Rent vs Buy a House: The 4-2-0 Rule

Summary

In this video by Zero1 by Zerodha, the financial decision of renting vs buying a house is explored through a concept called the 4-2-0 rule. The creator demonstrates the comparison between buying a house for 1 crore INR with a 20-year loan and renting the same house for 30,000 INR per month with a 10% annual increase in rent. Through detailed calculations using an Excel sheet, the video showcases how on a 20-year horizon, renting coupled with smart investments could potentially yield better financial returns than buying a house. The conclusion emphasizes understanding the nuances and intricacies of personal financial decisions beyond conventional rules, suggesting that the best decision aligns with one's personal freedom and experiences.

Highlights

• Comparison between buying a house for 1 crore INR and renting it for 30,000 INR monthly. 🌟
• Detailed explanation of costs associated with buying a home, including interest and maintenance. 🏡
• Renters may end up financially ahead by investing the difference. 💰
• Interesting analogy about Class 12 being like a home loan. 📚
• Emphasis on personal freedom and non-reliance on universal rules. 🦸

Key Takeaways

• Financial decisions of renting vs buying a house can be complex. 🤔
• The Excel sheet can help visualize the financial impact over time. 📈
• Renting might yield better financial returns with proper investments. 💡
• The real cost of house ownership includes interest and maintenance. 💸
• Freedom and personal preferences should guide your choice. 🕊️

Overview

This intriguing video from Zero1 by Zerodha delves into the age-old debate of renting versus buying a home. Through the unique lens of the '4-2-0 rule', viewers are shown how one might make an informed financial choice using a simple Excel sheet. It illustrates opposing views by comparing the financial outcomes of buying a 1 crore INR house with a hefty loan versus renting the equivalent property, factoring in all hidden costs.

The video emphasizes the complexities of homeownership including hefty EMIs, interest costs, and numerous maintenance fees that often go unnoticed. It cleverly compares the lifelong commitments of owning to the often overlooked benefits of renting, especially when the rental savings are wisely invested. A surprising revelation is that in many scenarios, renters could surpass owners in wealth accumulation over two decades.

Ultimately, the key takeaway is about freedom and making choices that serve one's lifestyle, rather than blindly following prescriptive rules or societal expectations. The moral: delve deeper into personal financial details, understand the implications beyond surface-level calculations, and align your decisions with your personal life goals and dreams.

Chapters

• 00:00 - 00:30: Introduction and Overview The chapter titled 'Introduction and Overview' starts with a comparison between the cost of buying a house versus renting it. It introduces the dilemma of whether to buy a house costing 1 crore (CR) or rent it for 30,000 per month. The solution suggested involves using an Excel sheet to understand the economics involved in the 'rent versus EMI' debate. The chapter plans to first explain the financial aspects of buying a house followed by the implications of renting for the next decade.
• 00:30 - 03:00: Economics of Buying a House: Initial Costs and EMIs The chapter titled 'Economics of Buying a House: Initial Costs and EMIs' provides an analysis of the costs involved in purchasing a house and the implications of taking a loan. The example given is for a house priced at 1 crore INR, with an initial down payment of 20 lakh INR, leaving a loan amount of 80 lakh INR. The chapter discusses the financial aspects by considering a loan interest rate of 9% over a 20-year tenure, providing insights into the comparability of profitability over two decades. The importance of customizing these numbers based on individual scenarios is emphasized.
• 03:00 - 05:00: Associated Costs of Owning a House The chapter discusses the associated costs of owning a house beyond the commonly perceived value of just the loan amount plus the down payment. It highlights the misconception that the cost of a house is simply the sum of the loan and the initial investment and notes that some people view the value as increasing to a projected future value. The chapter sets the stage for explaining a more comprehensive method of calculating the true cost of owning a house, possibly including other financial considerations.
• 05:00 - 06:30: Calculating Rent Over Time The chapter 'Calculating Rent Over Time' discusses the total cost of owning a home over a long period. Initially, the cost is 1 crore. However, by adding the interest paid to the bank over 20 years, the total repayment becomes 1.73 crores. Additionally, there are owner-related expenses that further increase the total cost.
• 06:30 - 08:30: SIP and Investment Strategy for Renters This chapter discusses the financial considerations for renters who choose not to invest in property ownership. It explains that renters should plan for expenses that property owners typically incur, such as annual property tax and society maintenance costs. In this specific case, the property tax is approximately 50,000 Rupees annually, with a 5% yearly increment, accumulating to a significant amount over 20 years. Similarly, society maintenance is also 50,000 Rupees initially and grows at the same rate. The discussion suggests that such expenses should be considered in long-term financial planning, especially for those opting for renting as opposed to buying real estate.
• 08:30 - 11:30: Analysis of EMIs and Home Ownership The chapter discusses the financial responsibilities related to home ownership, particularly focusing on Equated Monthly Installments (EMIs) and maintenance costs. It highlights the emotional value associated with owning a home, which often leads people to invest significant funds into maintaining and personalizing their property. The text uses a hypothetical scenario to illustrate the costs, suggesting an annual maintenance cost of 10,000 rupees with a yearly increment of 5%, culminating in a substantial expenditure over time. The speaker acknowledges that actual spending might be higher due to the emotional significance of making a house a home.
• 11:30 - 15:00: Financial Freedom and Decision-Making The chapter discusses the concept of financial freedom with a focus on real estate investments. It presents a case study where the total cost of a house amounts to 2.3 crore. The key message is that, unlike depreciating assets like cars or furniture, a house appreciates in value over time, making it a potentially profitable long-term investment. The chapter encourages readers to understand that ownership is only achieved once the home loan is fully repaid, highlighting the importance of making informed financial decisions regarding homeownership.

Rent vs Buy a House: The 4-2-0 Rule Transcription

• 00:00 - 00:30 [Music] this house costs 1 CR to buy today but I could rent it for just 30,000 a month [Music] special so how do I decide between the two this Excel sheet has the exact plan you need to figure out your rent versus Emi debate so first we're going to understand the economics of buying a house then we'll move to rent and what it means to rent for the next decade or
• 00:30 - 01:00 two decades then compare which one was actually more profitable let's assume it's a 1 CR house the down payment is 20 lakh rupees this is what you are paying from your pocket to buy this house the loan amount is obviously 80 lakh rupees remember everything you see in yellow is editable so this will be different for you but let's understand with this example first the loan interest is 9% the loan tenure is 20 years so your loan
• 01:00 - 01:30 for 80 lakh Rupees is going to last for 20 years this brings us to our Emi of 72,000 364 rupees so what does your house cost all your friends will say your house cost is the loan 80 LHS plus 20 lakhs that you put in 1 CR rupes and that's the value of your house in the future when it becomes 2 cror they'll sayble but this is wrong here's how you actually C calculate what The house's
• 01:30 - 02:00 cost is first is the cost 1 CR then you add on top of this all the interest that you paid to the bank because that is also a cost you're paying over 20 years and that's also compounding not for you for the bank so if you add that your total cost becomes 1.73 cror that you're repaying to the bank add the 20 lakhs and it's increased a bit more but that's not all you also have Associated owner related expenses when you own a home you
• 02:00 - 02:30 will spend on things an owner spends on which means you'll spend on annual property tax this is about 50,000 rupes for this property and it increases by about 5% every year you add that up for 20 years then you have Society maintenance this is 50,000 Rupees and increases about 5% a year this becomes 16.5 lakhs over the next 20 years then you have house maintenance n
• 02:30 - 03:00 you will constantly have to maintain the house so that's about let's say 10,000 rupes per year I'm taking a really low amount by the way and putting 5% increment on it it's about 3 and half lakh rupees I do think though people can spend a much large amount on their house because it's their house it's the most emotional thing they'll ever buy and they will spend whatever they can to make their house a home but since it's
• 03:00 - 03:30 an Excel sheet let's take a small amount when you add all these three things up total cost of the house is 2.3 cror I want you to pause here and think about this the house isn't yours until you've repaid the entire house loan but the beauty of owning a home is that it's not like a car or a dining table or whatever spare sneakers which wears out it goes up in value so the value of this house has gone up to an incredible amount and we'll calculate
• 03:30 - 04:00 that and we have a net gain but we'll have to compare this with the renter first let's see how much rent you've paid remember 30,000 rupees every month at a 10% yearly increase for 20 years I know that's a lot of numbers that's why we have an Excel sheet so look at this column over here column C you can see 30 30,000 30,000 and then suddenly in year two it becomes 33,000 because plus 10% then I go to year three it becomes 36,000 so on and so forth all the way
• 04:00 - 04:30 down it keeps going up and you're eventually paying almost 1.8 lakh rupees in rent and when I add all this rent up it becomes 2.04 rupees wow so maybe our mom and dad were right you're paying so much of rent you might as well buy a house You' paid 2 cror and just rent over the last 20 years but there's one more aspect over here we also have an Sip and the Sip was
• 04:30 - 05:00 calculated on this person's Emi minus this person's rent whatever is the differential so that both of them are having the same outflow of a certain amount in this case it's 42,000 R so 4236481372 a fair comparison then let's go to year
• 05:00 - 05:30 three the Sip has reduced even more in year four even more so you see every year the Sip is not increasing which it should it's actually decreasing because we want to make a fair comparison between buying and renting the place and by say what month 120 the Sip becomes zero month 121 actually becomes completely zero the rent he's paying is equal to this person's Emi so now now nothing's
• 05:30 - 06:00 happening so he's only invested for 120 months anyway this amount this sip grows over the next 20 years and that value of your future sip Investments is 1.57 crores not bad we can also see that there was an original lump suum remember the 18 something lakhs we invested in the first year that has now become 1.26 CR rupees so the net gain from renting is 79 l36 6,000 provided he invests that
• 06:00 - 06:30 differential amount over the next 20 years wow if rent made so much money I can't wait to see how much the capital appreciation happened on an owned house we can see we have years and we have Emi the Emi 72,000 rupees comparable both are spending the same amount one is investing one is investing in the house most of your Emi when you pay to buy a house goes towards the interest of the bank not not in equity of your home so
• 06:30 - 07:00 just look at this 83% 80% 80% 79% for many many years up till year five every single payment that you're making up to 75% even in year five is going towards interest payment it's only about 12 years and 7 months where it becomes 50% interest 50% principle in other words in the first 10 years most of the money went so that the lender could profit not that you could own the home so the question is do you really own the home
• 07:00 - 07:30 even after 10 years of Emi so the value of the house over 20 years compounds and grows to a grand total of 2.32 crores the net gain is 2 lakh rupees this means clearly in this situation the rent person actually made more money all of these Yellow Boxes will change so your answer will be slightly different in most cases unless you're putting a really large down
• 07:30 - 08:00 payment or you're not investing this money the numbers will roughly always have the renter to win when you were 10 years old the best part of your day was going out playing with your friends until you got tired and then you played a little more and then it became 12:00 mom said and you continue to play and you played some more then you played some hide and seek then you laughed looked up at the sky until it was evening and you came back home tired mom gave you food
• 08:00 - 08:30 and you slept then in class 10 and 11 and 12 you had to follow a schedule you had to get up on time do revision go to the school do test prep study a little more you could not go out the entire day in study and your life became restricted to that one thing which was your board exam Class 12 is like taking a home loan you were no longer free like you were when you were 10 years old when you could just go out into the Sun and play the
• 08:30 - 09:00 entire day without any worry but in class 12 you were compartmentalized into a schedule and you are now sort of working for this other version of yourself which had to get 99% or whatnot in class 12 if you take a really large loan then you'll be forced to be in class 12 forever preparing for your boards forever go to work forever to pay that Emi you can't take a break because if you do you won't be able to own that house that you're trying to pay for you
• 09:00 - 09:30 must optimize for freedom and experiences and no one should force you to do anything you must have options maybe that's what freedom is for adults and YouTube is full of all these videos talking about 5% Rule and 8.75% Rule proving one of the two your job is not to look at a rule and make a decision your job is to understand this Excel sheet deeply because a rule can't actually tell you what to do with your
• 09:30 - 10:00 life so that's why we talked about the 420 rule everyone wants to have a formula there's no such thing Char BC we did this to trick you so that you feel that there's a formula but actually there's none I want you to fill this up read it understand it shut down your laptop then sleep get up the next morning and your heart will tell you whether you should buy or whether you should rent for 18th March you can
• 10:00 - 10:30 experience all of this so head on to the app complete the missions and earn your free pass