What cost is fair for Renting over Buying?

[RobertBirnie]

What do you figure as a fair cost for renting over buying?

I've heard that if you make 8% or 9% on a rental in rent income then you are doing pretty good. Could you turn this around and say if you are spending less than 8% of what it'd cost to purchase a house then you are doing pretty good? I'm not sure if this makes as much sense, and as such who's renting out all these places that rent for 8% of their cost?

In my area a 2 bed condo fetches $300k-400k so 2% would be 2,000. Rent for a 2 bed place is about $1500 (~6%), so would I be further ahead renting and investing my savings elsewhere?

I've also thought about buying a 3-4 unit place for roughly 1M and renting out the other 3 units. I'd have to do an FHA loan though, and am still researching this to see if it makes sense.

Currently I'm renting a 1 bedroom apartment for my wife, me and my daughter. Its getting a pretty tight with 3. Rent is great at $900 though...

[Another Reader]

Renting a one bedroom in San Jose for $900?  Unless you are in a really bad neighborhood, that seems like a pretty good deal.

Figuring out how to navigate the housing market around here is difficult.  You will never cash flow 8 or 9 percent.  You won't even gross that.  Your free and clear cap rate is maybe 2 to 3 percent.  Leverage actually worsens your cash on cash return.  Any condo you can get in the price range you mentioned is going to be small and feel like an apartment.  With a child, it's not enough of an improvement for me. 

In your shoes, I would continue to rent cheaply while I saved and invested as much as possible.  When I could buy a house, then I would consider buying.

[tfordon]

NYT has a great calculator: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

You can fiddle with several variables that might be different for you and factor into your decision.  On the surface it looks like renting is the better option for your area.

Good luck.

[nawhite]

I second the NYT rent vs buy calculator. It is by far the simplest way to do the math for this.

Using your numbers and estimating condo fees (100/month) and what I think about return on investments(6%) and inflation (3%), I'm seeing buying only being a slightly better deal if you plan to stay in that place for over 9 years. Sounds like renting very well may be a better move for the moment.

[RobertBirnie]

The NYT calculator looks awesome!

I was using this one http://www.trulia.com/rent_vs_buy/ which is similar but doesn't have quite as many bells and whistles.

[Fuzz]

I'm confused by your numbers.

As far as your first paragraph, a good return is 8-9 percent of your investment--so if you invest 10K in purchasing a building, you'd want to make $800-900 profit that year, after all your expenses. Also, 2 percent of $300K is $6000, not $2000. I think the rule of thumb you mean is that monthly rents are supposed to be 2 percent of the purchase price on a rental property (not 8 to 9 percent, which is what you say), so a $100K investment rental would rent for $2000/month. The 2 percent rule is more ironclad for multi-family, not single family, where folks will go down to 1.5 percent, or whatever.

I'm guessing know this, but your post seemed confusing. I would look at all of Arebelspy's comments in the landlording section, plus the bigger pockets website.

On this forum, my sense is that people are extremely skeptical of buying rental property in big coastal cities like SF, Seattle and Boston, where the real estate market is generally overpriced relative to rents. The nytimes calculator is great.

[RobertBirnie]

I'm confused by your numbers.

As far as your first paragraph, a good return is 8-9 percent of your investment--so if you invest 10K in purchasing a building, you'd want to make $800-900 profit that year, after all your expenses. Also, 2 percent of $300K is $6000, not $2000. I think the rule of thumb you mean is that monthly rents are supposed to be 2 percent of the purchase price on a rental property (not 8 to 9 percent, which is what you say), so a $100K investment rental would rent for $2000/month. The 2 percent rule is more ironclad for multi-family, not single family, where folks will go down to 1.5 percent, or whatever.

I'm guessing know this, but your post seemed confusing. I would look at all of Arebelspy's comments in the landlording section, plus the bigger pockets website.

On this forum, my sense is that people are extremely skeptical of buying rental property in big coastal cities like SF, Seattle and Boston, where the real estate market is generally overpriced relative to rents. The nytimes calculator is great.

My 8-9% number came from a what I remembered from a biggerpockets tutorial and was related to the yearly income in rent. Going back to that page now I see the 2 percent rule you mention. My memory must be going bad....  I see i am quite wrong though. Thanks, this is all pretty new to me and I'm trying to learn as fast as I can.

Looking at the NYTimes calculator, buying a condo here doesn't really make sense until I get up to around 2k monthly rent. Looks like I'll need to stay in my place a while longer or up to renting a 2 bed place.

[StarryC]

One factor I find on this, is that often buying something equivalent to what you rent isn't possible.  For example, if you happily rent in a kind of slummy place, there might not be many condos for sale that are equally bad, and equally cheap. 

So, I rent an apartment with no dishwasher, no washer/dryer, linoleum, and no fan in the bathroom.  The landlord does the absolute minimum for landscaping etc.  There is no parking lot or garage. But it's pretty cheap and those things don't matter much to me.  However, I don't see many condos for sale that haven't had some substantial remodel/ updates done to install appliances, put in tile or granite, etc. They also charge condo fees sufficient to maintain waterfalls or at least rake the leaves and vacuum the halls. They often have deeded parking or assigned spaces.  The better condos owners want to sell for a higher price. 

If I could buy a similar place as the one I rent, for a similar or slightly higher price I might.  But the cheapest condos are still much nicer, and therefore much more expensive. 

[Another Reader]

It's getting to the point here where two professional level incomes are required to get into the house buying competition if you want decent schools and some space.  In your shoes, I would figure out a long term plan.  If your job requires you to be here, what are your long term housing goals?  Can you raise kids comfortably in a condo?  Will your income grow and grow quickly enough to buy a house?  Would it make sense to move somewhere housing is more affordable? 

Investors here are largely Asian and there is a lot of offshore money being funneled into housing in the desirable areas.  A lot of these investors think about buying today for future cash flow for their children and grandchildren.  Some are buying the option of less competitive American schools or a safe exit if things change direction at home.  They often pay cash or leverage the minimum needed  Those $1M fourplexes are grossing substantially less than what is acceptable to a seasoned US investor.  The buyers are betting on future appreciation and stability.  Their perception of risk is different than yours or mine.  They are less likely to trust financial markets and consider real estate a lower risk investment. 

As an example, my house would rent for around 0.35 percent of its value per month.  That's 4.2 percent gross ANNUALLY.  As an owner-occupant, you can borrow at around 4.25 percent, over 5 percent as an investor.  Leverage is not your friend with these numbers.  You might cash flow 1 or 2 percent if you don't have a bad year for capital improvements.  You and I would turn our noses up at these cash returns, but that's the market.

So, if you need to be here for your career, make a long term plan for your housing.

[RobertBirnie]

Currently our income is high enough that we could probably afford to buy here, we might break $150k this year (swapped jobs mid year so I'm unsure where we are at), and probably break $200k next year. But from the sounds of it I should be asking why would I buy here. Maybe I'd be better off renting here for a very long time and buy investment property in the central valley somewhere...

[iamlindoro]

Currently our income is high enough that we could probably afford to buy here, we might break $150k this year (swapped jobs mid year so I'm unsure where we are at), and probably break $200k next year. But from the sounds of it I should be asking why would I buy here. Maybe I'd be better off renting here for a very long time and buy investment property in the central valley somewhere...

Same location here-- bought a few years ago, desperately regretting it.  Going to spend a few more years cashing in on Silicon Vally money and building up remote consulting work and then head to CO, WA or OR, most likely.  Ideally by that time I'll have enough long term clients and work coming in that I can keep the income where it is and up the savings rate to 80-90%.

[scrubbyfish]

When I owned, the house cost me $130,000 and rental income was $2400/mo (or less if I lived in the smallest suite for free). This was good.

Where I live now, a shoddy, small, starter, detached fixer-upper is $700,000 and rent on that would be $1000-$1400 plus utilities.

So, now I rent.

My point? Owning vs renting really, really, really depends!