To Rent Or To Buy, That Is The Question.

January 28th, 2011

To determine whether it is more financially sound to rent or buy economists generally use a rule of thumb: divide the purchase price of a home by the annual rent of a similar property. Anything over a 15, and you should rent because it will cost you less over a period of time. Below 15? Start looking for homes. This takes into account many variables like tax breaks, maintenance, etc.

Here is an analysis on some cities:

Manhattan
Median home price: $1.31 million
Median annual rent: $42,370
Price-to-rent ratio: 31
so rent!

Miami
Median home price: $140,200
Median annual rent: $22,460
Price-to-rent ratio: 6
buy!

Kansas City
Median home price: $213,900
Median annual rent: $10,300
Price-to-rent ratio: 21
rent.

San Francisco
Median home price: $763,400
Median annual rent: $37,200
Price-to-rent ratio: 21
rent.

But you have to go home by home to get the most accurate idea, as opposed to relying on a vague index. The vague overall city index is interesting, but to really make a decision try applying the rule of thumb house by house.

I rent a home in the Washington DC area, and the rent where I live is $3200/month, which is $38,000/year. My neighbor just sold a similar house for $600,000. So the resulting 15.78 says its a pretty close value, rent or buy. You should try doing your formula for the place you live.

But you also need to consider your financial status. If you have above average income, or are wealthy, just because a city’s median figures suggest you may want to rent does not mean that you will. You have to take into account how long you will be in the area, predicted demographic growth, possible rent inflation, your own assets, maintenance, your frequency and likelihood of moving, school districts, neighbors, etc. As with anything, give it a lot of thought and analysis before making a decision.

Click here to read a good article on Zillow about renting versus buying. And click here for a rent-versus-buy calculator to play with.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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