Professional Documents
Culture Documents
Bengaluru Edition
Buy Rent
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Table of Contents
3 6 7 8
9 10 12 13 14 15 17 20 21 21 22
5 ArthaYantra Buy vs Rent Score (ABRSTM) 6. Other Important Numbers 7. Conclusion 8. Limitations and Concerns 9. Appendix
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Summary
Property cost vs Rental Value: The Residential Property prices in Kanakapur Road and Tumkur Road are not being translated to their rental value. Though the average residential property values of Kanakapur Road and Hosur Road are identical, the average rental value is less by nearly 20%. The same case goes with Tumkur Road and Whiteeld. Though their average residential property values are identical, their average rental values differ by nearly 50%. Down payment: The years of saving required to afford the initial down payment i.e. 20% of the property price determines how sooner we can buy a house. In Mysore Road it takes 3 years to save for the initial corpus. It takes at least 4 years to save for the required corpus in Bellary Road, Hosur Road, Whiteeld, Tumkur Road and Kanakapur Road. A professional will have to save for 5 years in Old Madras Road. In Indiranagar a professional has to save for at least 10 years to afford the down payment amount required. Area: The average number of square feet per INR 1 lakh determines the amount you need to pay for the desired area of occupancy. The average number of sq ft of 33.33 per INR 1 lakh in Mysore Road makes it the place where you can get the highest area for the same amount of money compared to other 6 localities. This implies that for a given price one can get the largest space in Mysore Road followed by Hosur Road, Kanakapur Road, Whiteeld, Tumkur Road, Bellary Road and Old Madras Road. Indiranagar offers the least in terms of space. Rent to Buy Ratio: The ratio compares the monthly cost of renting house to the monthly cost of owning the same place. The ratio undermines the necessity and urgency with which the house has to be bought. The rent to buy ratio of 0.40 shows that the rental values in Whiteeld are higher and makes them an immediately buy when you can afford place. The ratio of 0.32 for Bellary Road and Kanakapur Road gives ownership of house an advantage over renting. Annual out of Pocket Costs: The annual out of pocket costs in case of ownership include the monthly EMI being paid including the maintenance charges and the amount of tax being paid. The values have been calculated and compared across the average loan tenure of 15 years. The year at which the annual costs match determines the minimum stay period in the house. The minimum stay period is 11 years for Whiteeld, 12 for Hosur Road, 13 for Mysore Road, 14 for Kanakapur Road, 15 for Bellary Road and Tumkur Road and above 15 years for Indiranagar and Old Madras Road. The tax benets received under the HRA allowance dominate the tax benets received in case of ownership over the period of 15years. ArthaYantra Buy vs Rent Score: ArthaYantra Buy vs. Rent Score (ABRS) not only aids in making the rent vs. Buy decision but also explains the affordability and need to buy or rent in a given place. The three important factors on which scale is based are: affordability to rent, affordability to buy and a comparison of rent and EMI.
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Bellary Road: The rent to buy ratio of 0.32 meant that the rental prices are moderately high and it is advisable to buy. A professional with a salary range of 8-10 lakhs is better of renting in this locality. A professional with a salary of 11-14 lakhs falls in the neutral zone and a professional with a salary range of more than 15 lakhs are advised to buy. Hosur Road: The rent to buy ratio of 0.38 meant that the average rental value of residential property is high compared to the average property price. This makes Hosur a place to buy. The moderate prices and decent number of sq ft per INR 1 lakh make it a place where in you need to buy a house as soon as you can afford it. The out of pocket costs is also in favor of buy with the breakeven being achieved at 12th year (second fastest of the eight localities). Indiranagar: The highest in terms of average property prices. The rent to buy ratio of 0.15 meant that the average rental value of residential property is very less compared to its higher prices. The least number of sq ft per INR 1 lakh(among the eight localities) make it a place to rent. A professional with a salary of 8-25 lakhs cannot afford to buy in this locality, therefore renting is recommended. Kanakapur Road:The rent to buy ratio of 0.32 meant that the rental prices are moderately high and it is advisable to buy. A professional with a salary range of 8-9 lakhs is better of renting in this locality. A professional with a salary of 10-11 lakhs falls in the neutral a professional with a salary range of more than 11 lakhs are advised to buy. Mysore Road: The rst most affordable locality for a professional. The rent to buy ratio of 0.36 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment is 3 and one can get around 33.33 sq ft per INR 1 lakh. The affordable gross salary zone also starts from INR 10 lakh. Old Madras Road: The second highest in terms of average property prices. The rent to buy ratio of 0.27 meant that the average rental value of residential property is high, but can be considered less when compared to its higher prices. Renting is the best option. Tumkur Road: A rent to buy ratio of 0.27 and moderately high property prices and cheaper rental values makes it a place to rent. A professional with a salary range of 8-12 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 12 lakhs can afford to buy a house renting is a better option. Whiteeld: The rent to buy ratio of 0.40 meant that the average rental value of residential property is high compared to the average property price. This makes Whiteeld a place to buy. The moderate prices and decent number of sq ft per INR 1 lakh make it a place where in you need to buy a house as soon as you can afford it. The out of pocket costs also in favor of buy with the breakeven being achieved at 11th year (fastest of the eight localities).
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Place
Mysore Road
ABRS Score
33.33
3 4 4 4 4 4 5 10
Hosur Road
26.67
Kanakapur Road
26.67
Tumkur Road
25.00 25.00
Whiteeld
Bellary Road
22.22
18.18
Indiranagar
6.67
RENT
NEUTRAL
BUY
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1. Introduction
Buying a home is one of the most important decisions in one's life. It is a tough decision to make and emotions cloud the decision making process. Often buying a home is given a high weightage by our family, friends and society at large. People associate the advantages of housing security, physical asset creation and property appreciation with home ownership. Renting is associated with expenditure. However, renting on the other hand gives exible lifestyle options, high level of mobility and is easy on the purse when compared to the EMI to be paid. From a personal nance perspective there is always a tussle between buying a home and renting it. Is it prudent to buy? Is there an upside to taking a place on rent? How the lifestyle is going to be affected? What is the impact of the locality chosen? There are numerous other Questions that crop up when this topic is discussed. This research paper tries to nd the answers for these questions. As a part of this research we aim to objectively address the major factors which impact the decision of buying or renting. The common assumption that the residential property always appreciates is inconsistent. The appreciation of a residential property is dependent on several factors. So one can't actually determine the rate at which the residential property is going to appreciate or depreciate. A school of thought supporting the rent argument says the amount invested in a home when invested in equities for the common horizon of 15 years, yields the same or better rewards. The real estate market scenario is similar to that of equity markets because it is unpredictable. The other common assumption held is buying a home eventually results in increased tax savings. But provided the fact that the EMI payments accounting for principal payment of home loan come under the same section as Provident fund and required risk cover for self and family, one can't enjoy major tax benets under section 80C. The tax benets received under section 24B i.e. the interest payments made towards house loan can be matched up with HRA allowance in case of renting. So a professional shouldn't base the decision of buying a house on the tax savings he/she is going to receive. So eventually the three factors which play a predominant role in making the decision are: Current Property price which determines the EMI to be paid, current monthly Rental value and the current gross income. Monthly rent or the EMI being paid shouldn't end up consuming most of the salary which in turn affects the lifestyle. It is not a good nancial decision to buy if the rental value is low compared to the EMI to be paid in case of ownership. As a part of this research we aim to provide a quantitative answer to the question of buying vs. renting a home. We analyzed the costs associated with owning a house and renting a house across eight localities in Bengaluru: Bellary Road, Hosur Road, Indiranagar, Kanakapur Road, Mysore Road, Old Madras Road, Tumkur Road and Whiteeld.
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2. Methodology
Property prices and rental prices of various residential properties were collected from multiple data sources to generate the primary and secondary data for the analysis. The public data sources including the data by National Housing Board (NHB) of India, data from various real estate reports and data from major real estate aggregators is collated. The primary research has been performed by collating information from over 100 real estate agents across the localities considered. The methodology used for arriving at results considers various key parameters derived from the initial data collected: Price of the residential property and their rental value. Various important factors like the years of saving required for a professional to accumulate the corpus for down payment and the number of square feet per INR 1 lakh are derived from the average property price. The main idea behind this research was to quantify the buy vs. rent decision from a personal nance perspective. The main factors which drive the decision are: how much more money does a professional need to shell out for buying a home compared to renting it? Can the professional afford this additional amount? ArthaYantra's Buy vs. Rent Score tries to address these questions and come up with a comprehensive scoring system. The scoring system not only tells whether it's better to buy or rent but also tells whether it's affordable to buy or rent. Factors associated with buying a home Down payment for home loan No. of Years required to save for down payment EMI on home loan Monthly property maintenance charges Annual repairs Annual property tax Income tax savings under section 80c and 24 b Table 1: Factors associated with home ownership and renting Factors associated with renting a home Security Deposit Monthly Rent Yearly increase in rent Monthly property maintenance charges Income tax savings under HRA exemption
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3. Assumptions
The sale price and rental values are calculated for 1000 sq ft area ready to occupy residential property. 20% of the cost of the house is considered as the required down payment to buy a house. The loan tenure is 15 years. The lending rate for the loan is 10.50%. Average savings rate is 25%. The minimum gross income required to buy a house is calculated by considering 50% of monthly take home salary= Monthly EMI to be paid. The gross income of the professional increases 10% annually. 1.5% of the property value is considered as the property tax to be paid. 10% annual increase in rent is considered. Property appreciation is not considered.
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4. Findings
4.1 Historical data of Real estate prices
National Housing Board India's Residential Index (NHB Residex) tracks the movement of prices in the residential housing segment across India. Figure 1 shows the historical NHB Residex values since its inception in 2007.
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Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)
Bengaluru's city index hasn't recorded any raise or decline meaning the average prices of the city cmae back to where it was in 2007. Only Zone C and Zone D recorded a raise in their residex value. Zone C has recorded the highest raise in the index value by 106%. Zone D followed up with a 29% raise. Zone E and F have recorded a decline when compared to the base year by 16% and 20% respectively. The real estate market in Zones C and D have outperformed city's average. The real estate markets of Zones E and F have underperformed compared to the city's average. Hosur Road represents Zone C. Old Madras Road, Indiranagar and Whiteeld represent Zone D. Bellary Road and Mysore Road represent Zone E. Tumkur Road and Kanakapur Road represent Zone F. It is evident that each of the zones has different real estate market and different expectations from real estate. The effort is to identify the places that are most affordable for a professional, given the current scenario. It is important to look at these graphs to get a high level perspective of the general movement of real estate in each of the zones. We delve into each zone's prospect in the later sections. The relative nature of the index hides many interesting facts.many interesting facts.
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Rs. 16,000,000.00 Rs. 14,000,000.00 Rs. 12,000,000.00 Rs. 10,000,000.00 Rs. 8,000,000.00 Rs. 6,000,000.00 Rs. 4,000,000.00 Rs. 2,000,000.00 Rs. 0.00
R o ad H u os rR d oa na k u ap rR o ad W hi te d el ku rR o ad Be lla ry R d oa M a a dr s R d oa I i nd na r ga
Rs. 20,000,000 Rs. 15,000,000 Rs. 10,000,000 Rs. 5,000,000 Rs. 0.00
e ra
r so
Ka
m Tu
ld
Locality
Average Price of Residen alProperty Average Rental Value
Figure 3: Average property price and rental values across eight major localities of Bengaluru
The most important thing that strikes out while assessing the current residential property prices and NHB Residex is the base effect. Hosur Road's property prices (INR 3,750,000) as per NHB Residex have grown two fold but still remains identical with that of Kanakapur Road (INR 3,750,000) which recorded a decline of 20%. Whiteeld's property prices (INR 4,000,000) as per NHB Residex have grown by 29% but are still less than that of Bellary Road (INR 4,500,000) which has recorded a decline of 16%. This means that the property prices of Hosur Road and Whiteeld were less compared to the other localities in the base year. The most important factor that stands out from the rental value of the properties across the eight localities is the anomaly of the property values not being translated to the corresponding rental values. Hosur Road's and Kanakapur Road's average property prices are identical. But the Average rental value of Hosur Road (INR 12,000) is higher than that of Kanakapur Road (INR 10,000) by nearly 20%. The same case has been observed with Tumkur Road and Whiteeld. Though their average residential property values are identical, the average rental value of Whiteeld (INR 13,500) is higher than that of Tumkur Road (INR 9,000) by 50%.
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Locality
Bellary Road Hosur Road Indiranagar Kanakapur Road Mysore Road Old Madras Road Tumkur Road Whiteeld
*On a scale of 1 to 7 with 1 being most affordable and 7 being least affordable based on the average property prices.
Table 2: Locality wise ranking based on the affordability to rent and buy
The above table shows the affordability to rent rank and the affordability to buy rank based on the average property prices and average rental values across the eight major localities of Bengaluru. Mysore Road stands out to be the most affordable place to buy while Tumkur Road stands out to be the most affordable place to rent. Indiranagar stands out to be the least affordable place in both scenarios. Kanakapur Road is the second most affordable place to buy and Mysore Road is the second most affordable place to rent. Old Madras Road is the second least affordable place to buy and Whiteeld is the second least affordable place to rent. Hosur Road takes the 3rd place on affordability to buy and 4th place on affordability to rent. Tumkur Road takes 4th, Whiteeld takes 5th and Bellary Road th rd th takes 6 on affordability to buy rankings. Kanakapur Road takes 3 and Hosur Road take 4 th th on the affordability to rent rankings. The 5 and 6 place on the affordability to rent ranking is taken by Bellary Road and Old Madras Road respectively. The rank of affordability to Rent does not match with the rank of affordability to buy in the case of any of the eight localities. This means that the high/low property prices of the eight localities are not translated to their relative rental prices. This signies the fact that people of different localities have different expectations from their real estate markets.
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Figure 4: No.of years required to save the corpus for down payment across eight major localities of Bengaluru
The average property prices translate to the number of year's professional needs to save for the required corpus for down payment. Based on the above stated assumption and average property prices a professional can afford the down payment required to buy a house in Mysore Road in 3 years. In order to own a house in Bellary Road, Hosur Road, Whiteeld, Tumkur Road and Kanakapur Road a professional has to save for 4 years. A professional will need to save for 5 years in order to afford a house in Old Madras Road. It takes nearly 10 years of savings for a professional to afford to buy a house in Indiranagar. Figure 3 is in sync with the assigned affordability ranks for ownership.
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4.4 Area
The area of residential occupancy is an important aspect of life style. It determines the size of the home that is provided for the family. Figure 4 compares the average number of sq ft that can be bought for 1 lakh rupees across the eight localities.
Indiranagar Old Madras Road Bellary Road Locality Tumkur Road Whiteeld Kanakapur Road Hosur Road Mysore Road
5 10 15 20 25 30 35
Figure 5: Average no. of sq ft per INR 1lakh across eight major localities of Bengaluru
Indiranagar being the costliest locality offer a space of 6.67 sq ft per INR 1 lakh. Mysore Road being the cheapest locality offers a space of 33.33 sq ft per INR 1 lakh. This means for the same amount of living area, a professional who wants to own a house in Indiranagar has to spend at least 5 times the amount he spends in Mysore Road. Hosur Road and Kanakapur Road offer 26.67 sq ft per INR 1 lakh. Tumkur Road and Whiteeld offer 25 sq ft per INR 1 lakh. Bellary Road and Old Madras Road offer a living space of 22.22 sq ft and 18.18 sq ft respectively per INR 1 lakh. Figure 4 attuned to the Affordability to Buy Ranking mentioned above.
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Bellary Road Hosur Road Indiranagar Kanakapur Road Mysore Road Old Madras Road Tumkur Road Whiteeld
4 2 8 5 3 6 7 1
*On a scale of 1 to 8 based on the monthly cost of renting and monthly cost of buying with 1 being buy as soon as possible and 8 being renting is better than buying.
Table 3:Rent to Buy ratio and Urgency to buy rank of eight major localities across Bengaluru
Indiranagar has the least rent to buy ratio. This signies the fact that the higher property prices of the locality are not being translated to the rental value in the locality. Renting is cheaper than owning a house by at least 85%. Tumkur Road and Old Madras Road also have low rent to buy ratios. Whiteeld has the high rent to buy ratio. The urgency to buy rank assigned signies the fact that higher the rent to buy ratio, the sooner a professional needs to buy a home in the locality. With a rent to buy ratio of 0.40 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Whiteeld ranks 1 in the urgency to buy ratio. Hosur Road, Mysore Road and Bellary Road are also ranked high on urgency to buy rankings.
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Whiteeld Tumkur Road Old Madras Road Mysore Road Kanakapur Road Indiranagar Hosur Road Bellary Road
2 4 6 8 10 12 14 16
Locality
Figure 6: Break Even Horizon for the eight major localities of Bengaluru
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Score
100 90 87.5 80
Recommended Ac on
Buy (Rents are very high) Buy (Rents are high) Buy ( Rents are higher) Can afford both ownership and Renting but because of low Rent to Ownership Rent is recommended. Buy/Neutral (Can afford both ownership and rent ) It is Advisable to buy but EMI can't be afforded. Have to Rent. Rent/Neutral (Can afford both ownership and rent but rent/EMI ratio is low) Rent (Rents are high but can't afford to buy) Can afford to Rent but can't afford to Buy. Can't afford both ownership and renting. Table 4: ArthaYantra Buy vs. Rent Score Explanation
77.5 75 67.5 65 55 50
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Bellary Road
Hosur Road
Indirana gar
Mysore Road
65 65 77.5 90 90 90
65 77.5 90 90 90 90
55 55 55 55 55 55
65 77.5 90 90 90 90
77.5 90 90 90 90 90
55 55 55 67.5 80 80
55 67.5 67.5 80 80 80
65 77.5 77.5 90 90 90
Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across eight major Localities of Bengaluru.
Bellary Road: A professional with a salary range of 8-10 lakhs is better of renting. A professional with a salary of 11-14 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 15 lakhs are advised to buy. Hosur Road: A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-11 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 11 lakhs are advised to buy. Indiranagar: The score of 55 for a professional with a salary range of 8-25 lakhs signies that the monthly cost of renting is cheaper than buying by more than 70%. Kanakapur Road: A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-11 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 11 lakhs are advised to buy. Mysore Road: A professional with a salary of 8-9 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 10 lakhs are advised to buy.
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Old Madras Road: The score of 55 for a professional with a salary range of 8-14 lakhs signies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices compared to the EMI also meant that though the professional with a salary more than 15 lakhs can afford to buy a house renting is a better option. Tumkur Road: The score of 55 for a professional with a salary range of 8-12 lakhs signies that the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices compared to the EMI also meant that though the professional with a salary more than 12 lakhs can afford to buy a house renting is a better option.
Whiteeld: A professional with a salary range of 8-9 lakhs is better of renting. A professional with a salary of 10-14 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 14 lakhs are advised to buy.
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6 Key Factors
Here are some important numbers to look at before making the decision:
Indira Kanaka Mysore Old Madras nagar pur Road Road Road
Localities
Bellary Road
Hosur Road
Tumkur Road
Whiteeld
Initial Corpus required for owning* (INR) No.of Years to save for the corpus Average No.of sq.ft per INR 1lakh Initial corpus required for renting**
900,000
600,000
1,100,000
800,000
800,000
10
22.22
26.67
6.67
26.67
33.33
18.18
25
25
120,000
120,000
190,000
100,000
90,000
125,000
90,000
135,000
0.32
0.38
0.15
0.32
0.36
0.27
0.27
0.40
15
12
15+
14
13
15+
15
11
*Ini al corpus required for owning = 20% of the Average property price (down payment for house loan) **Ini al corpus required for ren ng= Amount equivalent to 10 months of rental value *** (Ren ng the house) / Average out of pocket cost (Owning the house) The gross income of 8 lakhs per annum is considered.
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7 Conclusion
Based on the current real estate markets Mysore Road is the best place to own a house. The property prices and rental value in this locality is low, thus making it the most affordable places for a professional to rent or own a house. The larger residential spaces offered by Mysore Road provide a better lifestyle option. The real estate market of Hosur Road, Kanakapur Road and Whiteeld favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Tumkur Road and Bellary Road make a strong case of ownership for professionals with higher salaries, the low rental values make renting a better option. The high property prices and low rental values of Old Madras Road make the decision to rent easier. Indiranagar is the least affordable locality for a professional because of its high property prices and rental values. The research addresses the fact that Buy vs. rent decision has a huge impact on the personal nance of a professional. Buying a home is an integral part of every one's dream. But a very calculated and merit based judgment is needed before taking the decision to own the house. The comprehensive ArthaYantra Buy vs. Rent Score (ABRS) suggests the decision a professional should take across the eight major localities of Bengaluru based on the current rental values, property prices and the salary. If a professional nds himself in the rent zone as per the ABRS but still wants to buy a house, one has to make sure that their Emotional Premium attached with buying a house is going to match the EMI premium being paid.
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9. Appendix
FIGURES:
Figure1: Graphical Representation of Buy Vs. Rent in Bengaluru Figure2: Historical values of National Housing Board India Residential Index (NHB Residex) Figure 3: Average property price and rental values across eight major localities of Bengaluru Figure 4: No. of years required to save the corpus for down payment across eight major localities of Bengaluru Figure 5: Average no. of sq ft per INR 1lakh across eight major localities of Bengaluru Figure 6: Break even horizon for the eight major localities of Bengaluru
TABLE:
Table 1 : Factors associated with home ownership and renting
Table 2 : Locality wise ranking based on the affordability to rent and buy Table 3 : Rent to Buy ratio and Urgency to buy rank of eight major localities of Bengaluru
Table 4 : ArthaYantra Buy vs. Rent Score Explanation Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across eight major Localities of Bengaluru. Table 6 : Other important numbers
SOURCES:
National Housing Board, India: www.nhb.org.in Jones Lang LaSalle: www.joneslanglasalle.co.in Makaan: www.makaan.com Magic Bricks: www.magicbricks.com Multiple Primary sources (100+)
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ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of Business (ISB) Hyderabad. It provides integrated personal nance services using its unique proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients achieve their nancial goals. ArthaYantra's vision is to provide independent, high quality, customized nancial planning solutions and their efcient execution to individuals. It employs proprietary nancial models and enable investments through well balanced passive investment strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.
Our Mission
To positively impact the future of our customers & their families.
For more information on this report please contact ArthaYantra Corporation Pvt. Ltd. visit us online: www.arthayantra.com or Write to : contactus@arthayantra.com Website: www.arthayantra.com : h p://twi er.com/arthayantra : h p://www.facebook.com/arthayantra :h p://www.linkedin.com/company/arthayantra
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ArthaYantra
A CFO FOR EVERYONE
Plot #319, Second Floor, Ayyappa Society, Madhapur, Hyderabad - 500081, AP, India. Phone : +91- 040-66245874, Fax : +91-040-66245. www.arthayantra.com, contactus@arthayantra.com