ArthaYantra Buy vs. Rent Score (ABRS)-Chennai

BUY VS. RENT A PERSONAL FINANCE PERSPECTIVE

Chennai Edition

CCopyright 2012Cwww.arthayantra.com

Buy Rent

ArthaYantraA CFO FOR EVERYONE

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

Property cost vs Rental Value: The Residential Property prices in Old Mahabalipuram and

Porur are not being translated to their rental value. Though the average residential

property values of Tambaram is higher than Old Mahabalipuram Road by 16%, the

average rental value is less by nearly 32%. The same case goes with Chromepet and Porur.

Though their average residential property values are identical, their average rental values

differ by nearly 32%.

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 Medavakkam, Tambaram, Porur, Kolathur, Chromepet and

Old Mahabalipuram Road. In Sholinganallur and Perambur it takes 5 years, in Ashok Nagar

it takes 7 years and in T. Nagar it takes 8 years. In Anna Nagar and Adyar a professional has

to save for at least 9 years to afford the down payment amount required. In Chetpet it

takes 10 years to save for a house.

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 28.90 per INR 1

lakh in Old Mahabalipuram Road makes it the place where you can get the highest area

for the same amount of money compared to other 11 localities. This implies that for a given

price one can get the largest space in Old Mahabalipuram Road followed by Tambaram,

Medavakkam, Porur, Chromepet, Kolathur, Sholinganallur, Perambur, Ashok Nagar, T.

Nagar and Anna Nagar. Adyar and Chetpet 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 0.52 shows that the rental values in Old

Mahabalipuram Road are higher and makes it an “immediately buy when you can afford”

place. The ratio of 0.32 in Tambaram 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 9 years for Old Mahabalipuram Road, 15 for

Tambaram, Medavakkam and Chromepet and above 15 years for T. Nagar,

Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar.

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

Adyar: The second highest in terms of average property prices. The rent to buy ratio of 0.2

meant that the average rental value of residential property is very less compared to its

higher prices. Renting is the best option.

Anna Nagar: A rent to buy ratio of 0.20 and high property prices makes it a place to Rent.

Ashok Nagar: A rent to buy ratio of 0.26 and moderately high property prices makes it a

place to Rent.

Chetpet: The place with highest average rental value and average property price. The rent

to buy ratio of 0.24 meant that the rental prices are high and it is advisable to buy. But the

higher property prices and least number of sq ft per INR 1 lakh (among the thirteen

localities) makes it a place to rent.

Chromepet: The rent to buy ratio of 0.31 meant that the rental prices are moderately high

and it is advisable to buy. The number of years required in order to save for down payment

(4 years, which is least among the twelve localities) and the property prices being in an

affordable range make it an affordable locality.

Kolathur: A rent to buy ratio of 0.27 and moderately high property prices makes it a place to

Rent.

Medavakkam: 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 (4 years, which

is least among the twelve localities) and the property prices being in an affordable range

makes it the third most affordable locality (out of the thirteen).

Old Mahabalipuram Road: The rent to buy ratio of 0.52 meant that the average rental

value of residential property is high compared to the average property price. This makes

Old Mahabalipuram Road 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 thit. The out of pocket costs also in favor of buy with the breakeven being achieved at 9 year

(fastest of the thirteen localities).

Perambur: The rent to buy ratio of 0.24 meant that the rental prices are high and it is

advisable to buy. But the higher property prices makes it a place to rent.

Porur: The rent to buy ratio of 0.22 meant that the average rental value of residential

property is very less compared to its higher prices. Renting is the best option.

Sholinganallur: A rent to buy ratio of 0.27 and moderately high property prices makes it a

place to Rent

T. Nagar: A rent to buy ratio 0f 0.28 meant that the rental values are high but the property

prices are higher. Therefore it is advised to rent.

Tambaram: 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 (4 years, which is

least among the thirteen localities) and the property prices being in an affordable range

makes it the second most affordable locality (out of the thirteen).





Buy Vs. Rent in Chennai

PlacePlace Salary range

Lacs ( )ABRS Score Sq feet

per Lac ( )No of Years

to Buy(1000 Sq feet)

8 - 25Adyar 7.69 9

Chetpet

8 - 9

10 - 25 6.85 10

Chromepet8 - 11

12 - 1415 - 25

23.65

AnnaNagar 8 - 25 8.70

AshokNagar

8 - 20

21 - 25 11.71

Kolathur8 - 11

12 - 14 67.515 - 25 80

23.33

Medavakkam8 - 11 65

12 - 14 77.515 - 25 90

23.81

Old Mahabalipuram

Road

8 - 9 75

10 - 11 87.512 - 25 100

28.90

Perambur8 - 14

15 - 1920 - 25

18.27

Porur8 - 11 55

12 - 14 67.515 - 25 80

23.81

Sholinganallur

8 - 11

12 - 1920 - 25

21.05 5

Tambaram8 - 9 65

10 - 14 77.5

15 - 25 9025

RENT NEUTRAL BUY

9

7

5

4

4

4

4

4

4

65

77.590

55

55

67.580

55

67.580

67.5

55

55

55

30

55

T Nagar8 - 25 9.85 855

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



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 thirteen localities in Chennai: Adyar, Anna Nagar, Ashok Nagar, Chetpet,

Chromepet, Kolathur, Medavakkam, Old Mahabalipuram Road, Perambur, Porur,

Sholinganallur, T. Nagar and Tambaram.

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


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



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



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)



4. Findings

Chennai as a city has recorded a raise of 209% when compared to the base year of 2007.

Zone 4 has recorded the highest raise in index value by 538%. Zones 5 and 8 have followed

up with a 530% and 464% raise respectively. All the other zones have also recorded a

minimum raise of 80% and a maximum raise of 253% when compared to their base year.

Some zones have performed better than the city while other zones have not done as well

as the city. Porur falls under Zone1, Perambur under Zone 3 and Kolathur under Zone 4.

Anna Nagar and Chetpet fall under Zones 5 and 7 respectively. Ashok Nagar falls under

Zone 8, Chromepet under Zone 9 and Adyar under Zone 10.

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

100200300400500600700 Zone 1

Zone 2

Zone 3

Zone 4

Zone 5

Zone 6

Zone 7

Zone 8

Zone 9

Zone 10

NHB Residex of ChennaiNHB Residex of Chennai

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



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 Chennai. 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 Chennai.

The most important thing that strikes out while assessing the current residential property

prices and NHB Residex is the base effect. Anna Nagar's property prices (INR 11,500,000) as

per NHB Residex have grown six fold but still remain similar to property prices of Adyar (INR

13,000,000). Kolathur whose property prices (INR 4,286,500) grew 538% as per NHB Residex

are identical with that of Chromepet (INR 4,229,000) which recorded a growth of only 200%

in its index value. This means that the property prices of Anna Nagar and Kolathur in the

base year 2007 were less compared to other localities.

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. Old Mahabalipuram Road's average property price (INR

3,460,000) is less than that of Tambaram (INR 4,000,000) by 16%. But the Average rental

value of Old Mahabalipuram Road (INR 15,500) is higher than that of Tambaram (INR

10,500) by nearly 32%. The same case has been observed with Chromepet and Porur.

Though their average residential property values are identical, the average rental value of

Chromepet (INR 11,000) is higher than that of Porur (INR 7,500) by 32%.

Rs. 16,000,000.00Rs. 14,000,000.00Rs. 12,000,000.00Rs. 10,000,000.00Rs. 8,000,000.00Rs. 6,000,000.00Rs. 4,000,000.00Rs. 2,000,000.00

Rs. 0.00

Rs. 35,000,000Rs. 30,000,000

Rs. 25,000,000

Rs. 20,000,000

Rs. 15,000,000

Rs. 10,000,000Rs. 5,000,000Rs. 0.00

LocalityOld

Mah

abal

ipur

am R

oad

Tam

bara

m

Med

avak

kam

Porur

Chr

omep

et

Kolat

hur

Sholin

gana

llur

Peram

bur

Ashok

Nag

ar

Anna

Nag

ar

T. N

agar

Adyar

Che

tpet



*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

Adyar 12 12

Anna Nagar 10 11

Ashok Nagar 9 9

Chetpet

Chromepet 6 5

Kolathur 2 6

Medavakkam 4 4

Old Mahabalipuram Road 8 1

Perambur 7 8

Porur 1 3

Sholinganallur 5 7

T.Nagar 11 10

Tambaram 3 2

13 13

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 Chennai. Chetpet stands out to be the least affordable place in both scenarios.

Adyar is the second least affordable place. Ashok Nagar takes the 9th position in both the

rankings. Medavakkam takes the 4th place in both the rankings. This means that the

high/low property prices of the above 4 localities are translated to their relative rental

prices.

Old Mahabalipuram Road stands out as the most affordable place to buy and Porur stands

out as the most affordable place to rent. Tambaram takes the second place and Porur

takes the third place in the affordability to buy rankings. Kolathur is the second most

affordable place to rent and Tambaram is the third most affordable place to rent. The

property prices do not match the rental values in the above localities. Chromepet,

Sholinganallur, Perambur, Anna Nagar and T. Nagar also face the same scenario. This

signifies the fact that people of different localities have different expectations from their real

estate markets.



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 Medavakkam, Tambaram, Porur, Kolathur, Chromepet and Old Mahabalipuram

Road in 4 years. In order to own a house in Sholinganallur and Perambur a professional has

to save for 5 years. To buy a house in Ashok Nagar a professional will need to save for 7

years. In T. Nagar takes 8 years to save for the down payment required to buy a house. A

professional can afford the down payment required to buy a house in Anna Nagar and

Adyar in 9 years. In order to own a house in Chetpet a professional has to save for 10 years.

Figure 3 is in sync with the assigned affordability ranks for ownership.

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

Chetpet

Anna Nagar

Ashok Nagar

T. Nagar

Perambur

Sholinganallur

Old Mahabalipuram Road

Chromepet

Tambaram

Medavakkam

Kolathur

Porur

Adyar

Figure 4: No. of years required to save the corpus for down payment

across thirteen major localities of Chennai

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 Chennai.

4.4 Area



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

Chetpet is the costliest locality offering a space of 6.85 sq ft per INR 1 lakh. Old

Mahabalipuram Road being the cheapest locality offers a space of 28.90 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 Chetpet has to spend at least 4.5 times the amount he spends in Old

Mahabalipuram Road. Tambaram offers a space of 25 sq ft per INR 1 lakh. A professional

gets 23.81 sq ft of space for INR 1 lakh in Medavakkam and Porur. This means that a

professional investing INR 1 lakh in Medavakkam and Porur gets 4 times the space he

would get in Chetpet.

Chromepet and Kolathur offer a space of 23.65 sq ft and 23.33 sq ft per INR 1 lakh

respectively. A professional gets a space of 21.05 sq ft and 18.27 sq ft per INR 1 lakh in

Sholinganallur and Perambur respectively. Ashok Nagar and T. Nagar offer a living space

of 11.71 sq ft and 9.85 sq ft per INR 1 lakh respectively. Adyar and Anna Nagar are the

second and third costliest locality in Chennai. They offer a living space of 7.69 sq ft and 8.70

sq ft per INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking

mentioned above.

Lo

cality

30 35252015105

Chetpet

Anna Nagar

T. Nagar

Ashok Nagar

Perambur

Sholinganallur


Chromepet

Tambaram

Medavakkam

Kolathur

Porur

Adyar

Average No.of sqft per INR 1lakh

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

Adyar 26,000 11,5961.4881 22% 11

Anna Nagar 21,000 10,2696.701 20% 13

Ashok Nagar 20,000 76,534.11925 26% 8

Chetpet 31,000 13,0084.0647 24% 10

Chromepet 12,000 38,397.85639 31% 3

Kolathur 10,500 38,906.33989 27% 6

Medavakkam 11,500 38,141.40384 30% 4

Old Mahabalipuram Road 16,500 31,597.44221 52% 1

Perambur 12,000 49,403.20807 24% 9

Porur 8,500 38,141.40384 22% 12

Sholinganallur 11,500 43,005.1591 27% 7

T.Nagar 25,500 90,811.45175 28% 5

Tambaram 11,500 36,372.76556 32% 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.

Anna Nagar 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 80%. Adyar and Porur also have low rent to buy

ratios. Renting is cheaper than buying by 78% in Adyar and Porur. Old Mahabalipuram

Road 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 0.52

and the average monthly out of pocket cost of Owning house being moderate, rents

being relative higher Old Mahabalipuram Road ranks high in the urgency to buy ratio.

Tambaram and Chromepet are also ranked high on urgency to buy rank.

Medavakkam takes the 4th place in the urgency to buy rankings. T. Nagar takes the 5th

rank. Kolathur and Sholinganallur rank 6th and 7th respectively in the urgency to buy rank.

The 8th position in the urgency to buy rank is taken by Ashok Nagar. The 9th and 10th

position in the urgency to buy rank is taken by Perambur and Chetpet respectively.

Table 3:Rent to Buy ratio and Urgency to buy rank of thirteen major localities across Chennai

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





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 Old Mahabalipuram Road is 9 years. The cost matchup in Tambaram,

Medavakkam and Chromepet happens in 15 years. It takes more than 15 years in T. Nagar,

Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar.

The planned length of stay in the house becomes an important aspect in deciding whether

to buy or rent.

4.5 Break Even Horizon

Break Even Horizon

Current Average stay 7 years

Lo

cali

ty

12 14 16108642

Chetpet

Anna Nagar

Ashok Nagar

Perambur

Sholinganallur


Chromepet

Tambaram

T.Nagar

Medavakkam

Kolathur

Porur

Adyar

Copyright 2012 www.arthayantra.com Page No:16


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

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



Gross Income/

Cities

Adyar

Anna Nagar

Ashok Nagar

Chetpet

Chromep

et

Kolathur

Medavakkam


Perambur

Porur Sholinganal

lur

TNagar

Tamba

ram

8 Lakhs 55 55 55 30 65 55 65 75 55 55 55 55 65

10 Lakhs 55 55 55 55 65 55 65 87.5 55 55 55 55 77.5

12 Lakhs 55 55 55 55 77.5 67.5 77.5 100 55 67.5 67.5 55 77.5

15 Lakhs 55 55 55 55 90 80 90 100 67.5 80 67.5 55 90

20 Lakhs 55 55 55 55 90 80 90 100 80 80 80 55 90

25 Lakhs 55 55 67.5 55 90 80 90 100 80 80 80 55 90

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across Thirteen major

Localities of Chennai.

Adyar : 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.

Anna Nagar : 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.

Ashok Nagar : 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 by more than 70%. 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.

Chetpet : 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.

Chromepet : The score of 65 for a professional with a salary range of 8-11 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 range of 12-25 lakhs is advised to buy.

Kolathur : 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.




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

Medavakkam : The score of 65 for a professional with a salary range of 8-11 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 range of 12-25 lakhs is advised to buy.

Old Mahabalipuram Road : A professional with a salary of 8 lakhs is better of renting. A

professional with a salary range of 9-11 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

12-25 lakhs are advised to buy.

Perambur : A professional with a salary range of 8-12 lakhs has an ABRS score of 55. 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.

A person with a salary range of 13-15 lakhs is in a neutral zone but is still advised to rent

because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as the

rents are high.

Porur : 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.

Sholinganallur : A professional with a salary range of 8-10 lakhs has an ABRS score of 55. 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. A person with a salary range of 11-15 lakhs is in a neutral zone but is still advised

to rent because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as

the rents are high.

T. Nagar : 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.

Tambaram : A professional with a salary range of 8 lakhs is better of renting. A professional

with a salary of 9-14 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.

*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 (Hyderabad which is 3 months)*** Average out of pocket cost(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

AdyarCities Ashok Nagar

AnnaNagar

Kolathur

Medavakkam

Old Mahabalipur

am Road

Perambur

Porur Sholinganallur

Tambaram

T Nagar

Initial

Corpus required

for owning*(INR)

2,176,500

2,300,000

840,000

1,094,700 2,031,200

800,000

No.of Years to save for the corpus

9 9

5

Average No.of sq.ft per INR 1lakh

7.69 8.70 11.70 6.85 23.65

23.81 23.90

18.27 23.81 21.05 9.85

25.00

Initial

corpus required for renting**

250,000 200,000

190,000

155,000

Break Even year

15+ 15+ 15+ 15+ 15 15+ 15 9 15+ 15+ 15+ 15+ 15

Chromepet

2,919,400

23.33

95,000

Chetpet

1,708,300

7 4 4 4 4 4 485

300,000 110,000



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

845,800 857,300 692,000 840,000 950,000

10

105,000 110,000 75,000 105,000 245,000 105,000

0.22 0.20 0.26 0.24 0.31 0.27 0.30 0.52 0.24 0.22 0.320.27 0.28

Average

out of

pocket

cost ***

Table 6: Other important numbers

Based on the current real estate markets, Tambaram and Medavakkam are the best

places to own a house. The property prices and rental values in these three localities are

low, thus making them the most affordable places for a professional to rent or own a house.

The larger residential spaces offered by Old Mahabalipuram Road and Tambaram provide

a better lifestyle option. The real estate market of Old Mahabalipuram Road favors the

home owners because of its moderate property prices and high rental value. Though the

moderate property prices of Porur and Kolathur make a strong case of ownership for

professionals with higher salaries, the low rental values make renting a better option.

Chetpet 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 twelve major localities of Chennai 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



The data is related to following localities of Chennai:

Adyar, Anna Nagar, Ashok Nagar, Chetpet, Chromepet, Kolathur, Medavakkam, Old

Mahabalipuram Road, Perambur, Porur, Sholinganallur, T. Nagar and Tambaram.

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:

9. Appendix

FIGURES:

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

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 Chennai

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

localities of Chennai

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

Figure 6: Break even horizon for the thirteen major localities of Chennai

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 across

Chennai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen

major Localities of Chennai.

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+)



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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