down payment, because if you are renting a place, you don't have to make a down payment. If you were to park that down payment into an investment and let's call it a quote-unquote safe investment, let's put it into an index mutual fund, which is considered to be a safer asset in the stock market. You are not doing an FD or anything like that. You are putting it into a safe, safer index mutual fund so that money grows. Plus, the EMI that you were paying for that loan amount, you pay the rent that you have to, but the extra amount that you still would have paid towards the EMI, you invest that as well. So let's say the EMI for a 70 lakh loan and EMI for a 25-year period will come to about 60,000 rupees. You're paying a rent of, say, 30,000 rupees. So you still invest that extra 30,000 that you save in an asset, which again could be an index mutual fund. So what are you essentially doing? You're paying the rent, but you've invested lump sum, the down payment you would have made, and you're also investing the extra EMI that you save into an investment. And you do that for a period of time, which could be, say, 10 to 15 years. By the time you get to about 35, 38, 39, 40, you have clarity over where do you want to settle, how big a house can you afford or want based on your family size, and of course, what locality and so on. So you have a far stronger idea that this is the city, this is the locality, this is the colony, this is the society, this is the area and so on. What you've also done is all of these investments that you've made so far can now pay for the entire house down payment. You don't have to take a loan. So what happened is over 15 years, you had a house on your roof, so you were not homeless. You were investing to make sure you could afford a house. And by the time you got to that 15-year cycle, you could actually afford the entire house down payment. Do the math. It works like magic. Of course, not always, but more often than not. Thank you, Ankur, for sharing this objective perspective. But also, a house is a capital asset, right, that has a resale value which can attract a lot of capital gains. So how does one account for that? So buying a house and investing in real estate are two very different things. I don't consider the house that you've bought to stay in as an investment because you don't intend to ever sell. Of course, it's something that you hold and, God forbid, if something happens and you still have the flexibility of being able to sell it and move to a rented place, but no one buys a house with the intent of selling it. Investing in real estate is very different. There you have two aspects, as you pointed out, Rashish. One is, of course, capital appreciation, which on an average in real estate is anywhere between 6% to 8%. So it's not really phenomenal growth. In fact, it's far lesser than what gold has given over the last 30 years. But then there is also the rental yield, which is over and above the capital appreciation. You also get rental income if you could send it out for rent. There, conclusively, commercial property is far better than residential. Commercial property in the top cities in our country gives you a rental income of anywhere between 5% to 8%. You add that to the 6% to 8%, so you're sitting on a very healthy anywhere between 14% to 16%, which could technically even beat the stock market at an index level if you were to play that right. But a residential with a 1.5%, at best, 3% rental yield will give you the ballpark of 10% to 11%. Of course, there is tax built into it. But 10% to 11% is something that you can easily beat by an index mutual fund, which will give you an average of 12% to 13% over a 10-15 year period. So why go through the hassle of buying property, managing it, and putting someone on the rent, and maintaining it, then making sure the rent is collected on time? And you wouldn't want to necessarily sign up for it when you can easily get that 12% outside in the market sitting online. Yes, that is well explained as well. So where do you think people go wrong in such decisions? I think the biggest mistake they make is commit to buying a house very early in their life. Like you went through it, and you were really smart, and I'm so glad to hear what you said. In your 20s, committing to an EMI is you just chaining yourself. You're chaining yourself to the city. You're chaining yourself to the EMI. You're chaining yourself to a job that you may or may not like, or perhaps you need a break, or you want a sabbatical, and you can't because the EMI is going to be there on your neck every day. So please make the decision of buying a house. It is a beautiful asset to have. I cannot overemphasize how wonderful it is to own your own house one day. But make that decision when you can afford the house that you want to stay in. You have all the flexibility of paying for it, hopefully down payment, but even if not, then 50-60% of it down payment and the rest on a loan or an EMI, and you are very sure that this is where I want to be. And if, God forbid, I don't have my income coming through, I'll still be able to pay for it, and I won't feel tied or chained to it. Once you get to that point, whenever that happens, some people could get there at 26, some people may not get there even at 36 or 46, but whenever that happens will be the right time for you to buy a house. I 100% endorse buying one, but please buy it when you don't feel any chain holding you back. Thank you for your time, Ankur. And thank you for providing a thorough explanation of the financial factors to consider before making such a decision. While it would be ideal if everyone shared the same perspective in life, the truth is that we each have unique viewpoints, mental frameworks, beliefs, and aspirations. So it is extremely valuable to delve into the core reasons behind our divergent choices and explore how our behaviors, emotions, and psychological intricacies shape our decision making process. To dig deeper into our behaviors, I decided to invite Prakash Sharma, who is the co-founder of 1001 Stories, a Bangalore-based behavioral science consultancy. Prakash has been a student and a researcher of human behaviors for many years. Welcome, Prakash, to the show. Good morning, Ashish. Thank you for having me. Prakash, I'm curious about the relationship between our behaviors and the decisions we make. How does our behavior influence our decision making process? All right, one of the best ways to look at this question is from the lens of context. And before we go there, what this means is not only is Prakash different from Ashish, which is true because Ashish is a different person, Prakash is a different person. Prakash is also different from himself, depending on the context and on time. What this means is that Prakash who was in college is not the same person as this Prakash. I have this friend of mine, he tried out a good amount of startups, made some money, lost some money, had an amazing life. And he would say, renting out makes way more sense than owning a house. My friend got married one and a half years ago, lovely wedding. Six months after his wedding, he told me, hey, I'm applying for a home loan and I'm actually buying a house. Now here's the beautiful question, was my friend wrong all those 10, 15 years when he's talking about freedom and power and ownership versus renting? Or is my friend wrong now? Or is my friend a hypocrite? Which one is it? If you look at it and try to rush towards a judgment zone, you can call him a hypocrite. But if you take a step back and simply try to understand contextual realities, you will realize he's not a hypocrite because hypocrisy means he was the same person throughout in this time frame. The contextual reality is the behavioral reality is he's actually two different persons. The person he was before he is married and the person he is now. He is married and the person that he becomes after he is married are two separate realities. These are not the same people. And for this person who is the single person living out a life on his term, when he says that I don't believe in owning a car, I would rather do an Uber and I would rather take a metro or I'll take the bus and auto. He actually believes in that. He's very sincere in his beliefs. But this new person that he changes into, he also understands that from a societal point of view, from a status point of view, from the expectation of his spouse and people around him point of view, it makes sense for him to get a house because this is a place his wife and he, they want to grow old into together, have a kid or maybe adopt a pet. And this is a place in different nooks and corners, they want to build up those memories. So the challenge with this is you can't plot this on a financial modeling algorithm or a equation or a exercise template. The reality though is when we live our lives, you don't live the 30 years which are those rows in an Excel sheet at one go. There is no one pulling or dragging those cells. You live each of those years, 365 days, one day at a time. I concur with you, Prakash. Although it is prudent to outline our lives on paper as it enables us to direct our actions effectively, it is equally crucial to recognize that our minds undergo evolution as we navigate through life, leading to shifts in our perspectives. However, the majority often overlooks this crucial point. Which biases do you believe have the most significant impact on us, leading us to remain oblivious, remain unaware of all this? I'll talk about a few of these, but I won't guarantee that it will be easy for you to control or check your behavior just because you're aware of them. One of the first of this is FOMO, your fear of missing out, which is when you're looking at the world around you and you're seeing people doing something, people are telling you to do something. There is a good amount of social proof because you're seeing a good number of people doing it. So a good number of people are doing it. It must be the right thing. The reason for that, again, is evolutionary biology. We are social animals. By listening to my group, following the norm, looking at expectations of the group, I've ensured that I survive. Another lens that you want to keep in mind is intertemporal discounting, which is essentially your inability to look at the larger future far off into your future and giving into the temptations of present. So your mind would rather prioritize something amazing and beautiful right now and instant gratification over a long-term benefit which you get in the future. This also influences the way you are going to look at the world. You're going to make your decisions. The last of it is realizing that your present self and your future self are two different people. What is interesting is we had done this one experiment. We realized that when you ask people to look in terms of their future, most of the time people will believe that the future self is definitely going to be doing better than their present self. There really is a basis for this. But if you ask people in terms of health, no one really tells you or expects their health in future to significantly be worse off than whatever is their current level of health. Most of us don't. Similarly, financially also, most of us have this sort of optimism or believe that it's not going to fall down below our current level. And this you've seen in our research a lot more in people between 30 to 40. But we know from real life that may not be true. But this inability to understand that your future self is a different person, just like your past self is not you, they also change the way you make your decisions. So these are things that you want to keep an eye on while making your decision when it comes to do I buy the house? I was contemplating the idea of adopting a way of thinking that cultivates greater awareness of our future selves in the present moment. One potential technique that comes to my mind is the concept of time travel. I'm curious to hear your thoughts on this. So time travel essentially is Ashish of 2023. He takes himself out from 2023 and he starts traveling in the future. It's a mental exercise and it places himself in 2050 or 2060, where Ashish is now slightly more older. I mean, God bless you, you'll remain young at heart for sure. But age wise, you're slightly more older, right? And then to imagine those realities around you. How has your life been? What kind of life have you lived? What have been your high points? What have been your low points? What were the things that you have done? And to trace out what brought you happiness and what did not. It's called premortem technique in the world of project management. It's a mental model to be able to go out there. You put yourself in the future and anticipate how the things go so that you can figure out what were the things that would have gone wrong and made you unhappy or your project to fail in the project management world. And then you come back, you travel back to the present so that now with the knowledge of the future events that are going to unfold in your life, you can now see them in much more detail. You are able to take much more clear decisions. What this means is maybe Ashish will realize that this whole approach of buying a house was not a good thing for him because what he did was he committed a huge part of his office salaries to the EMI of the house and he had to deny himself a lot of pleasure. He is a person who wants to travel. He wants to have good cars and bikes and he wants to have that life. But he had to deny himself that because the major part of the first 20-25 years of his prime time, prime life, the prime of it, he did not have the money because he was buying a really expensive house. On the other hand, Prakash might realize that his decision of not buying a house actually did not work out for him because when he is this 65, 60, 65, 70-year-old man, he realized that what he really wanted from life was to feel rooted down. This emotion of being rooted to a place, rooted to a life, he wanted anchors in his life. And this goes beyond just owning a house versus renting a house. That is correct. That is correct. And this way of thinking about life and money decisions is really smart and holistic. So, when you are about to make a choice, just ask yourself one question. What does success mean to you? And then check if your answer feels right in the long run as well. Eventually, it will all come down to one thing. What do you value? Is the value from having a huge amount of money in a mutual fund which your excel sheet extrapolation has promised you? Is that how you are going to see value? Or are you going to see value in terms of this house where you have got your memories, core memories with your family created over a period of time? And that is a decision we all need to be able to make for ourselves. And there is no right or wrong answer for this. Thank you, Prakash, for sharing your views. You will encounter numerous generic statements online from your parents, from your friends, and so on. The key is not to blindly accept them, but to comprehend their objectivity. They are deeper into the advantages, disadvantages, consider various perspectives, and then apply these conclusions to your own realities, life goals, and values. Recognize that as you gain life experiences, your beliefs, mental models, and the way you think all will evolve. This evolution may strengthen your opinions and desires over time, or it may lead to drastic changes. The crucial aspect is to align your financial decisions with your personality and rational values, providing a solid framework for making independent, confident, and clear choices. I hope this perspective adds value in your life. This is Temperament, and I'm your host, Ashish Chawla. Till then, stay curious, stay wise.