Comments on: Buy or Rent: The One Number you Need to Look at

By: Andre

Andre — Tue, 10 Apr 2012 16:43:31 +0000

Due to an unexpected job transfer in 1997, I sold my first house after owning it for five years. After three months of having the house listed, I got exactly one offer at 98% of list price. After all closing costs and repairs and improvements over the five years, I broke even (but, of course, I lived in the place for five years). I sold the place at a Price/Annual Rent ratio of 9.

I happily rented a series of nice apartments for the next fourteen years (but spent $126K in rent!). The dramatic drop in housing prices over the past few years enticed me back into the idea of home ownership, and in Sep. 2011 I purchased a nice 2000 sq ft 3/2/2 on a Florida golf course, four miles from the Atlantic Ocean, 1.5 miles from my job at a Price/Annual Rent ratio of a whopping 5!

By: Jamal

Jamal — Thu, 28 Apr 2011 07:31:32 +0000

Guys, the number one reason to buy RE as an investment is to take advantage of leverage. No other asset class allows for the utilization of leverage by the common investor. 20% down = 5 to 1 leverage; 10% down = 10 to 1 leverage; 5% down = 20 to 1 leverage. That means for every 1% of home value increase, you return 20% on your invested capital.

Of course this works the same way when prices fall, so it’s important to properly understand and assess the risk involved with the levered position.

Of course, this doesn’t take into account the other reasons to own your home (security, customization, pride of ownership, etc), but leverage is really the main reason to invest in real estate.

By: Leah

Leah — Tue, 12 Apr 2011 15:24:11 +0000

Salman,

That is great that you took advantage of renting for a while to save up! Smart move. The only problem with buying now is that you have to be an A+++++++ buyer. Anyone with even the slightest blemish on their credit report may find themselves in a jam. After the whole sub prime fiasco, it became a little more difficult to obtain a mortgage. For those people, now is an optimum time to rent and fix up their credit!

By: Tomas

Tomas — Sat, 02 Apr 2011 22:59:49 +0000

I live in CA. I did look at the price-rent ratio, so… I’m renting. Even when I could probably buy a (small) place with cash.

By: Salman Khan

Salman Khan — Thu, 31 Mar 2011 03:43:23 +0000

I agree with you. I have been a renter for more than 10 years and have saved a ton of money. However, this is the time to buy. The interest rates are low and house prices are a bit more reasonable.

By: Delaware Rental Communities

Delaware Rental Communities — Wed, 30 Mar 2011 17:30:42 +0000

I think that renting was commonly thought of as “throwing money away” in the past; however, the volatile state of our economy is pushing more people to rent. Even some homeowners are packing up and moving into rental properties in order to save some money. The fact that they can save money will ensure that they can become homeowners again when the markets rebound. I think more people should consider this option instead of staying in a house they can’t afford. Most times this causes foreclosure and can actually decrease your chances of homeownership in the future.

Leah

By: Natalie

Natalie — Fri, 16 Jul 2010 03:18:32 +0000

I don’t look at the rent ratio per se, but I do look at whether I can cover my mortgage with the going rent. I don’t want to be in a situation where I can’t afford to move out of my house.

I live in Las Vegas and home prices have dropped by as much at 75%. I just purchased a home for $53,000 that sold for about $200,000 three years ago. It’s a very nice 3 bed on .08 acres and didn’t need much more than paint and carpets.

Prices here have pretty much bottomed out, but are still slowly creeping down. I think it is going to be several years before we can profit by selling. However, with a mortgage payment of less than $400 and neighborhood rents going for $850 it still makes sense to buy this property rather than continuing to rent. In fact, so many investors are hip to this fact that almost every house listed has multiple competing cash offers. There are now “investment tours” where foreign investors ride on buses to view properties for sale. It’s a great opportunity for a first time home buyer to get into a home at the bottom of the market.

However, that said, there is a lot more to owning a home than just the mortgage payment. Liability, repairs and maintenance will eat up your money, free time and peace of mind unless you love working on your house. It’s not for everyone.

By: Honey

Honey — Tue, 06 Jul 2010 18:50:48 +0000

Most houses built in the 80s or after is so shoddily constructed that people will pay off their houses right before they are condemned. My boyfriend and I are renting a condo right now (built in 1983) and it is SO POORLY BUILT that I feel sorry for anyone in the complex that owns one – even the owner/landlord of ours is making things worse by deferring some fairly significant maintenance/replacement projects (and to make matters worse for them, we are renting for less than the cost of the mortgage because she was so desperate to get a renter in this economy – we live in Phoenix where the housing market collapsed so completely she probably couldn’t have sold it at all).

By: bbatson

bbatson — Wed, 31 Mar 2010 18:32:24 +0000

Great post, G.E.! I’ve never heard of this ratio but it makes a lot of sense. It’s a good nugget of information for realtors to carry around with them for markets that are especially deflated.

I just bought a house in Tampa/St. Pete so good to see the area has come down off it’s manic upswing.

By: Seth

Seth — Fri, 19 Mar 2010 18:19:24 +0000

Quick math in my neighborhood in Brooklyn pushes the ratio to high 20s and above if you include fees.