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Friday 12/15/2017 Mortgage Rates

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Should You Rent or Buy a Home?

If you’re finding difficulty in deciding whether you should rent or buy a home, this article will help you understand when a home is overpriced. 

When you're looking for a product with the best value for your money, you're always trying to compare it with another one that closely resembles it - home shopping is just like that. You need to look at the market value of surrounding homes in your area so you can compare them to yours. Some areas with good market value could be experiencing a lag period where a sudden depreciation is imminent, which is why you need to research and make sure that buying a home will be a successful investment for the future to make coping with your mortgage that much easier.

The DIY Price-To-Rent Ratio

The price-to-rent ratio is a quick and easy method of assessing how overpriced or underpriced a house is, relative to the neighbouring homes. It also enables you to know whether it is better to rent or buy the home.

The ratio works by dividing the home's listed price by the annual cost of rent. Let’s give an example:

Suppose a home has been rented for $1,200 per month and is currently being sold for $400,000. You simply multiply the monthly rent by twelve to get the yearly earnings of the home: 1,200 x 12 = $14,400. Then, you divide the price of the home by its yearly earnings to get its price-to-rent ratio: 400,000 ÷ 14,400 = 27.8, which is a very high value and a reliable indicator that you would be better off renting than buying the property.

According to Tulia, the resulting number from the ratio will fall under three thresholds detailed in the table below.

The Resulting Price-To-Rent Ratio Buy Rent
+21  
16 to 20 *
1 to 15

 

 

*It is not advisable that you buy a home when the ratio is between sixteen and twenty because it might pose too much of a risk for you financially. On the other hand, if the monthly mortgage payments on the home do not exceed 36% of your gross monthly income, budgeting for it becomes more manageable.

Your City's Price-To-Rent Ratio

It is worth mentioning that a price-to-rent ratio does not always accurately reflect how cheap or expensive a home is, it only expresses the home's value relative to the value of surrounding homes. Below you'll find a list of how well some city states perform in terms of price and rent, and how friendly they are toward buyers.

The Price-To-Rent Ratio of City States in Descending Order

Ratio Range of Buying vs Renting City State The Ratio Inside City Centre  The Ratio Outside City Centre The Mortgage as a Percentage of Income
+21 New York, NY 27.62 26.92 157.03
Brooklyn, NY 21.05 15.51 100.11
16 - 20 Los Angeles, CA 19.07 12.48 65.48
Honolulu, HI 17.59 16.97 78.33
San Francisco, CA 17.51 15.98 99.69
1 - 15 Boston, MA 14.77 9.02 55.29
Seattle, WA 14.38 11.42 42.74
Austin, TX 13.60 7.83 38.80
Miami, FL 13.55 10.38 43.30
Richmond, VA 7.62 6.62 18.72
Cleveland, OH 3.60 4.44 8.10

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