Real Estate Investment: Will You Buy a Flat or Rent? Know the Best Investment Strategies with Expert Advice

Real Estate Investment: For the Bengali middle class, owning a home or a flat is a lifelong dream. However, considering the skyrocketing prices in the current real estate market and economic uncertainties, many find themselves in a dilemma—is buying a flat on EMI a good decision, or is it wiser to continue living on rent? In this article, we will discuss the pros and cons of buying versus renting and the intricacies of real estate investment based on expert opinions.

EMI vs. Rent: Which is Right for You?

The decision to buy or rent a flat primarily depends on an individual’s income and lifestyle. It should be a practical decision, not an emotional one.

• Aligning EMI with Income: Experts suggest following a thumb rule. Your monthly EMI should not exceed 25-30% of your total monthly income. For instance, if your monthly income is ₹1 lakh, your EMI should ideally be between ₹25,000 and ₹30,000. Exceeding this limit can lead to financial risks in the future.
• Advantages of Renting: For those with a transferable job or plans to move to another city in the future, renting is more advantageous. It saves you from the burden of a huge loan and offers the flexibility to change residence easily.
• Disadvantages of Renting: However, rental accommodations come with uncertainties like renewing the agreement every 11 months, sudden rent hikes, or the pressure to vacate the house at the landlord’s discretion.

Real Estate as an Investment: Profit or Loss?

Many consider buying a flat to be a profitable investment. However, it is crucial to understand the concept of ‘Rental Yield’ in this context.

• Calculating Rental Yield: In India, the annual rental income from a residential property is typically between 3% to 6% of the property’s total value. On the other hand, home loan interest rates are usually around 8-9%. This means the income from rent is significantly lower than the interest you pay to the bank. Therefore, buying a flat on loan solely for rental income may not be financially viable.
• Investment Limit: According to the founder of HDFC, an individual should not invest in a property valued at more than 5 times their annual income. For example, if your annual income is ₹10 lakh, buying a flat worth more than ₹50 lakh could be risky.

Retirement Planning and Real Estate

Many people plan to buy a house with their Provident Fund (PF) or gratuity money after retirement. According to experts, this can be a very risky decision. It is advisable not to invest more than 30% of your total retirement corpus in real estate. This is because real estate is an ‘illiquid asset’, which is difficult to sell quickly to get cash during an emergency.

Smart Investment: The Zero EMI Strategy

Those who have a lump sum amount can consider the ‘Zero EMI’ strategy to buy a flat. Let’s say you want to buy a flat worth ₹1 crore and you have the full amount. Instead of paying the entire sum, make a down payment of ₹50 lakh and take a loan for the remaining ₹50 lakh. Invest the other ₹50 lakh in a good mutual fund and start a ‘Systematic Withdrawal Plan’ (SWP). The money from the SWP can be used to pay your loan EMIs, and over the long term, your principal capital will also grow.

Small-Ticket Investment: REITs

For those who don’t have a large capital, ‘Real Estate Investment Trusts’ (REITs) are an excellent alternative. Through REITs, you can invest in real estate with as little as ₹500 or ₹1000, much like the stock market, and earn dividends from rental income.

Whether you decide to buy a flat or rent one, proper financial planning is essential for every decision. Instead of being driven by emotions, one should proceed by evaluating their present and future financial capabilities and seeking expert advice.

Disclaimer: This article is for informational and educational purposes only. Please consult with a certified financial advisor before making any investment decisions.