Many people including family has screamed at my idea of renting instead of buying a house (rather any asset). My idea is quite simple. Whatever you use has a cost. The cost of any product is made up of materials, overheads, interest, depreciation, and manufacturer’s margin.
If you use a taxi say for 20 hours a month, you incur all these expenses for 20 hours. If you own a car you incur most of these expenses for 31 days a month. So in most cases, depending on your level of usage, it is cheaper to rent than to own.
However here are the objections and my replies to them! (I think they had about 6 objections, here is the first one)
“You can’t live in your shares” or “Renting is money gone down the drain.”
Rent is what you pay the landlord for using the asset which belongs to him. However, owners also have to incur cash flow expenses – taxes, insurance and maintenance, security. Apart from these the owner spends a lot of time in the administration – at least 2-3 hours a week, if not more! Rent costs about 3% of house prices each year if we apply the price/rent ratio of 33.
If you have Rs.10,000,000 and a choice between spending it on a house or shares, you’ll pay Rs.60,000 a year in incidentals if you buy the house or about Rs.360,000 a year in rent if you buy the shares. But the index will return Rs.15,00,000 a year after inflation while the house will return zero.
One can safely ignore transaction costs for this calculation – on an assumption that costs are equal. Actually, real estate transaction costs are higher.
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