Housing

To Rent or to Buy

That is the Question!

The Lowest Price to Rent Ratio Markets in the US at the End of 2018

Other than your personal situation, the price to rent ratio is the most important factor which you should investigate when deciding whether to buy a home or rent a place to live in. A low price to rent ratio market means that it is financially sound to buy rather than to rent.

DYI:  The reason for purchasing at a low price to rent ratio as this will alleviate on a total basis your cost of insurance, taxes, and the ever present maintenance.  Simply put this will place the odds – with all other potentialities being equal – that you will not over pay.

     

Conversely when renting at a high price to rent ratio your landlord – whether they know or don’t – is actually on a total basis of cost subsidizing his tenet.  As much as the owner would like to increase the rent to overcome those costs there is a limit to increases relative to prevailing incomes of his tenets.  If the rent increases are above the prevailing wages of his customer base when the property is between tenets it will take longer and longer to place a tenet thus dropping the overall profit [or even creating a loss].

Basically, the price to rent ratio is a real estate metric which tells homebuyers, renters, and real estate investors (i.e., landlords) whether property prices or rental rates are relatively higher in a certain location. The price to rent ratio is easy to calculate: you just have to divide the average property price in your local housing market by the average annual rent.

Price to Rent Ratio Formula:

Price to Rent Ratio = Average Property Price/Average Annual RentPrice to Rent Ratio = $427,700/($1,440 x 12)Price to Rent Ratio = 25

 Low price to rent ratio, i.e., 15 or below: 

Price to rent ratio of 15 or below is considered low. For renters and homebuyers, this means that it is relatively cheaper to buy a property in a certain market rather than to rent there. So, if you have the necessary cash for a down payment and have figured out the rest of your financing in such a market, go ahead and buy a home.

 Moderate price to rent ratio, i.e., between 16 and 20: 

If you live in a location where the price to rent ratio is between 16 and 20, it most probably is wiser – financially speaking – to rent a property rather than to buy a home. This is what most real estate professionals recommend anyway.

DYI:  The real estate professional the author from Rentberry is referring to is someone who specializes in rental properties.  Your real estate agent does NOT meet those criteria.  If you ask an agent when the best time to buy or sell is always now especially through the agent doing the talking as their income is dependent upon commissions.  This is not a slam against agents; you need to know their motivation then use them for your benefit.  They are very helpful once you find a property that meets your criteria in weaving you through the task of purchasing.

High price to rent ratio, i.e., 21 or above: 

High price to rent ratio markets are those where this number equals or exceeds 21. In such a place, it makes most financial sense to rent and not to buy as properties are just too expensive compared to the rental rates.

DYI:  I’ve seen in the past such as the Eastern Seaboard and crazy town California with price to rent above 35!  Once at that level any economic downturn of consequence any property bought at that level, on an after inflationary basis, will be at a loss.  If due to a job loss and you have to relocate hence attempt to sell the property default then becomes a real possibility.  Or attempting to rent out the property just to break even is very difficult in recession let alone just getting a qualified tenet.  Over paying especially your largest dollar purchase for most of us mere mortal middle class folks make will have severe consequences to your economic future.

On a personal financial basis the well thought out rule of thumb is to never buy a property greater than 2 times your income.  An individual or couple with a combined income of $50,000 per year should not purchase a house greater than $100,000.  I know right then and there you will tell me I’m out to lunch as most areas in the country are much higher.  Self made millionaires will tell you that the size of one’s net worth are inversely proportional to the mortgage size that is held.  Bigger the mortgage; smaller the net worth.  If your local area housing is less than 15 times rent and you limit your search to properties less than 2 times income the property will be a joy instead of an endless money pit!

 DYI