What is renting?

Renting means occupying a house for a period and paying an amount in exchange for such service. Renting does not require huge investments. Payments under renting are periodic and the amount is relatively low compared to EMIs.

Advantages of renting

• Renting Does not require a huge initial investment or down payment.
• Renting an asset does not burden you with other costs such as maintenance and restoration.
• There is a flexibility of downsizing available to those who choose to rent over buying.
• Budgets can be planned efficiently as a fixed amount is paid every month.

Disadvantages of renting

• Long-period rentals and lease closing costs can exceed the house's actual value, which leads to loss to the tenant.
• The rent paid is an expense and not an investment.
• Sometimes, the rental agreements are very rigid, and the house can not be adequately utilized.
• The rigid nature of the renter is also a disadvantage of renting because it can lead to mental stress for the occupant.

What is buying?

In simple words, buying means owing a house for consideration. Generally, the concern is monetary but it can be non-monetary depending upon the situation. Buying involves huge initial as well as subsequent investments.

Advantages of buying

• The very first and most common advantage is ownership.
• No engagement or restrictions of an outsider on the usage of the asset.
• If any loan has been taken for purchase, then the interest on such loan gives the benefit of tax.
• Loans for buying also help in positive credit score.

Disadvantages of buying

• The substantial initial as well as subsequent investments.
• Buying leads to blockage of funds and expected earnings on such funds is an opportunity cost.
• Along with the initial investment, there is the involvement of continuous maintenance and repair costs.
• Utility expenses and property taxes also increase with the ownership.

Choice of the best option

Whenever a person has to decide between renting and buying, the decision should be based on monetary and non-monetary factors. Money is not the sole factor that can help you make the best decision. As per the traditional approach, it is always good to buy than rent but, now people are changing their vision and give equal importance to renting because of its benefits. The long-term goals can differ from individual to individual. An individual who wishes to own a house will find buying a better option but, an individual who does not believe in huge investments or blockage of funds will find renting more sound and feasible. Many people find homeownership a symbol of status, but that's not true since renting has its benefits, and the mindset of rentee is equally essential.

Monetary factors

Financing when buying a house: When we talk about renting and purchasing, the first thing that bothers us is money. It is a significant factor to be considered. If our decision is solely based on monetary factors, the best way to decide is to check the net present value of both options. If one decides to buy a house, the next step is to decide on in-house funding or borrowing. One should also check the options available in the market for financing, like comparing down payment, mortgage interest, mortgage payment, early closing costs, etc. Different financial institutions provide plans with different down payments, tenure, mortgage interest, and mortgage payment structures. Homeownership also leads to the burden of property taxes. It is essential to compare these two options to select the most feasible option.

Financing when getting a house on rent: If a person chooses to rent, they must first contact a real estate agent to explore the best place and best deal. Negotiating with the renter is the most complex part of renting. Renter plays a significant role because that is the person the rentee has to deal with in the long run. Rentee should enquire about all the points like monthly rent, utility bills, renting period, closing costs, etc. The renter should keep in mind that the cost of renting should not exceed the house's value. Otherwise, it is not a financially viable option. Renting is a better option if you wish to invest in a business or high return investments.

Interest and other tax benefits: If a person has excess cash and ideal funds, buying a house for them would be a better option. Buying a home from your funds can lead to savings from monthly mortgage payments and interests thereon. However, there will be no tax deductions available, but it is still a better option because the benefit of inflation can be taken here. Owning a house also increase the burden of insurance costs, pest control cost, utility bills, property taxes, timely repairs, restoration expenses, etc.

Non-monetary factors

Apart from affordability and homeownership, many factors affect renting or buying. Following are some non-monetary factors:

1. Peer Pressure - Homebuying is always considered a prestige for ages. Even today who don't own a house feel the pressure of buying one just for the sake of society. Those who are free from the fear of peer pressure make a better decision over purchasing and renting. It is advisable and a better point of view to know your needs rather than making decisions based on society's self-made standards.
2. Opportunity Cost - We people have different dreams, and what is essential is a subjective matter that differs from person to person. Maybe owning a house is a dream for one person, a world tour for another person. So, here world tour becomes the opportunity cost of that person for owning a house.
3. Complex Procedure - Not everyone wants to undergo the complex procedure of buying a house. Renting is much easier than buying because you do not need to worry about the mortgage process, property taxes, high utility expenses, subsequent maintenance and repair, upfront costs, etc.
4. Tax Benefits - Financing a house reduces the burden of a substantial one-time investment and gives tax benefits. Interest paid on house loans is deductible, which results in savings on tax.
5. Travelers - Nowadays, many people work remotely and change their city or even countries every six months or yearly. For such people, buying a house is not a good option.
6. Conservative approach - Buying a home is mainly considered an investment. However, this is partially true, but it is better for those who see it as an investment option to pay monthly installments than monthly rentals.
7. Home Values - Not everyone is comfortable living in another's house, or they do not like the involvement of landlords, so they prefer to go for buying than renting.
8. Real Estate Business - Letting out residential property is also a safe source of income. Many retired couples let out their self-occupied property.

The above-explained factors are exhaustive and do not limit to this list. We may conclude theoretically, but it is a subjective matter that differs from individual to individual and situation to situation in practical life.

Concept and Applications

This topic is significant in the professional exams for both undergraduate courses & postgraduate courses and competitive exams, especially for:

• Bachelors of Business Administration
• Bachelors of Economics
• Masters in Business Administration

Practice Problems

Question 1: Which of the following gives you ownership rights?

(a) Buying

(b) Renting

(c) Both

(d) None of the above.

Answer: (a)

Explanation: Buying provides ownership rights to the individual. When individuals engage in the purchase transaction, they will get the right.

Question 2: __________ Factors are important for decision making

(a) Monetary Factors

(b) Non-Monetary Factors

(c) Both, Monetary and Non-monetary

(d) None of the above

Answer: (c)

Explanation: Decision-making is complete after applying and considering the impact of monetary and non-monetary transactions. If any one component is ignored, then the whole analysis will become meaningful.

Question 3: According to the traditional approach________is a symbol status.

(a) Owning a house

(b) Renting a house

(c) Leasing a house

(d) Letting out house

Answer: (a)

Explanation: Owning a house symbolizes status because it is counted as a part of the wealth. Also, the value of the house owned keeps appreciating with time. So, it is a status symbol.

Question 4: If you have surplus funds, which is the better source for buying a house?

(a) Borrowing from banks

(b) In-house Funding

(c) Borrowing from a friend or relative

(d) Any Of the above

Answer: (b)

Explanation: An individual must think about financing alternatives when surplus funds are unavailable. When surplus funds are available, borrowing the funds will increase the cost.

Question 5: Which of the following is not an advantage of renting?

(a) Initial Investment

(b) Maintenance and Repairs cost savings

(c) Saving of Property taxes

(d) No restriction on the renter

Answer: (d)

Explanation: A renter is required to face certain restrictions on the rented house. They must use the house as per the directions of the owner.

Common Mistakes

• Considering only financial factors
• Decision on the basis of cost
• Ignoring time value for money

Related Concepts

While studying this topic, it is important to read the following topics to get a better knowledge:

• Leasing
• Factoring
• Capital Budgeting
• Make or Buy Decision making