After nearly twenty years of homeownership, I’ve spent the past ten months renting an apartment. I like it. There are pros and cons to renting a place, just as there are pros and cons to owning a home.
At first I thought that buying a home would also be a smart financial decision. The more research I do, however, the more I realize that the idea of homeownership as a magical path to wealth is a marketing ploy of the real estate industry. In fact, home prices (like gold prices) generally barely keep pace with inflation.
There’s no question that buying a house makes sense for some folks, but mainly for non-financial reasons. Owning a home gives you stability and freedom. But financially, homeownership is not always the best bet.
The annual cost of owning a home — taxes, interest, insurance, maintenance, HOA fees — is often greater than the cost of renting. Sometimes significantly greater.
Assuming you want to make a purely financial decision whether to rent or buy, how do you begin? There are a couple of ways to stay objective.
One way to tell whether it’s better to rent or buy is by checking the price-to-rent ratio. This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t tough. All you do is:
- Find two similar houses (or condos or apartments), one for sale and one for rent.
- Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.
Say, for example, you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block renting for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.
But what does this number mean? A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting. That’s a little opaque, but what this means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.
During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities).
Another way to gauge the cost of housing is to compare it to your family’s income. Most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)
Discussions of homeownership should be grounded in reality. Buying a home isn’t some magical financial panacea. You can waste money buying a home. If you want to buy a home, do so. But don’t let anyone persuade you that you’re throwing your money away by renting.
For information on renting an apartment in Glen Allen, VA at The Gardens, contact us.
Time – Business & Money