My quest for a new home…


I’m refining my understanding of how to value residential properties. There is this rule of thumb: buy when you can get a rent for the property which is at least 1.2% of the property price (or in another form, when the home price is 7x the annual rent). This is an approx for a more formal spreadsheet (which I have).


 


This is fine and dandy, but in the area I’m interested in a typical one bedroom condo sells for around $200,000-300,000 and you can get a monthly rent of $1,000-1,300. This doesn’t work by a very large factor. Hmmm…


 


Let’s change the target to a cheaper area. Now I can probably get around $800 monthly. To make things work I need to find a condo for $67,200. Not an easy task, almost impossible.


 


It looks like for me it is hard to find a house in an area I like and at the same time make a good investment (unless the market bails me out by raising home prices at a high rate). There is quite a large disconnect between house prices and rents now. Maybe the residential market is really on the brink of a fall… Time to rent again?

Comments (14)

  1. Dennis says:

    I saw an article a while back in either Forbes or Fortune, about this. They argued that we’re in a real estate bubble, for exactly this reason – prices much too high compared to rents.

  2. Luca Bolognese says:

    Yeah, I just bloged on that here http://blogs.msdn.com/lucabol/archive/2004/07/28/199712.aspx

    It looks like all the hints point in that direction. Plenty of for rent signs as well…

  3. drebin says:

    The worst possible real estate situation you could ever get in…. is still better than renting.

    When you rent, 100% money goes away.

    With buying, hopefully house prices go up, but even if they don’t – you can write off interest and you are also building equity.

    The second you can afford to be in a house (or even a condo) you should do it, hands down.

  4. Mark Vejvoda says:

    I am in the middle of closing a house purchase. We waited patiently for over 6 months. I live in Canada (Kelowna) and unfortunately because of last years major forest fires this region is Canadas #1 active region. However check mls.ca daily I found a gem. Keep looking and jump on a good deal when you find one. We were blessed with an answer to prayer for this current situation.

  5. Luca Bolognese says:

    But if house prices stay flat or fall and if you invest the difference between rent and mortgage, then you may end up better renting (depending on the rate of return on your investment).

  6. Alan Yeung says:

    My friend bought a house ’cause the only thing he did was to keep his money in a saving account… (= virtually ~0% ROI after inflation)

  7. At least he didn’t loose any money 🙂

  8. drebin says:

    I can’t see how you could lose money, unless you make a REALLY bad decision…

    Take it even on a short-term basis.

    You pay rent $1000/month – that’s $12,000 per year GONE.

    Let’s say you purchase a house and have a $1000 mortgage. If NOTHING else, you will be able to write-off somewhere around $8000 (something like that) in interest in your first year.

    Even if the house goes DOWN in value (which it may in the short term but will NEVER in the long term) – even if you broke even and wanted to sell the house, you at LEAST got the interest write-off. With renting, you’ve lost EVERYTHING. Do not pass go, do not collect ANY money!!

  9. drebin,

    I answered you as a post. I thought it could be more generally intersting.