ArthaYantra

A CFO FOR EVERYONE

BUY VS. RENT

A PERSONAL FINANCE PERSPECTIVE

Mumbai Edition
Buy Rent

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Table of Contents

Summary 1. Introduction 2. Methodology 3. Assumptions 4. Findings

4.1 Historical data of Real estate prices 4.2 Property Cost vs Rental Value 4.3 Down Payment 4.4 Area 4.5 Rent to Buy Ratio 4.6 Break Even Horizon

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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Summary
Property cost vs Rental Value : The Residential Property prices in Chembur and Borivali West are not being translated to their rental value. Though the average residential property values of Chembur is higher than Ghatkopar by 32%, the average rental value is less by nearly 21%. The same case goes with Borivali West and Bhandup West. Though their average residential property values are identical, their average rental values differ by nearly 19%. 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. It takes at least 4 years to save for the required corpus in Virar and Kalyan. In Mira Road and Kharghar it takes 5 years and in Ghodbunder Road it takes 6. In Pokaran Road a professional has to save for 7 years and in Ghatkopar and Bhandup West a professional has to save for 8 years to afford the down payment amount required. It takes 9 years to save for a house down payment in Borivali West and 10 years in Wadala, Andheri and Chembur. It takes the longest to save in Lower Parel (14 years). 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 24 per INR 1 lakh in Virar makes it the place where you can get the highest area for the same amount of money compared to other 12 localities. This implies that for a given price one can get the largest space in Virar followed by Kalyan, Kharghar, Mira Road, Ghodbunder Road, Pokaran Road, Ghatkopar, Bhandup West, Borivali West, Chembur, Andheri and Wadala. Lower Parel 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 0.43 shows that the rental values in Ghatkopar are higher and makes it an immediately buy when you can afford place. The ratio of 0.33 for Lower Parel 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 12 years for Ghatkopar, 14 for Wadala and Andheri, 15 for Lower Parel and Kharghar and above 15 years for Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. 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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Andheri : The rent to buy ratio of 0.34 meant that the rental prices are high. A professional with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of 15-25 lakhs allows a professional to rent but not buy. Bhandup west : A rent to buy ratio of 0.29 and high property prices makes it a place to rent. It is advisable to rent for a professional with a salary range of 8 25 lakhs. Borivali west : A rent to buy ratio of 0.23 and high property prices and cheaper rental values when compared to the prices makes it a place to rent. It is advisable to rent for a professional with a salary range of 8-25 lakhs. Chembur : Though the average residential property values of Chembur is higher than Ghatkopar by 32%, the average rental value is less by nearly 21%. A rent to buy ratio of 0.26 and high property prices makes it a place to Rent. Ghatkopar : The rent to buy ratio of 0.43 meant that the average rental value of residential property is high compared to the average property price. This makes Ghatkopar a place to buy. The moderate prices 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 12th year (fastest of the thirteen localities). Ghodbunder 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 8-15 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option. Kalyan : 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 8-11 lakhs is advised to rent. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option. Kharghar : The rent to buy ratio of 0.32 meant that the rental prices are moderately high and it is advisable to buy. The years required to save for down payment (5 years) and the property prices being in an affordable range make it an affordable locality. Lower Parel : The rent to buy ratio of 0.33 meant that the rental prices are high and one is advised to buy. But even the property prices are very high. A professional with a salary range of 8-25 lakhs cannot afford to buy or rent in this locality. Mira Road : The rent to buy ratio of 0.25 meant that the rental prices are cheaper compared to EMI to be paid in case of ownership. A professional with a salary range of 8-15 lakhs should rent. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option. Pokaran Rd : The rent to buy ratio of 0.24 meant that the rental prices are cheaper compared to EMI to be paid in case of ownership. A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent. Virar : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option. A rent to buy ratio of 0.26 meant that renting is better in this locality.
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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Wadala : The rent to buy ratio of 0.35 meant that the rental prices are high. A professional with a salary range of 8-14 lakhs cannot afford to buy or rent in this locality. A salary range of 15-25 lakhs allows a professional to rent but not buy.

Buy Vs. Rent in Mumbai

Place

Place
Virar

Salary range Lacs ( )

8 - 11 12 - 14 15 - 25 8 - 11 12 - 14 15 - 25 8 - 19 20 - 24 24 - 25 8 - 19 20 - 24 24 - 25 8 - 19 20 - 24 24 - 25 8 - 24 24 - 25 8 - 11 12 - 25

ABRS Score

Sq feet per Lac ( )

No of Years to Buy (1000 Sq feet)

Kalyan

Kharghar

Mira Road

Ghodbunder Road

Pokaran Rd

55 67.5 80 55 67.5 80 65 77.5 90 55 67.5 80 55 67.5 80 55 67.5 50 75

24.04

4 4 5 5 6 7 8 8 9 10 10 10 14

21.97

16.95

16.90

14.29 11.19

Ghatkopar

9.30

Bhandup west

8 - 25

55

8.99

Borivali west

8 - 25 8-9 10 - 25 8 - 14 15 - 25 8 - 14 15 - 25 8 - 25

55 30 55 40 65 40 65 40

8.27

Chembur

7.05

Andheri

6.90

Wadala

6.45

Lower Parel

3.64

RENT

NEUTRAL

BUY

Figure 1: Graphical Representation of Buy Vs. Rent in Mumbai

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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 Mumbai: Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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 different zones of the city. Figure 1 shows the historical NHB Residex values since its inception in 2007.

NHB Residex of Mumbai Chennai

400 350 300 250 200 150 100 50 0
07
Ja

Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6

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Navi Mumbai Thane Kalyan Mira Byander Virar Vasai Other Muncipalities

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Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Mumbai as a city has recorded a raise of 97% in it NHB Residex value compared to the base year of 2007. Zone 2 has recorded the highest raise in the index value by 243%. Zones 3 and 1 followed up with a 119% and 110% raise respectively. All the other zones except Other Municipalities have recorded raise in their index value ranging from 2% to 96% when compared to their base year. Other Municipalities Zone has recorded a decline of 9% when compared to the base year of 2007. Lower Parel falls under Zone 2, Andheri under Zone 3 and Chembur under Zone 4. Borivali West and Bhandup West fall under Zones 5 and 6 respectively. Kharghar comes under the Navi Mumbai Zone. Pokaran Road comes under the Thane Zone. Kalyan cones under Kalyan Zone and Mira Road under Mira Byander Zone. Virar falls under the Virar Vasai Zone. 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.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.2 Property cost Vs. Rental Value

The graph compares the property price and rental value of 1000 sq ft ready to occupy house across thirteen localities of Mumbai. The bar graph depicts the average property price in the locality and the line graph depicts the average rental value in the locality.

Comparisons of Average Rents and Average Property Prices

Rs. 30,000,000.00 Rs. 25,000,000.00 Rs. 20,000,000.00 Rs. 15,000,000.00 Rs. 10,000,000.00 Rs. 5,000,000.00 Rs. 0.00
ra Vi r l Ka ya n Kh g ar ha r M ira G R oa d nd e rR oa d ka n ra R d G h k at op ar nd up w es t riv i al w es t C m he bu r d An he ri ad W al a w e a rP re l

Rs. 100,000,000 Rs. 80,000,000 Rs. 60,000,000 Rs. 40,000,000 Rs. 20,000,000 Rs. 0.00
Po

ho

u db

a Bh

Bo

Lo

Locality Average Price of Residen alProperty Average Rental Value Figure 3: Average property price and rental values across thirteen major localities of Mumbai

Lower Parel's property prices as per NHB Residex have grown two and half times. This locality has seen the highest increase in Mumbai city and this is shown in its property price of INR 27,500,000. Andheri whose property prices (INR 14,500,000) doubled as per NHB Residex are identical with that of Chembur (INR 14,183,500) which recorded a 54% raise in its index value. The most important factor that stands out from the rental value of the properties across the thirteen localities is the anomaly of the property values not being translated to the corresponding rental values. Ghatkopar's average property value (INR 10,750,000) is less than that of Chembur (INR 14,183,500) by 32%. But the Average rental value of Ghatkopar (INR 40,000) is higher than that of Chembur (INR 31,500) by nearly 21%. The same can be said about Borivali West and Bhandup West. Though their average residential property values are almost similar, the average rental value of Bhandup West (INR 28,000) is higher than that of Borivali West (INR 23,500) by 19%.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Locality
Andheri Bhandup west Borivali west Chembur Ghatkopar Ghodbunder Road Kalyan Kharghar Lower Parel Mira Road Pokaran Rd Virar Wadala

Aordability to Rent Rank

11 8 7 9 10 5 2 4 13 3 6 1 12

Aordability to Buy Rank

11 8 9 10 7 5 2 3 13 4 6 1 12

*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 thirteen major localities of Mumbai. Virar stands out as the most affordable place to buy and rent. Lower Parel stands out to be the least affordable place in both scenarios. Kalyan is the second most affordable place and Wadala is the second least affordable place. Ghodbunder Road and Pokaran road take the 5th and 6th place respectively in both scenarios. Bhandup West and Andheri take the 8th and 11th place respectively in both scenarios. This means that the high/low property prices of the 8 localities are translated to their relative rental prices. Mira Road ranks 3rd on the affordability to rent where as it ranks 4th on affordability to buy. Kharghar ranks 4th on the affordability to rent where as it ranks 3rd on affordability to buy. This means that the average property price in Kharghar is less than that of Mira Road but the rental value is higher. Borivali West ranks 7th on the affordability to rent where as it ranks 9th on affordability to buy. Chembur ranks 9th on the affordability to rent where as it ranks 10th on affordability to buy. Ghatkopar ranks 10th on the affordability to rent where as it ranks 7th on affordability to buy. This means that the average property price in Ghatkopar is less than that of Chembur and Borivali West but the rental value is higher. This signies the fact that people of different localities have different expectations from their real estate markets.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.3 Down payment

A critical decision in purchasing a home is the down payment required to make in order to avail the facility of housing loan. It is often a substantial amount of money to be paid upfront in order to own the house. While some of the professionals depend on their extended family to provide for this amount, often they do need to save for it. Assuming a 20% of property price as the down payment and saving rate of 25% for a professional with a gross income of 8 lakhs, based on the current average property prices, the time required to save the corpus determines how sooner one can afford to buy a home.

No.of Years Required to save corpus for downpayment of buying a house

Lower Parel Chembur Andheri Locality Wadala Borivali west Bhandup west Ghatkopar Pokaran Rd Ghodbunder Road Mira Road Kharghar Virar Kalyan
12 14

Figure 4: No.of years required to save the corpus for down payment across thirteen major localities of Mumbai

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 Virar and Kalyan in 4 years. In order to own a house in Mira Road and Kharghar professional has to save for 5 years. To buy a house a professional will need to save for 6 and 7 years in Ghodbunder Road and Pokaran Road respectively. A professional can afford the down payment required to buy a house in Ghatkopar and Bhandup West in 8 years. In order to own a house in Borivali West a professional has to save for 9 years. To save for the down payment of a house in Wadala, Andheri and Chembur a professional will need to save for 10 years. To buy a house in Lower Parel a professional will need to save for 14 years. Figure 3 is in sync with the assigned affordability ranks for ownership.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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 thirteen major localities in Mumbai.

Average No.of sqft per INR 1lakh

Lower Parel Wadala Andheri Locality Chembur Borivali west Bhandup west Ghatkopar Pokaran Rd Ghodbunder Road Mira Road Kharghar Kalyan Virar
5 10 15 20 25

Figure 5: Average no. of sq ft per INR 1lakh across thirteen major localities of Mumbai

Lower Parel being the costliest locality offers a space of 3.63 sq ft per INR 1 lakh. Virar being the cheapest locality offers a space of 24 sq ft per INR 1 lakh. Kalyan offers a space of 21.97 sq ft per INR 1 lakh. This means that for the same amount of living area, a professional who wants to buy a house in Lower Parel has to spend at least 7 times the amount he spends in Virar and Kalyan. A professional gets 16.95 sq ft space for INR 1 lakh in Kharghar and Mira Road. Ghodbunder Road and Pokaran Road offer a space of 14.29 sq ft and 11.19 sq ft per INR 1 lakh respectively. Ghatkopar and Bhandup West offer a space of 9.30 sq ft and 8.99 sq ft per INR 1 lakh respectively. Borivali West and Chembur offer a space of 8.27 sq ft and 7.05 sq ft per INR 1 lakh respectively. Andheri and Wadala offer a space of 6.90 sq ft and 6.45 sq ft per INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking mentioned above.

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4.5 Rent to Buy Ratio

The rent to buy ratio explains the additional monthly payments to be paid in case of ownership compared to renting. The ratio also helps in understanding whether the property prices are being translated to the rental value or not. The ratio is calculated based on the average monthly cost of renting i.e. monthly rental value + monthly maintenance and average monthly cost of ownership i.e. monthly EMI being paid in case of owning the house + monthly Maintenance charges.
Locality Average monthly out of pocket cost(Ren ng the house) (INR) 43,500 29,000 24,500 32,500 41,000 17,000 11,000 17,000 81,000 13,500 19,290 10,000 48,500 Average monthly out of pocket cost(Owning the house) (INR) 12,9226.2751 99,367.23942 10,7936.2919 12,6427.4051 96,064.30744 62,902.33973 41,258.6288 35,3174.8292 24,4187.7632 35,3311.89867 80,031.60145 37,787.67618 13,8069.4665 Rent yo Buy Ra o Urgency to buy rank

Andheri Bhandup west Borivali west Chembur Ghatkopar Ghodbunder Road Kalyan Kharghar Lower Parel Mira Road Pokaran Rd Virar Wadala

34% 29% 23% 26% 43% 27% 27% 32% 33% 25% 24% 26% 35%

3 6 13 10 1 7 8 5 4 11 12 9 2

*On a scale of 1 to 7 based on the monthly cost of renting and monthly cost of buying with 1 means buy as soon as possible and 7 means renting is better than buying.

Table 3:Rent to Buy ratio and Urgency to buy rank of twelve major localities across Mumbai

Borivali West 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 77%. Mira Road and Pokaran Road also have low rent to buy ratios. Ghatkopar has 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 0.43 and the average monthly out of pocket cost of Owning house being moderate, rents being relative higher Ghatkopar ranks high in the urgency to buy ratio. Wadala and Andheri are also ranked high on urgency to buy rank. Lower Parel and Kharghar rank 4th and 5th respectively in the urgency to buy rank. The 6th and 7th position in the urgency to buy rank is taken by Bhandup West and Ghodbunder Road respectively. Kalyan and Virar take the 8th and 9th positions respectively. The 10th position in the urgency to buy rank is taken by Chembur.
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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.5 Break Even Horizon

Ignoring the price escalations of the residential property, one important question to be answered is the breakeven horizon i.e. how long a new home buyer would have to own the home to justify the decision of buying instead of renting in nancial sense. Figure 5 shows the graphs of the annual out pocket costs incurred in case of ownership and renting based on the average property prices and average rental prices across the thirteen localities. The annual out of pocket cost in case of renting include the annual amount paid towards the rent, the annual maintenance charges paid and the amount of income tax being paid. The annual out of pocket cost in case of ownership include the annual amount paid towards the EMI payments of the house loan, annual maintenance and repair charges and the amount of income tax being paid. The income tax being paid is considered in calculations because most of the professionals feel buying a home will do a world good for their tax savings. The idea is to compare the tax benets received in case of buying a home and renting the home. The payments made towards the principal amount of the home loan are considered under section 80C. The payments made towards interest on home loan are considered under section 24b. In case of renting one can claim tax benets under house rent allowance. The provident fund received and required risk coverage for self and family also come under section 80C. These items do ll up most of the 80C part. Out of the EMI payments being made, in the initial years most of the amount accounts for interest payments rather than the principal amount. By the time the payment towards principal increases, one can also expect the salary of the professional to increase in turn increasing the Provident fund being received. So, the tax benet under section 80C in case of ownership doesn't actually add much of advantage. Though the tax benets in case of ownership are higher during the initial years, renting the same place gives better tax benets over the next few years. The benets of renting are higher especially in the regions where the costs of ownership and renting don't match up during the average loan tenure of 15 years. The breakeven year i.e. the year at which the annual cost of owning house is equal to the annual cost of renting the same place is calculated over the average loan tenure i.e. 15 years. The matchup of cost of ownership and renting in Ghatkopar is 12 years. The cost matchup in Wadala and Andheri happens in 14 years. In Lower Parel and Kharghar, it takes 15 years. It takes more than 15 years in Bhandup West, Borivali West, Chembur, Ghodbunder Road, Kalyan, Mira Road, Pokaran Road and Virar. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Break Even Horizon

Current Average stay 7 years

Wadala Virar Pokaran Rd Mira Road Lower Parel Kharghar Kalyan Ghodbunder Road Ghatkopar Chembur Borivali west Bhandup west Andheri
2 4 6 8 10 12 14 16

Locality

Figure 6: Break Even Horizon for the thirteen major localities of Mumbai

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

5 ArthaYantra Buy vs Rent Score (ABRSTM)

The property price and rental value of the place speaks volumes about why one should rent or buy the place. They have an impact on the amount of money being spent on the house (be it rent or EMI), the tax savings being received and many other important things. But one can't only rely on the rent to buy ratio and make the decision to buy without assessing his affordability. Similarly a decision to buy a house just because one can afford the EMI is not advisable. ArthaYantra came up with a unique scoring system called ArthaYantra Buy vs. Rent Score (ABRS) which is an effort to seamlessly integrate the above two aspects. We even added another layer of parameter, the rental value. So given a locality, based on the income of the professional ABRS describes a suitable action from wide range of options spanning from why one can't rent to why one has to rent though he/she can afford to buy to why one should buy. As a part of this research report we have considered the average property prices and rental values of the localities and calculated the ABRS score across different salary ranges. In this research, the scope of the scoring system is conned to rental value and price of the corresponding property of the same region. It can be extended to compare the rental value of one region and property prices of a different region. This makes ABRS a powerful tool to logically gauze the pros and cons of renting and buying a house.

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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Gross Income/ Cities

And heri

Bhand up west

Boriv ali west

Che Ghatk Ghod mbur opar bunde r Road

Kaly an

Khar Lowe Mira gharR Road oad r Parel

Pokar an Rd

Virar

Wad ala

8 Lakhs 10 Lakhs 12 Lakhs 15 Lakhs 20 Lakhs 25 Lakhs

40 40 40 65 65 65

55 55 55 55 55 55

55 55 55 55 55 67.5

30 55 55 55 55 55

50 50 75 75 75 75

55 55 55 55 67.5 80

55 55 67.5 80 80 80

65 65 65 65 77.5 90

40 40 40 40 40 40

55 55 55 55 67.5 80

55 55 55 55 55 67.5

55 55

40 40

67.5 40 80 80 80 65 65 65

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen major cities of Mumbai

Andheri : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. The score of 65 signies that though the rents are high, it is advisable to rent because the property prices are also high. The EMI payments to be made in case of ownership are not affordable. Bhandup west : The low rental values compared to high property prices makes it a place where renting can be easily afforded and the EMI associated with home loan in high. It is advisable to rent for a professional with a salary range of 8 25 lakhs. Borivali west : The score of 55 signies that though the rents are high, it is advisable to rent because the property prices are also high. The EMI payments to be made in case of ownership are not affordable. Chembur : A professional with a salary of 8 lakhs cannot afford this locality. He will not be able to pay the rents nor will he be able to afford the EMI payments. A professional with a salary range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated with home loans. Ghatkopar : A professional with a salary range of 8-11 lakhs cannot afford to stay in this locality. The ABRS score of 75 for a salary range of 12-25 lakhs signies the fact that the rental value is critically high but a professional in this salary range cannot afford to buy.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Ghodbunder Road : The score of 55 for a professional with a salary range of 8-15 lakhs signies that the monthly cost of renting is cheaper than buying. The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option. Kalyan : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option.

Kharghar : The score of 65 for a professional with a salary range of 8-15 lakhs signies that though the rents are high, it is advisable to rent because the property prices are also high. The EMI payments to be made in case of ownership are not affordable. A professional with a salary more than 16 lakhs is advised to buy. Lower Parel : A professional with a salary range of 8-25 lakhs cannot afford the rents or the EMI associated with a home loan in this locality. Mira Road : The score of 55 for a professional with a salary range of 8-15 lakhs signies that the monthly cost of renting is cheaper than buying.The low rental prices also meant that though the professional with a salary more than 16 lakhs can afford to buy a house renting is a better option. Pokaran Rd : A professional with a salary range of 8-20 lakhs can afford to rent but can't afford to buy in this locality. A professional with a salary range of 21-25 lakhs can afford to buy but because of the low rents is advised to rent. Virar : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even with the high rents because he can't afford the EMI associated with a home loan. A professional with a salary more than 12 lakhs can afford to buy a house, but because of the low rents, renting is a better option. Wadala : A professional with a salary range of 8-14 lakhs cannot afford to stay in this locality. A professional with a salary range of 15-25 lakhs has a score of 65. The score of 65 signies that though the rents are high, it is advisable to rent because the property prices are also high. The EMI payments to be made in case of ownership are not affordable.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

6 Key Factors
Here are some important numbers to look at before making the decision:
Cities Andhe Bhand Boriva Chem up li west bur ri west Ghatk opar Ghodb Kaly unde an r Road Khar Lower Mira Poka ghar parel Road ran Road Rd Virar Wadal a

Initial Corpus required 2,900,000 2,224,700 2,418,500 2,836,700 for owning (INR) *

50

2,150,000 1,400,000 910,5001,180,000 5,500,000 1,183,100 1,787,400 832,000 3,100,000

No of Years to save for the corpus Average No.of sq.ft per INR 1lakh Initial Corpus required for renting ** Average out of pocket cost *** Break Even Year

10

10

14

10

6.90

8.99

8.27

7.05

9.30

14.29

21.97

16.95

3.64

16.90

11.19

24.04

6.45

425,000

280,000

235,000 315,000

400,000

160,000 100,000 160,000

800,000 125,000 182,900 90,000

475,000

0.34

0.29

0.23

0.26

0.43

0.27

0.27

0.32

0.33

0.25

0.24

0.26

0.35

14

15+

15+

15+

12

15+

15+

15

15

15+

15+

15+

14

*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.

Table 6: Other important numbers

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

7 Conclusion
Based on the current real estate markets, Virar and Kalyan are the best places to own a house. The property prices and rental values in these two cities are low, thus making them the most affordable places for a professional to rent or own a house. The larger residential spaces offered by Virar and Kalyan provide a better lifestyle option. The real estate market of Ghatkopar favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Mira 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 Borivali West make the decision to rent easier. Lower Parel 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 thirteen major localities of Mumbai 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.

8. Limitations and Concerns:

The data is related to following localities of of Mumbai: Andheri, Bhandup West, Borivali West, Chembur, Ghatkopar, Ghodbunder Road, Kalyan, Kharghar, Lower Parel, Mira Road, Pokaran Road, Virar and Wadala. The property tax to be paid is considered as 1.5% of the property value. The property tax calculation reforms need some stringent reforms to regulate the process. In most places the value is calculated based on the rental value. The rental values being shown in the related local governing bodies website varies from the actual rental prices. The tax benets received under section 80C is considered as INR 1.2 lakh both in the case of house ownership and renting.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

9. Appendix
FIGURES:
Figure 1: Graphical Representation of Buy Vs. Rent in Mumbai Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex) Figure 3: Average property price and rental values across thirteen major localities of Mumbai Figure 4: No. of years required to save the corpus for down payment across thirteen major localities of Mumbai Figure 5: Average no. of sq ft per INR 1lakh across thirteen major localities of Mumbai

Figure 6: Break even horizon for the thirteen major localities of Mumbai

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 thirteen major localities of Mumbai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen major Localities of Mumbai. 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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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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