Welcome to the audio video education series. In this series we will discuss about the popular dilemma of whether one should buy or rent a property. Additionally, we will also be limiting our discussion with respect to the Indian market. I want to do that because rental market is not a global phenomenon which is governed by some global parameter. Rental market across the world behaves differently with area. This is because local factors play a very important role in deciding what the rental market is going to be. And because the rental markets are different across the world, it is all the more important that we keep our discussion specific to certain area which in our case is the Indian market. To put the things in context, let's understand how rental market in India is different than say United States. In the case of India, I take an example from my local area Noida where the cost of a property let's say is about 80 lakhs. And I know that if I have to take this property on rent, I will have to pay around 80,000 rupees a month. If we calculate the rental yield which essentially means that the earning I have for one year against the property will be about 2.7%. And let's say I pick up a property on rent in United States and I am not talking about a very high-end city here. Maybe we can talk about some middle-level city where the property may be costing around 250,000 dollars. I have found that the rental I will have to pay for this property would be around 1100 dollars a month. And if we calculate the total earning in a year against this property, it will be around 6.2%. So what do we have here? We have on one hand a rental yield in India of a city Noida hovering around 2.7%. While in United States the rental yield is around 6.2%. It is not a small difference. We are talking about a good 3.5 to 4% difference here. Now why is this rental yield so crucial to our discussion? Let's find out. At present which is around July 2016, the government bond which is the government of India 10 years bond is having a coupon of about 7.5%. Whereas the same bond which is also called US Treasury for 10 years is currently giving a coupon of 1.6%. Now why we are discussing about government bonds here is because the government bonds interest rate is a good indicator of how the economy is performing and what the interest rates of that economy is. We can very well see that in the case of United States the bond which are paying a power 3.1% is quite easily outpaced by the rental yield one can get on a property. The same is not true with India because the rental yield of about 2.7% is not at all comparable to 7.5% which a guaranteed bond issued by the government can give. So essentially what it tells you is that in India you are better off investing in bond and receiving a guaranteed interest of 7.5% instead of going for a rental yield which stands no way or close to it. To put things in context if you have 80 lakhs and you invested in property to earn rental you will be earning 2 lakhs 16.000 in one year which essentially means you will be earning 18.000 rupees a month. On the other hand if you invested this 80 lakhs into bond you will be earning about 6 lakhs rupees a year which is 50.000 a month. It is obvious investing in property to earn rent in India is not a good idea. Having said that let's look at another scenario wherein you do not have 80 lakhs to put in for a property to buy it right away but instead you have the option of going for rent or buying a property through loan. Let's look at the scenario and find out whether it makes sense. To buy property on loan which costs you around 80 lakhs to please you will need to put down means you will have to actually give a check of 12 lakhs to please to the developer before you can go to the bank and apply for loan. So let's say you do that you will have to apply for a loan amount of 80 lakhs minus 12 lakhs which is 68 lakhs. After your loan will be approved you will be going on an EMI. So let's assume that this EMI is for 15 years and also assume that the loan that you got was a 10% per annum. You will see that your estimated monthly installment for buying a property would be about 73,000 rupees. On the other hand if you were to go on rent simple rent you will have to pay a rent of 18,000 rupees as we have seen already. But also a difference here is that you will now not have to pay any down payment which means that the 12 lakhs rupees you will have to shell out to buy a property on loan. In case of rent you will actually not be doing that. So let's see what we have here. In case of rent you have not bought any property therefore your asset is zero and so is liability because it did not pick up any loan. But the rental payout every month is your cash outflow which in this case would be about 18,000 rupees. On the other hand in case you bought the property your asset becomes the property itself which is worth 80 lakhs. Now remember that you also picked up a loan against your asset that becomes your liability which in this case is about 68 lakhs. Now to pay of the liability you have picked up a monthly EMI of 73,000 that becomes your cash outflow per month. So in nutshell what we have is that in case of rent you saved the cash outflow of about 55,000 which is 73,000 EMI minus 18,000 rentals that you would have paid. And also remember the 12 lakhs that you paid as a down payment for your house is also sitting with you as cash. So when you go on rent you have these two cash flows saved which you can easily invest and generate 15% plus return. So for example if you go for equity investment you can easily get 15% return in long run. On the other hand if you had bought the property you can probably assume that your property is going to be growing at about 10%. Now why we say that is because if you look at the property appreciation index which is published by National Housing Bank Residex you see that the property has in last 10 years appreciated between 7 to 12%. So I think in this case it is a good assumption that your property grows at about 10%. Let us see what we will have in our hands after 15 years. If you use your calculator as you can easily calculate that the value of your investment in the case of the savings that you would have if you went on rent would be around 4.6 crores which is 46 million rupees after 15 years. The same in the case of property which is growing at 10% would be equivalent to about 3.3 crores which is about Rs 33 million rupees. This is important because we do not really realize that the long term property rates or the price appreciation of property is not exactly as much as we perceive it to be. So therefore even if we grow at 10% it cannot possibly catch up with the growth that you would have in case you invest the savings into a good scheme that can potentially earn you much more than the appreciation of your property. So let us see what we have discussed in this video. We have seen that the rental yield in India is a bit low. It is not at all comparable to the bond rate or the interest rate that we see in the bank. We have also seen that investing in real estate for the purpose of earning rent is not a good decision. What we have also seen that because the rental yield in India is so low it might actually be a good idea to live on rent and use the proceed of the savings because you are living on rent in investing something else which could be more profitable than buying a property. So therefore if you look at the typical statistics of how you can save more and you can earn more it may be much more beneficial for you to live on rent than to buy your property. Thank you for watching this video. This is Summer Vijay. If you have any question related to this video or any questions you may otherwise want to ask me please write to me on the email given below. Thank you so much again.