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BUY VS. RENT A PERSONAL FINANCE PERSPECTIVE Mumbai Edition C Copyright 2012 C www.arthayantra.com Buy Rent ArthaYantra A CFO FOR EVERYONE

ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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India's first integrated personal financial service company, has commenced one-of-its kind research on Buying a home vs. Renting a home in key metros - Delhi NCR, Mumbai, Bangalore, Hyderabad, Kolkata, Chennai and Pune. The main objective of the research is to quantify the buy vs. rent decision from a personal finance perspective.

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Page 1: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT A PERSONAL FINANCE PERSPECTIVE

Mumbai Edition

CCopyright 2012Cwww.arthayantra.com

Buy Rent

ArthaYantraA CFO FOR EVERYONE

Page 2: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

Table of Contents

C

Summary 3

1. Introduction 6

2. Methodology 7

3. Assumptions 8

4. Findings

4.1 Historical data of Real estate prices 9

4.2 Property Cost vs Rental Value 10

4.3 Down Payment 12

4.4 Area 13

4.5 Rent to Buy Ratio 14

4.6 Break Even Horizon 15

TM5 ArthaYantra Buy vs Rent Score (ABRS ) 17

6. Other Important Numbers 20

7. Conclusion 21

8. Limitations and Concerns 21

9. Appendix 22

Copyright 2012Cwww.arthayantra.com

Page 3: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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

benefits received under the HRA allowance dominate the tax benefits 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.

Summary

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:3

Page 4: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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.

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:4

Page 5: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:5

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

RENT NEUTRAL BUY

PlacePlace Salary

rangeLacs ( )

ABRS Score Sq feetper Lac ( )

No of Yearsto Buy

(1000 Sq feet)

Virar 24.04 4

Wadala

8 - 14

15 - 25 6.45 10

Ghatkopar 8 - 1112 - 25 9.30

Pokaran Rd 11.19

Lower Parel 8 - 25 3.64

Ghodbunder Road

8 - 19

20 - 2424 - 25 80

80

90

80

80

14.29

Chembur8 - 9 30

10 - 25 7.05

Andheri8 - 14 40

15 - 25 6.90

Kharghar8 - 19

8 - 19

8 - 24

8 - 11

20 - 24

20 - 24

12 - 14

24 - 25

24 - 25

24 - 25

15 - 25

16.95

Borivali west 55 8.27

Kalyan8 - 11

12 - 1415 - 25

21.97

6

Bhandup west 8 - 25

8 - 25

558.99

7

14

5

4

8

9

8

10

10

50

55

75

67.5

77.5

67.5

67.5

67.5

67.5

65

65

55

55

65

55

55

55

40

40

Mira Road16.90 5

10

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

Page 6: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:6

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 flexible lifestyle options, high level of mobility and is easy on the purse when

compared to the EMI to be paid.

From a personal finance 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 find 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 benefits under section 80C. The tax benefits 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 financial

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.

Page 7: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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

finance 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.

2. Methodology

Copyright 2012

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

C www.arthayantra.com Page No:7

Factors associated with buying a home Factors associated with renting a home

Down payment for home loan Security Deposit

No. of Years required to save for down payment

Monthly Rent

EMI on home loan Yearly increase in rent

Monthly property maintenance charges Monthly property maintenance charges

Annual repairs Income tax savings under HRA exemption

Annual property tax

Income tax savings under section 80c and 24 b

Table 1: Factors associated with home ownership and renting

Page 8: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:8

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.

3. Assumptions

Page 9: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:8

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.

4. Findings

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

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:9

4. Findings

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.

NHB Residex of Chennai

100

500

150200250300350400 Zone 1

Zone 2

Zone 3

Zone 4

Zone 5

Zone 6

Navi Mumbai

Thane

Kalyan

Mira Byander

Virar Vasai

Other Muncipalities

NHB Residex of Mumbai

2007

Inde

x

Jan-

Mar

201

0 In

dex

Apr-J

un 2

010

Inde

x

Jun-

Sep 2

010

Inde

x

Oct

-Dec

201

0 In

dex

Jan-

Mar

201

1 In

dex

Apr-J

un 2

011

Inde

x

Jul-S

ep 2

011

Inde

x

Oct

-Dec

201

1 In

dex

Jan-

Mar

201

2 In

dex

Apr-S

ep 2

012

Inde

x

Page 10: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:10

4.2 Property cost Vs. Rental Value

Comparisons of Average Rents and Average Property Prices

Average Price of Residen�alProperty Average 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.

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%.

Rs. 30,000,000.00Rs. 25,000,000.00Rs. 20,000,000.00Rs. 15,000,000.00Rs. 10,000,000.00Rs. 5,000,000.00

Rs. 0.00

Rs. 100,000,000

Rs. 80,000,000

Rs. 60,000,000

Rs. 40,000,000

Rs. 20,000,000

Rs. 0.00

Locality

Virar

Kalya

n

Kharg

har

Mira

Roa

d

Gho

dbun

der R

oad

Pokar

an R

d

Gha

tkop

ar

Bhand

up w

est

Borival

i wes

t

Che

mbu

r

Andhe

ri

Wad

ala

Lower

Par

el

Page 11: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:11

*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

Locality Affordability to Rent Rank Affordability to Buy Rank

Andheri 11 11

Bhandup west 8 8

Borivali west 7 9

Chembur

Ghatkopar 10 7

Ghodbunder Road 5 5

Kalyan 2 2

Kharghar 4 3

Lower Parel 13 13

Mira Road 3 4

Pokaran Rd 6 6

Virar 1 1

Wadala 12 12

9 10

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 signifies the fact that

people of different localities have different expectations from their real estate markets.

Page 12: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:12

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.

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

of Mumbai

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.

4.3 Down payment

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

Lo

cality

12 14

Lower Parel

Chembur

Wadala

Borivali west

Bhandup west

Ghatkopar

Pokaran Rd

Kharghar

Virar

Kalyan

Ghodbunder Road

Mira Road

Andheri

Page 13: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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.

4.4 Area

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:13

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.

Average No.of sqft per INR 1lakh

Lo

cality

252015105

Lower Parel

Wadala

Chembur

Borivali west

Bhandup west

Kalyan

Virar

Pokaran Rd

Kharghar

Mira Road

Ghatkopar

Ghodbunder Road

Andheri

Page 14: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

Locality Average monthly out of pocket

cost(Ren�ng the house) (INR)

Average monthly out of pocket

cost(Owning the house) (INR)

Rent yo Buy Ra�o Urgency to buy rank

Andheri 43,500 12,9226.2751 34% 3

Bhandup west 29,000 99,367.23942 29% 6

Borivali west 24,500 10,7936.2919 23% 13

Chembur 32,500 12,6427.4051 26% 10

Ghatkopar 41,000 96,064.30744 43% 1

Ghodbunder Road 17,000 62,902.33973 27% 7

Kalyan 11,000 41,258.6288 27% 8

Kharghar 17,000 35,3174.8292 32% 5

Lower Parel 81,000 24,4187.7632 33% 4

Mira Road 13,500 35,3311.89867 25% 11

Pokaran Rd 19,290 80,031.60145 24% 12

Virar 10,000 37,787.67618 26% 9

Wadala 48,500 13,8069.4665 35% 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.

Borivali West has the least rent to buy ratio. This signifies 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 signifies 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.

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

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.

4.5 Rent to Buy Ratio

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:15

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 financial 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

benefits 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 benefits under house rent allowance.

The provident fund received and required risk coverage for self and family also come

under section 80C. These items do fill 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 benefit under section 80C in case of ownership doesn't actually

add much of advantage.

Though the tax benefits in case of ownership are higher during the initial years, renting the

same place gives better tax benefits over the next few years. The benefits 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.

4.5 Break Even Horizon

Page 16: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

Break Even Horizon

Current Average stay 7 years

Lo

cali

ty

12 14 16108642

Ghatkopar

Borivali west

Chembur

Mira Road

Virar

Lower Parel

Ghodbunder Road

Wadala

Kharghar

Kalyan

Pokaran Rd

Bhandup west

Andheri

Copyright 2012 www.arthayantra.com Page No:16

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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

Page 17: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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 confined 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.

TM5 ArthaYantra Buy vs Rent Score (ABRS )

Score Recommended Ac�on

100 Buy (Rents are very high)

90 Buy (Rents are high)

87.5 Buy ( Rents are higher)

80 Can afford both ownership and Renting but because of low Rent to Ownership Rent is recommended.

77.5 Buy/Neutral (Can afford both ownership and rent )

75 It is Advisable to buy but EMI can't be afforded. Have to Rent.

67.5 Rent/Neutral (Can afford both ownership and rent but rent/EMI ratio is low)

65 Rent (Rents are high but can't afford to buy)

55 Can afford to Rent but can't afford to Buy.

<50 Can't afford both ownership and renting.

Table 4: ArthaYantra Buy vs. Rent Score Explanation

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:17

Page 18: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

Gross Income/

Cities

Andheri

Bhandup

west

Borivali

west

Chembur

Ghatkopar

Ghodbunder Road

Kalyan

KhargharRoad

Lowe

r Parel

Mira Road

Pokaran Rd

Virar Wadala

8 Lakhs 40 55 55 30 50 55 55 65 40 55 55 55 40

10 Lakhs 40 55 55 55 50 55 55 65 40 55 55 55 40

12 Lakhs 40 55 55 55 75 55 67.5 65 40 55 55 67.5 40

15 Lakhs 65 55 55 55 75 55 80 65 40 55 55 80 65

20 Lakhs 65 55 55 55 75 67.5 80 77.5 40 67.5 55 80 65

25 Lakhs 65 55 67.5 55 75 80 80 90 40 80 67.5 80 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 signifies

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 signifies 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 signifies the fact that the rental

value is critically high but a professional in this salary range cannot afford to buy.

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

www.arthayantra.com Page No:17Copyright 2012C www.arthayantra.com Page No:19

Ghodbunder Road : The score of 55 for a professional with a salary range of 8-15 lakhs

signifies 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 signifies 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 signifies 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 signifies

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.

Page 20: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

*Ini�al corpus required for owning = 20% of the Average property price (down payment for house loan)* * I n i � a l c o r p u s re q u i re d fo r re n � n g = A m o u n t e q u i va l e n t t o 1 0 m o n t h s o f re n ta l va l u e )*** (Ren�ng the house) / Average out of pocket cost (Owning the house)The gross income of 8 lakhs per annum is considered.

6 Key Factors

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:20

Here are some important numbers to look at before making the decision:

Cities Andheri

Bhandup west

Borivali west

Chembur

Ghatkopar

Ghodbunder Road

Kalyan

KhargharRoad

Lowerparel

Mira Road

Pokaran Rd

Virar Wadala

50

(INR)

10

14

8

15+

7

15+

9

15+

8

12

6

15+

4

15+

5

15

5

15+

4

15+

10

14

14

15

10

15+

InitialCorpusrequiredfor owning *

InitialCorpusrequiredfor renting **

Averageout ofpocketcost ***

BreakEvenYear

No ofYears tosave forthe corpus

AverageNo.ofsq.ft perINR 1lakh

2,900,000

425,000

2,224,700

280,000

910,500

100,000

5,500,000

800,000

832,000

90,000

3,100,000

475,000

2,836,700

315,000

2,418,500

235,000

2,150,000

400,000

1,400,000

160,000

1,180,000

160,000

1,183,100

125,000

1,787,400

182,900

6.90

0.34

8.99

0.29

8.27

0.23

7.05

0.26

9.30

0.43

21.97

0.27

16.95

0.32

3.64

0.33

16.90

0.25

11.19

0.24

24.04

0.26

6.45

0.35

14.29

0.27

Table 6: Other important numbers

Page 21: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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 finance 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 finds 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.

7 Conclusion

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:21

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 benefits received under section 80C is considered as INR 1.2 lakh both in the case of house ownership and renting.

8. Limitations and Concerns:

Page 22: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

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:

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Copyright 2012C www.arthayantra.com Page No:22

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+)

Page 23: ArthaYantra Buy vs. Rent Score (ABRS)-Mumbai

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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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 finance services using its unique

TMproprietary framework, Personal Financial Lifecycle Management (PFLM) , which helps clients achieve their financial goals. ArthaYantra's vision is to provide independent, high quality, customized financial planning solutions and their efficient execution to individuals. It employs proprietary financial models and enable investments through well balanced passive investment strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.

For more information on this report please contact ArthaYantra Corporation Pvt. Ltd. visit us online: or Write to : [email protected] www.arthayantra.com

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