One of the most frequent question I hear is, “Does it make sense for me to buy right now or does it make more sense to rent?” I have been saying for some time now that it is time to buy but other than market trends and gut instincts I did not really have hard facts to back that statement up. Today, however that has changed. Vanessa Wong, from Business Week has revealed a formula for quantifying this that takes much of the mystery out of this dilemma. According to her formula, if you:
divide the purchase price by the annual rent the home will command, you can determine which is better as follows.
1 to 15 Less expensive to own
16 to20 Owning is more expensive but may make sense
Over 21 Only makes sense to own in select instances.
Let’s consider a real world situation. Let’s say a house that will sell for $159,000.00 will rent for $1,200.00 per month. According to her formula you should divide the selling price by the annual rent ($14,400) and you will come up with the number of 11.04. In this instance, it would be much better to own than to rent. Of course there are always many variables that come into play. In Southwest Florida HOA fees can be considerable and have an impact on the cost of occupancy. On the other side is the uncertainty of market influences on rentals. When you rent you are at the mercy of the landlord every year at renewal time. Buying must always be a careful decision and it is one that you live with for years to come. The market we are experiencing in Southwest Florida defies logic. When selling prices are only 50 to 60% of the cost of new construction it is hard to make the argument for renting. One of the key incentives for ownership is the ability to build equity. With the market prices of re-sales at historic lows compared to new construction it is very hard to envision that this gap will not close meaning an increase in value and equity for those who own. In Southwest Florida, if you have the ability to buy, all indications are that now may be one of the best opportunities in history.