As an investment, historically (OK, not the last couple of years!), homes have appreciated much better than inflation (especially considering the leverage of financing, etc.)
Our neighbor bought her home for $73,000 in the 1970s and even with the recent crash in prices it is still worth $350,000 or more...and she owns it free and clear! If she had been renting all of that time, she would be paying probably $1800 per months and own...nothing.
But what about the cash flow economics of buying vs. renting?
When is a real estate market affordable for buyers? The short answer is "When it is less expensive to buy than rent."
There are 2 ways to look at this: the "Rent vs. Buy Ratio" and the actual rent cost vs. market rent.
Rent vs. Buy Ratio
Some real estate experts say that when a market price of a home is 15 times the annual rental cost, it is a good value. In recent years, that has certainly not been the case in many parts of the country, including Sonoma county, but it is now.
For example, if the the price point to buy a home is $300,000, divide that number by the annual rental cost for a similar home, say $20,000 ($1666 per month times 12 months), the rental ratio would be 15.
Actual Rent vs. Market Rent
This is a more accurate analysis, because it takes into account interest rates, which are historically low at this time.
We have recently helped several people buy homes who now pay less than a comparable home would rent for.
In one example, our clients had been paying $1650 per month for a typical home. They bought a better home in the same neighborhood and now pay $1600 per month in mortgage payments. (Of course they must also pay property taxes and insurance, but the mortgage and property tax income tax deductions more or less cover those costs. And part of that $1650 they pay every month goes toward paying down that mortgage.)
Here are 2 articles about cities with the current best and worst Rent To Buy ratios in the U.S.
If you are thinking about investing in rental real estate, the cities with the best Rent to Buy ratios offer some of the best opportunities. If you are considering this, please contact us. We have contacts in those areas and we also know some of the advantages and disadvantages of investing out-of-state. For example, Florida has some low prices right now, but some of the areas in Florida are very poor rental markets and the homeowner's insurance costs are prohibitive.
San Francisco has one of the worst Rent to Own ratios at 22. So, I consider Sonoma County a good buy at this time. It is in the greater San Francisco Bay Area, but is affordable.
10 U.S. Cities Where It's Cheaper To Buy Than Rent
If you're looking for a quick and easy calculation about whether you should finally buy your dream home, you'll likely want to first check out your area's price-to-rent ratio. (For a list of 10 U.S. cities where it's better to rent than buy click here.) Trulia, the online real estate data provider, recently took a look at this hand statistic in the 50 largest U.S. cities by population. By comparing the average purchase price of a 2-bedroom home --including mortgage fees and maintenance expenses -- with the average rental price for 2-bedroom apartments, condos, and townhouses, Trulia calculated the price-to-rent ratio to determine whether it is better to rent or buy in a particular city. Cities with low price-to-rent ratios (under 15) indicate that is cheaper to own a home than rent. "At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true," said Pete Flint, co-founder and CEO of Trulia. "Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result, these unattainable markets are so affordable it makes better financial sense to buy than rent."
The Top 10 Cities Where It's Cheaper To Rent Than
Buy A Home
If you're enamored of the age-old wisdom that renting a home is akin
to throwing your money away, think again.
A simple calculation called the price-to-rent ratio can give you an indication of
whether it's a better move to rent or buy a home. Trulia, the online real
estate data provider, evaluated the price-to-rent ratio in the 50 largest U.S. cities by population. By comparing the average purchase
price of a 2-bedroom home -- including mortgage fees and maintenance
expenses -- with the average rental price for 2 bedroom apartments,
condos, and townhouses, Truilia came up with a handy,
back-of-the-envelope way to gauge a local market.
Cities with price-to-rent ratios between 16 and 20 indicate that is
cheaper to rent than purchase a home, but certain financial situations
may make ownership a viable option. In cities with price-to-rent ratios
of 21 and above, it is much more expensive to buy than rent.
"It is not a surprise to see cities like New York and San Francisco
on the 'Rent' cities but I was surprised to see areas like Omaha,
Oklahoma City and Kansas City on our rental list, "said Pete Flint,
co-founder and CEO of Trulia. "We're not suggesting that it's unwise to
buy in these areas though -- just that it's significantly more expensive
than renting."
"In many of these cities, even though home buying is much more costly
than renting, prices are still much lower than they have been in a
long, long time," Flint added.
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