Rent or Buy Ratios

1 Reply

So a lot of people looking for housing (our potential clients) might wonder if it's better to rent or to buy in their own personal case.  There are a couple of guidelines I've found on the internet that some may use which both revolve around price to rent index (or vice versa).

One says if annual rent is >9%, you should buy instead of rent.

Another one says if purchase price is 15 times or less the monthly rent, it's better to buy.

I've incorporated this into a table along with our own % rule metric investors look at.

I'm using purchase price of $100k for easy of figuring.  First four rows are using variations of the 1% rule going from 0.8% to 1.5%.

The dark orange group says if the rent % is greater than 9%, buy.  If it's 6% borderline.  If it's 3%, definitely rent.

The lighter orange is based off of the fifth column which is using the 15-to-1 ratio.  (Purchase price / annual rent).

In our area, most homes here fall into the "Buy" category for home purchasers.

So rents are high compared to asking price.  What does this say about the overall housing market for my area?

Is it better to Rent or Buy (Primary Residence)?

How many times have you heard somebody say some version of this statement: “We made 100,000 on the sale of our house and we only lived there for five years. Can you imagine if we continued to rent the apartment we used to live in all that time? We would have lost all that money…

What they really mean is that they sold the house for $100k more than they paid for it.

Most of us here on BiggerPockets chime in to help new investors, so I put this post together hoping to help them on this topic.

I have long been an advocate of renting your primary residence vs. owning it. A lot of years ago, I wrote a technical paper on this topic (long before there were blogs or MicroSoft Word). It turns out I was right. Well in most circumstances, anyway.

For the record, I own two homes (I paid cash for the both).

Of course there are several financial factors that are involved when making a decision like this.

Home price

How long will we live there?

Down payment amount

Future economic factors

Maintenance costs

And that concept call Opportunity Cost

I ran across this Post in the New York Times today and I’ve spent two hours analyzing it.

NEVER HAVE I SEEN SUCH A CONCISE WAY TO REVIEW THIS TOPIC.

It confirms what I have what I have been saying for many years.

Please take a look:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=1

Here’s my synopsis: We are all involved in real estate because we know how to, or we are trying to learn how to, generate a secure and attractive rate of return on our money.

I regularly double or triple my money or more buying and selling vacant land. Usually in less than 30 days (or I don’t do buy in the first place).

The input in the post only allows for a 20% annual return. If it went any higher the argument for renting would become even stronger.

The opportunity cost of tying up all that cash, time & energy is almost never worth it.

One of the only times it makes since to finance your primary residence is when you know you are buying a property substantially under market, and reselling it. Some folks call that flipping. Or if you buy a duplex, live in one side, and work the deal so the tenant is paying all or most of the mortgage (some circumstance like that).

Buying a rental house (or 20) the right way, and renting them out forever is one of the best passive business models I’ve ever experienced. This discussion is only about your primary residence.

And that’s just half of the decision. The other half is location. Every apartment or townhouse I’ve ever lived in centered around a ton of fun. Every house I’ve lived in was in the quiet suburbs where we did chores on Sunday.

A few years ago, I sold my primary residence and paid cash for a townhouse in Old Town Scottsdale, Arizona smack in the middle of all the fun. We completely renovated it and I can’t imagine living anywhere else.

It was one of the best financial and lifestyle decisions I’ve ever made.

Renting is almost always better, when you consider every aspect.

@Dan D.

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