When Is It Better To Rent Than To Buy?

If you're trying to decide whether to rent a home or buy one, here's a useful back-of-the-envelope calculation:

1. Take the price of a home you'd be likely to buy.

2. Divide the price by 20.

3. Compare the result to the annual rent on a comparable home.

If the result is higher than the annual rent, renting is probably a better deal.

A quick example: Take a $500,000 home. If you divide the price by 20, you get $25,000. So if the annual rent is less than $25,000 — that's a monthly rent of roughly $2,100 — there's a good chance you're better off renting.

As a story in this morning's NYT notes, the ratio was higher than 20 in much of the country during the past decade — during the bubble, the price of buying rose a lot faster than the price of renting.

But now, the ratio has fallen below 20 in many places, suggesting that buying is now often a better deal. (Here's a useful graph of how the cost of renting-versus-owning has changed.)

Of course, the rent ratio is just one factor, and there are (obviously) all kinds of variables to consider — how long you're going to stay in a place, what's going to happen in the real estate market, and all the intangibles associated with both renting and owning. Still, I'm a sucker for a rule of thumb.



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