I did some research on what kind of calculations would help a person decide whether to rent or buy a home. People need to move for many reasons for example: career changes, educational pursuits, proximity to family. All of these are perfect reasons why a person might switch area codes and the next question depending on your finances is if one should rent or buy? Obviously most of you think that if you have the money and your finances are in order that the reasonable thing would be to buy, but the smart thing to do is to research first. I have listed two tests below to guide you:
Test 1
Step One: Pull several multiple listing statistics from the local Realtor on the specific town.
Step Two: Find out the average annual appreciation over the past ten years for the town
Step Three: Find the average days on market in the town.
For example, if the houses are going up 3% a year and it takes them 6 months to sell, you probably don’t want to buy in that area because you’ll probably lose money and have a hard time selling. Therefore you will only consider renting if you had to move to that town. If house values go up 15% a year and sell in a couple weeks, then you should buy because you will make money in about four years of living in the area.
Test 2
-Multiply expected annual rent times 15
-If purchase price is more than the 15 X rent expense- Rent
-If purchase price of home is less than 15 X rent expense – Buy
Consider what is the average rent for the town as well as what the median purchase prices are for homes in the town. The test most real estate experts use is if the house is 15 times more than the annual rent then renting is more economical.
Now you have two approaches to apply before you take the major step of buying or renting in a specific city or town. Obviously there are many other variables to consider but now you are a step closer to deciding if it’s right to become a home owner in a town you may not know anything about.
Saving $$$ in real estate is another way to watch your money.
This is great. I don't own a home, and given the market, and other economic uncertainties, its not something I'm eager to jump into. Plus, I have witnessed many people loose their homes which is very devastating. I assume this applies only to a single family home? Do you know of any tools that would help with a multi-family unit? Assuming one unit is rented, which can pay for the mortgage at least part, it would be something that could be suitable for those who fall on the rent side (LOL me). Keep them coming, good information and lots of food for thought.
@Yaz-The test is for all types of property, it is information that one can use to gauge if the town your looking to buy is good in terms of resale(test 1) and also to see if the home price is way over what the rent market calls for in a specific area.(test 2) Multi-family units are a great way to help a home buyer with mortgage assistance after the fact. Which is gravy income, and it's always a good thing if it's consistent. These test are based on before you purchase or rent.
Hope that helped shed some light on your questions, great comment keep them coming.
Thanks for clarifying – this is very helpful. Keep them coming! I'm looking to invest this year and will most likely be in property and hopefully take advantage of some great foreclosure properties.
You are definitely correct in stating that we all have to do our homework in order to make better decisions for our lives. Can you please clarify something that I have heard which is that if you rent you are throwing your money out the window instead of investing it on property? Ingrid
@Ingrid-In an Ideal world everybody could be a home owner and be better off in the future. But unfortunately many people can not qualify to buy a home due to credit issues, cash flow concerns, or just want the freedom to move around and not be tied down to a specific residence. If a job opportunity opens up in California maybe that person can pick up and go if they only have to break a lease. So renting does offer a purpose for many individuals, with the tax rate for homeowners in NJ being almost as much as a mortgage payment many people have a hard time making ends meet in those highly taxed states. So renting is another option instead of living with relatives. Thanks for the comment.