ArthaYantra

A CFO FOR EVERYONE

BUY VS. RENT

A PERSONAL FINANCE PERSPECTIVE

Kolkata Edition
Buy Rent

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Table of Contents

Summary 1. Introduction 2. Methodology 3. Assumptions 4. Findings

4.1 Historical data of Real estate prices 4.2 Property Cost vs Rental Value 4.3 Down Payment 4.4 Area 4.5 Rent to Buy Ratio 4.6 Break Even Horizon

3 6 7 8

9 10 12 13 14 15 17 20 21 21 22

5 ArthaYantra Buy vs Rent Score (ABRSTM) 6. Other Important Numbers 7. Conclusion 8. Limitations and Concerns 9. Appendix

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Summary
Property cost vs Rental Value: The Residential Property prices in Jadavpur and Salt Lake City are not being translated to their rental value. Though the average residential property values of Jadavpur is higher than EM Bypass by 8%, the average rental value is less by nearly 10%. The same case goes with PA Shah Road and Salt Lake City. Though their average residential property values are identical, their average rental values differ by nearly 27%. 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 2 years to save for the required corpus in Howrah. In Lake Town and Behala it takes 3 years and in EM Bypass and Jadavpur it takes 4. In PA Shah Road, Jodhpur Park and Salt Lake City a professional has to save for at least 5 years and it takes 9 years in Alipore to afford the down payment amount required. 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 52.63 per INR 1 lakh in Howrah makes it the place where you can get the highest area for the same amount of money compared to other 8 localities. This implies that for a given price one can get the largest space in Howrah followed by Lake Town, Behala, EM Bypass, Jadavpur, PA Shah Road and Salt Lake City. Jodhpur Park and Alipore offer 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 0.49 shows that the rental values in PA Shah Road are higher and makes it an immediately buy when you can afford place. 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 11 years for EM Bypass, Howrah, Lake Town and PA Shah Road, 12 for Behala and 13 years for Alipore, Jadavpur, Jodhpur Park and Salt Lake City. The tax benets received under the HRA allowance dominate the tax benets 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.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Alipore : The rent to buy ratio of 0.39 meant that the rental prices are moderately high. A salary range of 15-25 lakhs a professional can only rent as the property values are very high. Behala : A professional with a salary range of 8-10 lakhs can afford to rent and buy. A professional with a salary range of 11-25 lakhs is advised to buy as the rents are high. EM Bypass : The ABRS score of 75 for a salary range of 8-10 lakhs signies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. A professional whose salary range is between 13-25 lakhs is better off owning a home than renting it. Howrah : The rent to buy ratio of 0.39 meant that the rental prices are low. A salary range of 8-25 lakhs allows a professional to buy. Jadavpur : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 12-25 lakhs allows a professional to buy. Jodhpur Park : The rent to buy ratio of 0.38 meant that the rental prices are low. The rent is low compared to the EMI that has to be paid in case of buying a house. A salary range of 16-25 lakhs allows a professional to buy. Lake Town : A professional with a salary range of 8-10 lakhs and 10-25 lakhs has an ABRS score of 87.5 and 100 respectively. This signies that a professional with these salary ranges should buy in this locality. PA Shah Road : The rent to buy ratio of 0.49 meant that the average rental value of residential property is high compared to the average property price. This makes PA Shah a place to buy. The moderate prices and decent number of sq ft per INR 1 lakh 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 11th year (fastest of the nine localities). Salt Lake City : A professional with a salary range of 8-12 lakhs is better of renting. A professional with a salary of 13-15 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 15 lakhs are advised to buy.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Buy Vs. Rent in Kolkata

Place

Place
Howrah

Salary range Lacs ( )

8 - 25 8 - 11 12 - 25 8 - 10 11 - 25 8 - 10 11 - 12 13 - 25 8 - 11 12 - 15 16 - 25 8 - 14 15 - 19 20 - 25 8 - 14 15 - 19 20 - 25 8 - 18 19 - 22 23 - 25 8 - 14 15 - 25

ABRS Score

Sq feet per Lac ( )

No of Years to Buy (1000 Sq feet)

90

52.63

2 3 3 4 4 5 5 5 9

Lake Town

87.5 100 77.5 90 75 87.5 100 65 77.5 90 75 87.5 100 65 77.5 90 65 77.5 90 40 65

30.76

Behala

30.76

EM Bypass

23.52

Jadavpur

21.74

PA Shah Road

20.00

Salt Lake City

18.90

Jodhpur Park

16.47

Alipore

8.00

RENT

NEUTRAL

BUY

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

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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 exible lifestyle options, high level of mobility and is easy on the purse when compared to the EMI to be paid. From a personal nance 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 nd 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 benets under section 80C. The tax benets 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 nancial 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 nine major localities of Kolkata: Alipore, Behala, EM Bypass, Howrah, Jadavpur, Jodhpur Park, Lake Town, PA Shah Road and Salt Lake City.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

2. Methodology
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 nance 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. Factors associated with buying a home Down payment for home loan No. of Years required to save for down payment EMI on home loan Monthly property maintenance charges Annual repairs Annual property tax Income tax savings under section 80c and 24 b Table 1: Factors associated with home ownership and renting Factors associated with renting a home Security Deposit Monthly Rent Yearly increase in rent Monthly property maintenance charges Income tax savings under HRA exemption

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

3. Assumptions
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.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4. Findings
4.1 Historical data of Real estate prices
National Housing Board India's Residential Index (NHB Residex) tracks the movement of prices in the residential housing segment across India. Figure 1 shows the historical NHB Residex values since its inception in 2007.

NHB Residex of Kolkata

350 300 250 200 150 100 50
de x
20 10 In de x

Zone 9 Zone 10 Zone 11 Zone 12 Zone 13 Howarh

07
Ja

In

20

-M

ar

Ap

u r-J

20

10 Ju

In

de

x 20 10 c In

de

x 20 10 In

de

x 2 1 01 In

de

x 2 1 01 Ju In

de

x 2 1 01 O In

de

x 2 1 01 J In

de

x 20 12 In

de

x 20 12 In

de

Bidhan Nagar South Dumdum

e -S

t-D

ec

an

-M

ar

Ap

u r-J

e l-S

t-D

ec

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-M

ar

-J pr

un

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

Kolkata as a city has recorded a raise of 96% in its NHB Residex value compared to the base year of 2007. Zone 9 of Kolkata has recorded the highest raise in index by 172%. Zone 10 and Bidhan Nagar have followed up with a 153% raise when compared to the base year. Howrah and Zone 13 recorded an index raise of 99% and 85% respectively. Zone 12, South Dumdum and Zone 11 have also recorded a raise of 69%, 53% and 47% respectively, when compared to their base year index. While Zones 9 and 10, Bidhan Nagar and Howrah have outperformed the city average, Zones 11, 12, 13 and South Dumdum have underperformed. Alipore falls under Zone 9, Behala under Zone13 and EM Bypass under Zone 12. Howrah falls under Howrah zone, Jadavpur under Zone 11 and Jodhpur Park under Zone 10. Lake Town falls under South Dumdum and Salt Lake City falls under Bidhan Nagar. It is evident that each of the localities under different 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.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.2 Property cost Vs. Rental Value

The graph compares the property price and rental value of 1000 sq ft ready to occupy house across seven major cities of India. The bar graph depicts the average property price in the city and the line graph depicts the average rental value in the city.

Comparisons of Average Rents and Average Property Prices

Rs. 14,000,000 Rs. 12,000,000 Rs. 10,000,000 Rs. 80,000,00 Rs. 60,000,00 Rs. 40,000,00 Rs. 20,000,00 Rs. 0.00
ow ra h ke w To n h Be al a p By as s Ja v da pu r ah R oa d La ke C ity dh p P ur ar k ip Al or e

Rs. 45,000 Rs. 40,000 Rs. 35,000 Rs. 30,000 Rs. 20,000 Rs. 15,000 Rs. 10,000 Rs. 5,000 Rs. 0.00
H La EM Sh lt

PA

Sa

Jo

Locality Average Price of Residen alProperty Average Rental Value Figure 3: Average property price and rental values across nine major localities of Kolkata

The evident base effect in property prices that can be observed in the other cities is missing in the case of Kolkata. While comparing the NHB Residex and current Property Prices of Kolkata, one can observe a steady rise in the prices. Alipore scored high in the rise of NHB Residex value as well as the property prices. Except Alipore the prices in all the other regions are in affordable level for a professional with a yearly gross income of 12 lakhs. Though all the regions of Kolkata recorded a steady rise in the property prices, still the property prices remain moderate. The most important factor that stands out from the rental value of the properties across the nine localities is the anomaly of the property values not being translated to the corresponding rental values. EM Bypass's average property price (INR 4,250,000) is less than that of Jadavpur (INR 4,598,000) by 8%. But the Average rental value of EM Bypass (INR 16,500) is higher than that of Jadavpur (INR 15,000) by nearly 10%. The same case has been observed with PA Shah Road and Salt Lake City. Though their average residential property values are identical, the average rental value of PA Shah Road (INR 21,000) is higher than that of Salt Lake City (INR 16,500) by 27%.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Locality
Alipore Behala EM Bypass Howrah Jadavpur Jodhpur Park Lake Town PA Shah Road Salt Lake City

Aordability to Rent Rank

9 2 5 1 12 4 7 3 8 6

Aordability to Buy Rank

9 2 4 1 5 8 3 6 7

*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

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 nine major localities of Kolkata. Howrah stands out as the most affordable place for a professional to rent as well as buy. Alipore stands out as the least affordable place in both scenarios. Behala and Lake Town are the second and third most affordable places respectively. The rank of affordability to Rent matches with the rank of affordability to Buy in the case of above mentioned 4 cities. This means that the high/low property prices of the 4 cities are translated to their relative rental prices. Jadavpur ranks 4th on the affordability to rent where as it ranks 5th on affordability to buy. EM Bypass ranks 5th on the affordability to rent where as it ranks 4th on affordability to buy. This means that the average property price in EM Bypass is less than that of Jadavpur but the rental value is higher. Salt Lake City ranks 6th on the affordability to rent where as it ranks 7th on affordability to buy. Jodhpur Park ranks 7th on the affordability to rent where as it ranks 8th on affordability to buy. PA Shah Road ranks 8th on the affordability to rent where as it ranks 6rd on affordability to buy. This means that the average property price in PA Shah Road is less than that of Salt Lake City and Jodhpur Park but the rental value is higher. This signies the fact that people of different localities have different expectations from their real estate markets.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.3 Down payment

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.

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

Alipore Salt Lake City Jodhpur Park Locality PA Shah Road Jadavpur EM Bypass Behala Lake Town Howrah 1 2 3 4 5 6 7 8 9

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

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 in Howrah in 2 years. In Lake Town and Behala a professional has to save for 3 years. In EM Bypass and Jadavpur a professional has to save for 4 years. In PA Shah Road, Salt Lake City and Jodhpur Park a professional has to save for at least 5 years to afford the down payment amount required. To afford a house in Alipore a professional will need to save for 9 years. A professional from EM Bypass and Jadavpur needs to save two fold to buy a house in Alipore, while a professional from Howrah will have to save for 7 more years to afford a house in Alipore. Figure 3 is in sync with the assigned affordability ranks for ownership.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.4 Area
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 the nine major localities of Kolkata.

Average No.of sqft per INR 1lakh

Alipore Jodhpur Park Salt Lake City Locality PA Shah Road Jadavpur EM Bypass Behala Lake Town Howrah
10 20 No.of sq ft 30 40 50 60

Figure 5: Average no. of sq ft per INR 1lakh across nine major localities of Kolkata

Alipore, being the costliest locality to buy a home out of the nine localities considered, offers the least space of 8 sq ft per INR 1 lakh. Even though Jodhpur Park is the second costliest city offering a living space of 16.48 sq ft per INR 1 lakh, it offers twice the living space for the same amount compared to Alipore. Howrah, being the cheapest city to buy a home out of the nine localities considered offers the largest living area of 52.63 sq ft per INR 1 lakh. This means that a professional who wants to own a home in Alipore and Jodhpur Park has to spend seven times and three and half times more respectively than what he spends in Howrah for the same no of sq ft. Lake Town and Behala are the next cheapest localities to buy a home in. They provide a living space of 30.77 sq ft per INR 1 lakh. A professional from Alipore will get four times more area in Lake Town and Behala for INR 1 lakh. EM Bypass offers the third largest living space of 23.53 sq ft per INR 1 lakh. Jadavpur and PA Shah Road come in next at 21.75 sq ft and 20 sq ft per INR 1 lakh respectively. Salt Lake City offers a living space of 18.90 sq ft for INR 1 lakh. Figure 4 attuned to the Affordability to Buy Ranking mentioned above.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.5 Rent to Buy Ratio

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.
Locality Average monthly out of pocket cost(Ren ng the house) (INR) 45,000 12,000 17,500 7,000 16,000 21,000 13,000 22,000 17,500 Average monthly out of pocket cost(Owning the house) (INR) 11,1539.8924 29,740.37202 38,583.56341 17,802.06364 41,660.99401 54,669.32854 29,740.37202 45,215.95695 47,780.48245 Rent yo Buy Ra o Urgency to buy rank

Alipore Behala EM Bypass Howrah Jadavpur Jodhpur Park Lake Town PA Shah Road Salt Lake City

39% 40% 45% 39% 38% 38% 44% 49% 37%

5 4 2 6 7 8 3 1 9

*On a scale of 1 to 8 based on the monthly cost of renting and monthly cost of buying with 1 being buy as soon as possible and 8 being renting is better than buying.

Table 3:Rent to Buy ratio and Urgency to buy rank of nine major localities across Kolkata

All localities in Kolkata have a high rent to buy ratio. This implies that it is favorable to buy than rent in these localities, but one should also take into consideration the affordability to buy ranking while buying a house. Even though Salt Lake City has the least rent to but ratio value among all the localities it is still high. Renting is only 63% cheaper compared to buying a house based on the monthly charges one bares in both the cases. It ranks 7th in the affordability to buy rankings. PA Shah Road scores highest making the decision to buy easier once in a position to afford the EMI payments and required down payment. It ranks 6th in the affordability to buy rankings. While Howrah places 6th in the urgency to buy rank, it is the most affordable to buy. EM Bypass has the second highest rent to buy ratio at 0.45. Buying a house costs INR 21,083 more than renting. It ranks 2nd in the urgency to buy rankings but 4th in the affordability to buy rankings. Jodhpur Park ranks 8th in the urgency to buy ratio with an out of pocket cost of INR 21,000 and INR 54,669 to rent or buy a house respectively. It ranks 8th in the affordability to buy rankings. Only Jodhpur Park and Lake Town rank the same in urgency to buy and affordability to buy rankings.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

4.5 Break Even Horizon

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 nancial 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 seven cities. 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 benets 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 benets under house rent allowance. The provident fund received and required risk coverage for self and family also come under section 80C. These items do ll 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 benet under section 80C in case of ownership doesn't actually add much of advantage. Though the tax benets in case of ownership are higher during the initial years, renting the same place gives better tax benets over the next few years. The benets 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 cost of ownership and renting matchup in EM Bypass, Howrah, Lake Town and PA Shah Road happens after 11 years. The costs matchup happens at 12 years for Behala. The costs matchup happens approximately after 13 years in Alipore, Jadavpur, Jodhpur Park and Salt Lake City. The planned length of stay in the house becomes an important aspect in deciding whether to buy or rent.

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Break Even Horizon

Salt Lake City PA Shah Road Locality Lake Town Jodhpur Park Jadavpur Howrah EM Bypass Behala Alipore
2 4 6 8 10 12 14

Figure 6: Break Even Horizon for the eight major localities of Kolkata

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

5 ArthaYantra Buy vs Rent Score (ABRSTM)

The ArthaYantra Buy vs Rent Score (ABRS) is determined based on two most important criteria: Can I afford to buy a home? If I can afford it, what is the additional monthly cost I am bearing compared to renting. The affordability to buy and rent is determined taking into account the monthly earnings excluding the taxes and payments towards any existing loans. The rental price of the house is compared to its value to assess the protability associated with both renting and owning the house. ABRS aids you in making the renting vs buy decision by giving an explanatory score based on the rental value, Property value and the current nancial state.

Score
100 90 87.5 80

Recommended Ac on
Buy (Rents are very high) Buy (Rents are high) Buy ( Rents are higher) Can afford both ownership and Renting but because of low Rent to Ownership Rent is recommended. Buy/Neutral (Can afford both ownership and rent ) It is Advisable to buy but EMI can't be afforded. Have to Rent. Rent/Neutral (Can afford both ownership and rent but rent/EMI ratio is low) Rent (Rents are high but can't afford to buy) Can afford to Rent but can't afford to Buy. Can't afford both ownership and renting. Table 4: ArthaYantra Buy vs. Rent Score Explanation

77.5 75 67.5 65 55 <50

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Gross Income/ Cities

Alipore

Behala

EM Bypass

Howrah

Jadavpu r

Jodhpur Park

Lake Town

PA Shah Road

Salt Lake City

8 Lakhs 10 Lakhs 12 Lakhs 15 Lakhs 20 Lakhs 25 Lakhs

40 40 40 65 65 65

77.5 77.5 90 90 90 90

75 75 87.5 100 100 100

90 90 90 90 90 90

65 65 77.5 77.5 90 90

65 65 65 65 77.5 90

87.5 87.5 100 100 100 100

75 75 75 87.5 100 100

65 65 65 77.5 100 100

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across nine major Localities of Kolkata

Alipore : 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 an ABRS score of 65. This signies 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. Behala : A professional with a salary range of 8-10 lakhs can afford to rent and buy. A professional with a salary range of 11-25 lakhs is advised to buy as the rents are high. EM Bypass : The ABRS score of 75 for a salary range of 8-10 lakhs signies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. A professional whose salary range is between 13-25 lakhs is better off owning a home than renting it. Howrah : The score of 90 signies that though the rents are high, a professional with a salary range of 8-25 lakhs should buy in this locality. The EMI payments to be made in case of ownership are affordable. Jadavpur : A professional with a salary range of 8-11 lakhs is better of renting. A professional with a salary of 12-15 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 15 lakhs are advised to buy.

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Jodhpur Park : A professional with a salary range of 8-15 lakhs is better of renting even though the rents are high. This is because he can't afford the EMI in this salary range. A professional with a salary range of 16-20 lakhs falls in the neutral zone i.e. he can afford both renting and buying. A professional with a salary range of 21-25 lakhs is advised to buy. Lake Town : A professional with a salary range of 8-10 lakhs and 10-25 lakhs has an ABRS score of 87.5 and 100 respectively. This signies that a professional with these salary ranges should buy in this locality.

PA Shah Road : The ABRS score of 75 for a salary range of 8-12 lakhs signies the fact the rental value is critically high but a professional in this salary range cannot afford to buy. With a salary of 15 lakhs a professional to should buy because the rents are higher. A professional whose salary range is between 16-25 lakhs is better off owning a home than renting it. Salt Lake City : A professional with a salary range of 8-12 lakhs is better of renting. A professional with a salary of 13-15 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable to buy but have to make few adjustments to the current lifestyle in order to afford the additional amount for EMI payments. The professionals with a salary range of more than 15 lakhs are advised to buy.

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6 Key Factors
Here are some important numbers to look at before making the decision:
Behala EM Howrah Bypass Jodhpur Park PA Shah Road Salt Lake City

Localities

Alipore

Jadav pur

Lake Town

Initial Corpus required 2,500,000 for owning* (INR) No.of Years to save for the corpus Average No.of sq.ft per INR 1lakh Initial corpus required for renting**

650,000

850,000

380,000

919,600

1,213,800

650,000

1,000,000

1,058,000

52.63

21.75

30.77

20

16.48

18.90

23.53

30.77

425,000

110,000

165,000

60,000

150,000

200,000

120,000

210,000

165,000

Average out of pocket cost ***

0.39

0.40

0.45

0.39

0.38

0.38

0.44

0.49

0.37

Break Even year

13

12

11

11

13

13

11

11

13

*Ini al corpus required for owning = 20% of the Average property price (down payment for house loan) **Ini al corpus required for ren ng= Amount equivalent to 10 months of rental value *** (Ren ng the house) / Average out of pocket cost (Owning the house) The gross income of 8 lakhs per annum is considered.

Table 6: Other important numbers

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7 Conclusion
Based on the current real estate markets, Howrah, Lake Town and Behala 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 Howrah, Lake Town and Behala provide a better lifestyle option. The real estate market of PA Shah Road favors the home owners because of its moderate property prices and high rental value. Though the moderate property prices of Salt Lake City 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 Jodhpur Park make the decision to rent easier. Alipore 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 nance 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 nine major localities of Delhi based on the current rental values, property prices and the salary. If a professional nds 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.

8. Limitations and Concerns:

The data is related to following localities of Kolkata: Alipore, Behala, EM Bypass, Howrah, Jadavpur, Jodhpur Park, Lake Town, PA Shah Road and Salt Lake City. 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 benets received under section 80C is considered as INR 1.2 lakh both in the case of house ownership and renting.

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9. Appendix
FIGURES:
Figure 1: Graphical Representation of Buy Vs. Rent in Kolkata Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex) Figure 3: Average property price and rental values across nine major localities of Kolkata Figure 4: No. of years required to save the corpus for down payment across nine major localities of Kolkata Figure 5: Average no. of sq ft per INR 1lakh across nine major localities of Kolkata

Figure 6: Break even horizon for the nine major localities of Kolkata

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 nine major localities of Kolkata

Table 4 : ArthaYantra Buy vs. Rent Score Explanation Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across nine major Localities of Kolkata. Table 6 : Other important numbers

SOURCES:
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+)

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BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

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

Our Mission
To positively impact the future of our customers & their families.
For more information on this report please contact ArthaYantra Corporation Pvt. Ltd. visit us online: www.arthayantra.com or Write to : contactus@arthayantra.com Website: www.arthayantra.com : h p://twi er.com/arthayantra : h p://www.facebook.com/arthayantra :h p://www.linkedin.com/company/arthayantra

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ArthaYantra
A CFO FOR EVERYONE

Plot #319, Second Floor, Ayyappa Society, Madhapur, Hyderabad - 500081, AP, India. Phone : +91- 040-66245874, Fax : +91-040-66245. www.arthayantra.com, contactus@arthayantra.com