Buying a home is perhaps the most common and the biggest dream of every Indian. Though owning a home in our society has a high level of emotional quotient, the decision has to be prudent, and backed by financial viability. An incorrect assessment can lead to financial difficulties like an overloaded debt.
The union government’s top-of-the-order mission — Affordable Housing for All by 2022 — has eased the home loan interest rates since the beginning of this year, making housing more affordable and lucrative. So what are the options? Well, both rented accommodation, as well as an owned place with EMI accountability, has their own set of pros and cons.
Here are some key parameters that will help you determine whether you should pay monthly rent or buy a flat in Kolkata and pay monthly EMIs.
Property Cost vs. Rental Value
NHB Residex, the National Housing Board’s residential index, tracks the price changes in residential housing segment across India. The most significant factor that stands out from the latest NHB Residex is the disproportionate ratio between the property cost and its corresponding rental value in some of the cities surveyed by the National Housing Board. For instance, the average residential property price in Kolkata is less than that of Bengaluru by 6% but the average rental value of Kolkata is higher than that of Bengaluru by nearly 32%. Similar situations have been observed in Mumbai and Delhi NCR where the average property value is higher than that of Kolkata but the rental value is less than Kolkata by 60% or more.
Rent to Buy Ratio
The rent to buy ratio is defined by the monthly payments that have to be paid in the case of ownership as compared to the monthly expenses of taking an accommodation on rent. The ratio is calculated on the basis of the monthly average cost of ownership (EMI + Maintenance) and the average monthly spending on renting (Rental + Maintenance). Rent to buy ratio helps understand whether or not the property value is being translated into rental value.
According to the ArthaYantra Buy Vs Rent Report 2017, Kolkata with a rent to buy ratio of 0.41 scores the highest among Indian cities, which makes the city a lucrative destination for property investments; rather than rented accommodations.
Rental yield is the ratio between the total property cost and its annual rent. For example, if a property value is Rs.50 Lakhs and the prevailing monthly rent for the property is Rs.10, 000, the rental yield calculation will be as follows –
Annual Rent = 10,000 X 12 = Rs.1, 20,000
Rental Yield = Annual Rent/Property Cost, which in this case is – 1, 20,000/50, 00,000 x 100 = 2.40%.
Historically, the average rental yield for residential apartments in India according to the National Housing Board is close to 2%, however, there are some addresses in Kolkata where the rental yield is significantly high and that makes good sense to buy a property and rent it out.
Locations like EM Bypass in Kolkata have a rental yield of 6.14%, the highest in India, driven by increased commercial activities in the surrounding areas. In future, places like Rajarhat, Newtown, or the adjoining areas of VIP road and BT road are anticipated to give a good return on investments due to the escalating demand and high expected rent. Read this article if you are looking to buy a flat in Kolkata for handsome returns.
The ArthaYantra Buy Vs Rent Report 2017 illustrates that the average rental value of residential properties in Kolkata is considerably higher than the average property price, which makes Kolkata a destination for “immediate buy” as soon as one can afford it. The city is also in favour of buy with out of pocket expenses (EMI +maintenance) achieving a breakeven in the 12th year, the fastest among metro cities in India.
The requirement of each person is unique and the decision to rent or buy a home has to be dealt keeping in mind the individual scenarios and preferences. It’s true that buying a home is an integral part of everyone’s dream but the decision of owning a house should be a calculated one based on EMI premiums and not on emotional impulses.