Rent versus buy, properly

The most common financial argument in Indian households, usually conducted with the wrong question.

The frame that ruins the comparison

"Rent is money down the drain." It is the standard opening and it does not survive inspection, for a simple reason: owning also has costs that produce nothing recoverable.

Chapter 2 listed them. Stamp duty is gone the day it is paid. So is brokerage, so is interest, so is maintenance, so is property tax. None of that returns to you at sale.

So the honest comparison is not rent against nothing. It is:

Rent, plus whatever your unspent capital earns elsewhere

against

The unrecoverable costs of owning, less whatever the property is worth at the end

Both sides have money that disappears. The question is which disappears faster.

The ratio that frames everything

Start with one number: annual rent divided by purchase price.

$\text{rental yield} = \frac{\text{annual rent}}{\text{purchase price}}$

This is the return the property generates as a property, before any price change — and it is the same quantity SEBI builds the REIT regime around, requiring "not less than ninety per cent. of net distributable cash flows of the REIT" to be distributed to unit holders. A REIT exists to pass rent through. Rent is what property earns; price change is a separate bet.

Indian residential rental yields are typically low — commonly in the low single digits. That single fact does most of the work in a rent-versus-buy comparison, because it means:

Renting the same property costs you a small percentage of its price each year. If the yield is 3%, you are renting an ₹80 lakh asset for ₹2.4 lakh a year. Whether that is cheap depends entirely on what else ₹80 lakh could do.

A low yield means the buy case rests on price appreciation, not on the rent avoided. Anyone saying "buying is obviously better" while rents are 3% of price is making a forecast about prices, usually without noticing.

The two sides, properly

Cost of renting, per year: rent, rising with time, minus the return on the capital you did not spend — the deposit, the stamp duty, the difference in monthly outgo.

Cost of owning, per year: interest on the loan, maintenance, property tax, repairs, insurance, plus the opportunity cost of the money sunk in the down payment and entry costs, minus the price change on the property.

Two items decide most comparisons, and both are easy to omit:

The opportunity cost of the down payment. A buyer putting ₹20 lakh down has given up what ₹20 lakh would have earned. Over long periods this is a very large number and it is almost never counted.

Interest as against principal. Only the interest is a cost; the principal repayment is forced saving that comes back as equity. Comparing the full EMI with rent is the second most common error after ignoring the opportunity cost, and it makes owning look worse than it is.

Time is the deciding variable

Chapter 2 showed entry and exit costs are large and paid once. They are spread over however long you stay.

Short stay: costs of roughly a fifth of the price are spread over a few years, and renting wins comfortably.

Long stay: the same costs are spread over decades, the loan amortises, and rent rises while a fixed-rate component of your cost does not. Buying usually wins.

There is a break-even number of years, and it is the only output of this comparison that matters. For most Indian cities at typical yields and rates it is commonly somewhere around five to ten years — but it is sensitive enough to local conditions that you should compute it for your own numbers rather than adopt anyone's rule of thumb.

Working the problem

₹80 lakh to buy, ₹22,000 a month to rent.

Rental yield first. ₹22,000 × 12 = ₹2,64,000 a year on ₹80,00,000 = 3.3%.

What that tells you immediately: you can use this asset for 3.3% of its value a year. If your money can earn meaningfully more than 3.3% after tax somewhere else, renting and investing the difference starts well ahead — and the buy case must be made on price appreciation.

Assumptions I need:

Assumption	Taken as
Down payment	20% = ₹16 lakh
Entry costs	7% = ₹5.6 lakh
Loan	₹64 lakh, 20 years, floating
Home loan rate	~8.5%
Return on money if invested instead	~10% before tax
Maintenance, tax, repairs	~₹60,000 a year, rising
Rent growth	~5% a year
Property price growth	the open question
Holding period	the other open question

The shape of the answer. In year one the buyer pays roughly ₹5.4 lakh of interest plus ₹60,000 of holding costs — about ₹6 lakh — against the renter's ₹2.64 lakh of rent. The buyer also forgoes the return on ₹21.6 lakh of down payment and entry costs, around ₹2.2 lakh. So the buyer is out roughly ₹8.2 lakh against the renter's ₹2.64 lakh, a gap of about ₹5.5 lakh in year one, offset only by whatever the property appreciates.

At 3.3% yield, the property must appreciate by roughly 6 to 7% a year for the buyer to be level early on. Below that, renting wins until the entry costs are amortised and the loan has run down far enough for the comparison to flip.

The single assumption that most changes the answer: how long you stay. Not the price growth rate, though that is the one people argue about. Here is why — the entry and exit costs of about ₹11 lakh are fixed and paid regardless. Over three years they cost ₹3.7 lakh a year and swamp everything. Over twenty years they cost ₹55,000 a year and are nearly irrelevant, while the loan has amortised, rent has compounded at 5% to more than double, and the buyer's housing cost has stopped rising.

Price growth matters, but it is a forecast you cannot make. Holding period is a fact about your own life that you can estimate honestly — and it dominates. If you do not know whether you will be in this city in five years, that uncertainty is itself the answer.

The point

Rent is not wasted money, because owning also has unrecoverable costs — stamp duty, interest, maintenance, tax — so the comparison is rent plus the return on unspent capital against the unrecoverable costs of owning less the eventual sale value. Start with the rental yield: at around 3% the property earns little as a property and the buy case rests on price appreciation. Count the opportunity cost of the down payment and count only interest rather than the whole EMI. And the variable that decides it is not price growth, which you cannot forecast, but how long you will stay, which you can.