It’s time for yet another mortgage match-up, so without further ado, here’s a biggie: “Renting vs. buying a home.” Or a townhouse for that matter…
This is certainly an intimidating question, and one that’s difficult to sum up in one post, but I’ll do my best to cover as many pros and cons for each as possible (feel free to add more in the comments section!).
First and foremost, there is no universal yes or no answer to this question seeing that real estate is constantly in flux and extremely local.
These days, home prices are well off their recent (ridiculous) highs and mortgage rates continue to break new record lows, which is surely making many renters salivate at the notion of homeownership.
After all, if you can buy a home for $100,000 less than your future neighbor while also snagging a mortgage rate several percentage points better than theirs, you’d be in pretty good shape, right?
That’s the hope, barring a complete implosion on the economic and housing front.
But nothing is ever that easy, is it? With homeownership comes responsibility, while renting may be relatively carefree.
Rent vs. Buy Ratio
- There are several rent vs. buy ratios out there
- Which you can use to determine if a specific property is a good buy or not
- But purchasing real estate isn’t always just about the money
- People buy for many reasons so you don’t necessarily need to adhere to these stringent rules
Before we talk about the pros and cons of renting vs. buying, I wanted to touch on the many ways pundits determine if it’s more economical to buy than rent, and vice versa.
There are plenty of different rent vs. buy calculators out there, but most compare annual rents to asking prices to find out if it’s a good or bad time to buy.
For example, there is the “rent vs. buy rule of 15,” which says to multiply the annual rent of a comparable property by 15.
So if rent is $1,000 a month, it’s $12,000 annually. Multiple that number by 15 and you’ve got a suitable purchase price of $180,000.
Trulia uses a “price-to-rent ratio” that follow the same formula, whereby you take the list price and divide it by one year’s rent.
Using our prior example, $180,000 divided by $12,000 would be 15. Trulia considers ratios of 1-15 as more favorable to buy than rent, whereas numbers of 16+ favor renting.
Of course, hot cities like New York City and Los Angeles will typically have much higher ratios.
Read the full ARTICLE HERE.