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The Rent v. Buy Ratio: 4 Crucial Things to Consider

 

rent vs buy

The rent vs. buy ratio is a helpful heuristic for first time home buyers who are trying to decide between moving into a new home and living in an apartment. It's a nice tool for guiding the decision-making process, but there are several crucial factors to consider. Here are a few things to keep in mind as you make your decision.

The Basics of the Ratio

The rent vs. buy ratio is a simple way to help people decide whether to purchase property or to rent it instead. The basic premise is to compare the costs of two similar properties (condo, apartment, house, etc.): one for sale and one for rent. Find the ratio by dividing the sale price of the for-sale property, combined with all one-time costs such as closing costs and down payments, and recurring costs such as insurance and taxes, by the annual rent for the property that is for rent, including deposits and insurance.

The resulting number is the rent vs. buy ratio. A number above 20 generally indicates the monthly costs of owning the property will exceed the cost to rent. For instance: A $200,000 home would be compared to an apartment renting for $1,000 per month. The rent vs. buy ratio is 16.7. In this case it seems it would be more economical to buy.

But there are other factors to consider as well.

Personal Preferences

The Rent v Buy Ratio 4 Crucial Things to Consider resized 600

In the grand scheme of figuring out the most efficient use of your money, the rent vs buy ratio is certainly helpful. It puts the annual cost into perspective, but that doesn't necessarily mean that home ownership is right for you. Even if the rent vs. buy ratio is a 14, renting still may still be your best bet.

For example, renting comes with certain perks. The 24-hour on-call maintenance staff, off-street parking, and the ability to write one monthly check for rent as opposed mortgage, insurance and tax payments each month are certainly appealing to many renters. Many apartment dwellers also enjoy the camaraderie that comes with living in a building with a dozen other people. It's a great way to make friends, and you'll never feel alone.

On the other hand, it really is like a box of chocolates -- you never know what you're gonna get. Living that close to your neighbors can be a nightmare. Homeowners usually enjoy having more control than renters do as far as service providers for electric and cable providers. Apartment complexes are often more limited in the selection of ISPs available, but you'll probably still find Verizon high-speed Internet available in most major markets.

Market Stability and How Long You Plan to Stick Around

If the rent vs buy ratio is favorable now, you're probably tempted to go ahead and buy. Before you do that, really look at your current circumstances. Do you see yourself staying where you are for at least seven years? What does your job look like? Will you need to find different work during that time? Does your family have children, or plan to within the next several years? Look at the local school districts. Are you comfortable sending any future children there?

These are the questions you'll in inevitably ask yourself over the next decade or so. Plan ahead and ask them now. If it seems you'll be making moves during that time, it's probably not in your best interests to buy any property now.

However, if the market is stable and you're confident you'll be able to sell quickly and efficiently when the time comes, you may be singing a different tune. As is any investment, buying a home can be a bit of a gamble. Closely analyze your current financial standing, and the projection you see it going over the course of the next several years before diving into such a major decision.

Tax Deductibility Perks

While they usually aren't large enough to be stand-alone reasons for buying a home, the tax deductions and credits that come from owning a home can certainly be a nice perk come tax season. Homeowners can deduct property taxes and mortgage interest from their income taxes when they are filing for both federal and state income taxes. This factor isn't accounted for in the rent vs. own index, but it should be taken into consideration.

Whether you're looking to move across town or across the world, it's important to consider all aspects of the situation before diving in. Buying a home is certainly a great investment, but it's also a big commitment. Anyone considering it should do so under the right circumstances, and after considering every aspect of the scenario. Have you ever used the rent v. buy ratio to make a home ownership decision? Tell your story in the comments below. 

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Author Bio:

Joe Fortunato is a freelance writer from Tampa, Florida. He enjoys learning about new subjects, following his Baltimore Orioles, and traveling the country for fishing. You can find Joe on Twitter at @joey_fort.

Image via Flickr by Ken Shuman

Comments

Valuable information and excellent design you got here! I would like to thank you for sharing your thoughts and time into the stuff you post!! Thumbs up
Posted @ Monday, October 21, 2013 6:41 AM by Learn To Dive Melbourne
Ratios of many scenarios are important and are needed to understand in order to make a better decision, should I buy or Rent and if I rent, for how long? However, in many case, not all, the RENTER is NOT itemizing deductions, as they have none. In addition, most renters, pay into their deductions, above their # of dependents, such as claiming yourself ONLY or ONE deduction in payroll, so they can get back money come April 15, the following year. IF you itemize deductions as a home owner, you usually can claim up to 4 dependents, as a result, KEEP more money monthly. As a result, the choice of owning a home, becomes more factorial and mathematically realistic to GO BUY A HOME......even if you use FHA or FHA 203k mortgage programs, to get a low cost home, it usually pays to OWN a home, versus renting. However, if your planning to relocate a job, within 1 to 2 years, renting may be your best choice. as in a Fingerprint, everyone has a different rationale, but mathematically, owning a home makes more sense. But not a BIG house with a BIG mortgage. Thanks for your comments on this blog, your info is always beneficial.
Posted @ Monday, October 21, 2013 2:54 PM by Sam Piccione
I have been one to advise that there are several great benefits to owning a home over renting, and that it is ultimately what you should look to achieve. That being said, I concede that you have made some very solid points when it comes to weighting the rent vs. buy ratio. Certainly, you should look ahead and be sure that you are in a place you can live comfortably for the better part of a decade before making a decision to buy. At least under most circumstances, there are some outlier situations.
Posted @ Tuesday, November 19, 2013 12:06 PM by Stephen in Orlando
Whoa, slow down Buckwheat! 
If you are just getting by with paying $750./mo. for rent, don't think for a moment you can skate by with a $550./mo. mortgage. Even if that includes P&I, taxes and insurance, you have a long way to go to even up on your quality of living - a long, long way. 
You don't happen to have a lawn mower around your apartment, do you?  
Do you like to decorate for the holidays? There's a big difference between dressing up a few windows, and stringing lights around your house - the time and energy, (not yours, the power company's). You'll probably be trimming trees both winter and summer; oh, and don't forget the ladder.  
Will you give your trash to the city; and will they give you water and sewerage? Ever wonder how long a roof lasts; or how much it cost to fill a tank of propane; I know, apartment dwellers rarely grill. Yes, a 50 gallon tank costs about 10X a five gallon tank; but at least the delivery is free, usually. Just make sure your credit card has a zero balance when the oil tank goes empty. 
I could go on for hours, but you get my point. 
Posted @ Thursday, April 17, 2014 4:33 PM by Bob Wilson
All great points when considering the rent vs buy decision, Bob. Just like renting isn't for everyone ... neither is owning a home. Thanks for stopping by and chatting. Oh...I'd suggest not using a credit card to pay for your propane, but that's just me. 
Dan
Posted @ Friday, April 18, 2014 6:49 AM by Dan Moyle
In The whole world people always eager to buy their own home because it is the best idea that we can live in a better way that do not need to change the home time to time. but the matter is what is your financial condition and what is your status you live. Your post is so great and you describes it in a great detail.
Posted @ Monday, June 23, 2014 4:49 AM by Jasmine
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