Determining price-to-rent ratio. Is it better to buy or rent?
Sunday, 30 August 2009 05:28
I came across this WSJ article,(Better to buy or rent? online.wsj.com/article...69691.html ) that basically gives you something concrete and practical to work with when deciding whether to buy or rent a property. The price-to-rent calculation is simple and I have outlined it in steps below.
Step 1. Determine your price point for a property (example:say you are interested in buying a home that costs $175,000 in the midwest)--$175,000
Step 2. Determine annual rent for a property (example: say you currently rent at $600 a month so 12 months x $600 is $7200 annual rent that you pay)--$7200
Step 3. Divide your answer from step 1 by your answer found in step 2 ($175,000/$7200=24.3)
Step 4. There are 3 decision criteria outcomes that centers around the ratio 20:
If your answer in Step 3 is GREATER THAN 20, then do not buy because it is better to rent.
If your answer in Step 3 is LESS THAN 15, then you are definitely better off and safe to buy than to rent.
If your answer is between 15 and 20, it is a close call and you should take a careful look at what prices (both buying a home and renting a property) are doing in your area that may adjust your calculations one way or the other.
In this particular example, the price-to-rent ratio is 24.3, which means that it is better to rent at $7200 per year ($600 per month) than to buy a home priced at $175,000. This is how the math works out in this particular example so base your decision on concrete reality and numbers rather than emotions and whims. Avoid buying under pressure. Hope this is useful.