Property
If you are wondering whether it is better to buy a house or live on rent, then a simple rule can help you. This is called 1% rent vs buy rule. This rule helps you understand whether a property is suitable for investment or not, so that you can avoid expensive or less profitable properties.
What is the 1% rule?
According to this rule, any property is considered a good investment only when the monthly rent received from it is at least 1% of its value. For example, if the price of a flat is Rs 1 crore, then ideally its rent should be around Rs 1 lakh per month. If the rent is much less than this, then buying that property is not considered a profitable deal. However, if you are buying a house not for investment but for living, then not only the figures but also things like school, distance to office, convenience and lifestyle matter.
How to use this rule?
First of all, check the rent of similar properties in your area. Then apply this formula. (Monthly rent ÷ Property price) × 100
If this figure is around 1%, then the deal can be considered good. Along with this, also include the expenses like maintenance, property tax, home loan interest, stamp duty etc. because these affect your returns a lot.
Limitations of this rule
This rule does not take into account some things, like future increase in property prices, tax exemption available on home loan, your personal needs and preferences. According to experts, the rental yield in India is already low, so this rule does not fit completely here.
How effective is this rule in India?
This rule is more useful in countries like America and Europe, because there rent and interest rates are almost balanced. The average annual return of residential property in India is only around 2%, hence the 1% rule is considered a bit strict here.
Tips for Indian Homebuyers
Houses are expensive in big cities like Mumbai, Delhi, Bengaluru, but the rent does not increase that much, so sometimes living on rent there can be a better option. Rental returns are better in small cities, buying a house there can be a profitable deal.
Rent vs Buy: What to Look For?
- Fare vs Price Growth: Rent is low, but property value increases over time
- Asset is created: Nothing is gained by paying rent, wealth is created by buying.
- Flexibility: It is easier to change place than living on rent.
- Expenses: Down payment, EMI, maintenance burden on purchase
- Personal factors: Job, family, future planning important