Should You Rent or Buy?

Whether to buy is a big question. Are you ready to make this investment? Will you be able to obtain the financing? Are there properties available in your price range in the neighborhoods you like? These are all questions that I can help to answer. How do you know whether and when to buy or rent? In short, it comes down to what’s the better value in light of your goals.

One way to measure a property’s value is to look at recent comparable sales. Appraisers usually use this method when valuing residential real estate for financing purposes. Another way to value property is to look at its income potential. Appraisers often use this method when valuing apartment buildings or commercial properties.

In a down market, using the income rather than the comparable sales approach can help to answer the rent vs. buy question. That’s because it frames the question in a more tangible way by focusing on the “income” produced (in this case, the amount that can be saved monthly by owning) rather than on the more unpredictable criterion of “what if prices fall further?”

In a flat or falling market, everyone wants to know when we have reached the bottom of the cycle. Buying before we reach the bottom is bad, right? Nobody wants to be holding real estate that’s going down in value, right? Not necessarily.

Let’s consider an example where rental vacancies are low, house prices are low and interest rates are low (e.g., the Denver market through a good part of 2011 and into 2012). Low rental vacancies mean relatively high rents. Low house prices and interest rates mean relatively low monthly costs of ownership. In this scenario, it’s possible to own a house for a monthly payment that’s several hundred dollars less than what the house would rent for each month. In other words, buying rather than renting would create a more positive cash flow (i.e., “income”).

When a house is generating income and rents are rising but your costs of ownership are locked in for 30 years, it may not matter that the market is flat or even still falling. On a monthly basis, you are making money by owning vs. renting. Certainly no one wants to own property that is falling fast in value. But, if values are flat or only slightly declining, it may make more sense to own rather than rent. In the short run, you will save money over renting; in the long run, when the home sales cycle trends upward again, you will make money through appreciation.

Trying to perfectly time when to buy a house may leave you with a case of paralysis by analysis. Few people get the timing just right. The important thing to think about is long-term value, which can make buying the right choice even in a flat or slightly declining short-term market situation. I have been keeping track of what the market is like right now, so get in touch if you’d like to ask me some questions.