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To Buy or Not to Buy... Is Renting the Answer?

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By : Gary Lundholm    99 or more times read
In the best of times the real estate market can be very confusing, if not just plain overwhelming, and in today's crazy economy, it is even more mystifying. Heavily fluctuating house prices and interest rates are prompting many to ask themselves whether it is better to rent or to purchase a home.

There are many factors involved when making this decision. Considering the sense of pride and accomplishment that comes with having your name on the title of your home, emotion is often an overriding element in the decision to purchase a home. Of course financial responsibility/affordability is also a huge component in the process. So how do you know when renting is a better option than buying?

Whether renting is better than buying depends on many factors, including how fast prices are rising and how long you plan to stay in your home. Currently, house prices are at rock bottom and real estate analysts predict a rise in prices will happen at a very slow pace. This means that buying a home as an investment is no longer the motivating factor it once was. So does this mean renting is better? The answer to this is entirely dependant on the region in which you live.

To figure this out from a financial standpoint you can use the Rent Ratio formula to determine which decision makes the most sense. The rent ratio is calculated by dividing the purchase price of a home by 12 months of rent payments on a similar property. If the answer is below 20 then it makes more sense to purchase, above 20 then renting may be the better option. The rent ratio varies significantly from region to region depending on how well the local market has weathered the recent economic storm. Below are some examples from the 4th quarter of 2009, showing the highest, lowest and break-even ratios in the country: (A quick internet search for "rent ratios" will help you determine the situation in your area)

  • Oakland, Calif. = 36.3

  • Memphis, Tenn. = 20.2

  • Pittsburgh, Pa. = 11.7

This formula considers all aspects of buying vs. renting; however, the biggest factor may be how long you plan to stay in your home. A recent comparison done by the NY Times concluded that buying a $172,000 dollar home vs. renting a home for $1,100/mnth will be beneficial only if you stay in the home for 7 years or more, with a total savings of $5,314, or $759/yr.

If your motivation for buying a home is to have a place to call your own, and you are not overly concerned with making a profit on the property in the short term, then making the purchase may be the right thing to do. If you consider buying a home as strictly an investment, you may want to put your money elsewhere.
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