If you’re looking to get a new place, whether it be one of the new commercial projects in Andheri East or a swanky new flat somewhere in Bandra, the first decision to make is whether to rent the place or to buy it.
Quite obviously, the primary factor affecting such a decision is the financial considerations to be made. Apart from the financial considerations, you need to look at the more subjective aspects of the decision. These subjective aspects are personal factors such as emotionality and other similar factors which cannot be quantified. Since it is difficult to examine the personal factors related to such a decision, let us look at the financial considerations that are required to be made thinking of purchasing or renting a new place.
The first question to be answered is whether or not you are financially healthy enough to support the purchase if you do decide to buy. Purchasing a property means fronting down payment which usually stands anywhere between 5-20 percent of the total value of the property. You will also have to pay closing costs which are another 5 percent.
If you’re comparing between the initial expenses of buying and renting, then buying a property will require a lot more money than the initial cost of renting a property. If you want to rent, then you will have to make payments to the broker, pay security deposits and the first month’s rent. However, you cannot base your decision to purchase a property simply on your ability to front initial costs.
Costs Prior to Purchase
Expenses do not stop after you have bought the property. For example, if you want to buy a new commercial project in Andheri East, you will have to modify and decorate it according to your needs and purposes. Fixtures, wiring, electronic components, furniture, carpeting, window treatments, doors, etc. anything which constitutes a functioning office will have to be made from scratch. Of course, you could mortgage the property in order to pay for the improvements, or take out a loan, the consideration to make though, is how much will the total expense take out of your monthly income.
Renting is easier in this case as you will have a fixed cost for each month and you will not have to do a lot of improvement work to the property. Other expenses such as utilities are added to the rent, hence, the monthly cost remains roughly the same for every month.
If after all these considerations, you still find that you can make the payments and not suffer too much, you have to look at another aspect, whether the purchase can help you financially. Generally speaking, monthly rentals are cheaper than monthly mortgage payments. Financial benefits cannot be looked at in the short term though, one has to plan for the future.
Those who choose to buy property say that they do so in order to build equity and justify their decisions due to the investment value of a property as compared to the complete expenditure of renting a property. Let us look at the merits and demerits of attempting to build equity:
- Merits : The money that you spend making payments towards your property will add to the equity of the property. Rental money can never be recovered. Property equity can also serve as collateral for loans hence enabling speedy conversion of equity into liquid money.
- Demerits: Equity doesn’t get built overnight. If you want to move from the property after a short duration, you will have very little equity and you could lose money trying to sell too fast.
These considerations need to be looked at carefully before deciding on whether purchasing or renting is the best deal for you.
Andrew Wilkinson is a former realtor turned free lance writer. Andrew has considerable experience in the field of real estate management and has worked as a consultant for many real estate firms in the sub-continent. Contact him for advice regarding new commercial projects in Andheri East and pros and cons of purchasing or renting a property.