Rent vs buy formula

[CAwireman]

I searched the archives and then the internet for a formula to determine if the property should be rented or purchased.

I didn’t find anything in the Piggington but found this:

profitability = rental rate + appreciation rate – interest cost

When profitability is positive, you should buy. When it is negative, you are better off renting.

Can anyone comment on this? Is there a more refined formula available?

Pleased post any other recommendations you might have.

[lindismith]

The Donald has few comphrensive ones:

http://www.trumpmortgage.com/purchase/calculators.php

[lindismith]

At the bottom of the page he has a link to a rent vs. buy calculator. It used to tell me it was better to rent. I don’t know if it still has that functionality.

[powayseller]

If the house costs less than 8-12x annual rent, then buy. We’re a long way from that. I will have the charts on my website.

[CAwireman]

Thanks Lindi and PS.

Looking at the Trump site, I think a spreadsheet approach might be best.

Will look for your website chart PS when its ready.

[(former)FormerSanDiegan]

cawireman –

The problem with your initial formula is that the appreciation rate fluctuates wildly in the SD market.

At the last bottom of the market (~96) properties could be purchased with 10% down and rented out for about break-even cash flow. The 8-12x factor that powayseller pointed out, depends on interest rates. With high rates (e.g. 10-12%) then you would expect around 8x rent to make it cash flow.
With low rates (e.g. 6-7%) wou would expect around 12x to make it cash flow.

[sdsundevil]

In 1996 …

.. you could easily buy a condo/house and beat rent. 2 BR/2 BA condos were around 100-120K. At 7%, PITI was less that the equivalent rent of $1000+. Of course, this was dependant on location, etc, but these were the numbers I looked at. On top of all of this, you were getting the interest deduction, so it was pretty much just plain silly to rent if you had down payment money, etc.

This phenomenon will happen again, but it may be 20 years from now. Rents will increase to catch up with the increased property values, and most people agree that property values are due for some sort of correction. It’s cyclical and simply the nature of things.

Renting seems to be the obvious correct choice in the short term right now. Just remember that your rent is 99.9% likely to increase every time you renew your lease. This is probably the peak time for renting due to the same low interest rates that made the current boom possible.

Unfortunately, now investors need to make higher payments if they are on an adjustable loan, so they will pass the costs on to their renters. Your rent may go up $50/month, and you’ll be forced to decide if that’s worth moving out over. The collapse in prices that many people like to predict on this board seems very unlikely. It may happen in certain areas, but it should be tempered as a whole. Areas that were desirable to live in will remain so, and outlying areas where people speculated will be hit the hardest.

[sdrealtor]

I rented a beautiful 2BR/2BA condo in Rancho bernardo in 1996 for $800 per month. This was the bottom of the market before things picked up. They were one of the early condo conversion and were selling for about $130,000 in 1997. At the time HOA fees were about $150/month and a 5/1 ARM with 700+ fico scores was around 8%. There was no piggyback mortgages available and you had to pay PMI which ran about $125/month. Do the math and tell me this was breakeven.

[lendingbubblecontinues]

Let’s see 3 lease renewals in the last four years and my rent has gone up….never. I feel so lucky to be among the 0.1% 😉

Don’t forget—the “outlying areas where people speculated” were purchased and financed by people who live in “areas that were desirable to live in”.

This is a zero-sum game and I know LOTS of people who live in “desirable” areas that took bus trips to Arizona to invest within the last year and a half…YEE-HA!!!!

[sdrealtor]

Interesting friends. I dont know anyone that got on a bus to AZ.

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