May 2, 2010

Rent Vs Buy Today

Mind The Gap

Marcus & Millichap just completed a study and found the gap between monthly rents and mortgage payments are at their lowest level in 20 years. Years of declining prices and mortgage rates have created a buyer's market. In 45 metro areas studied, Marcus & Millichap found the 
difference between mortgage payment on a median-priced home and the rental option is down to $256. The smallest gap since 1993 as price to rent ratios come down to their historical mean, except in the priciest markets.
Rent Vs Buy Comparisons

The Real Deal

The rent vs. buy comparison is a lot like any financial planning, the outcome is a guess on the future direction of rents, equity growth and carrying costs. In other words, predicting multiple variables in an uncertain future. A rent or buy comparison can never secure the best financial move, but it can point the buyer to how future equity increases and cost cap assumptions work in tandem to cover the costs of owning: including the down payment, property taxes, insurance and maintenance.

The Rule Of Twenty
A simple way to look at the rent ratio is to take the purchase price and divide by the annual cost of renting a similar property. 20 is considered a useful rule of thumb. If you do the math, a ratio above 20 means you should at least consider renting. When the ratio is well below 20, the case for buying becomes a lot stronger. Of course, these are simplified tools to help you make a decision. you should never use the online buy Vs rent calculators to rest your decision on. Best to use them to understand what cost parameters and equity assumptions you need to make it work. Think of these financial variables as levers and toggle them to tease out an understanding of how your assumptions work
impact the purchase decision. 

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