My quest for a new home

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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?

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14 Comments

Comments

Dennis

2004-07-29T10:13:00Z

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.

Luca Bolognese

2004-07-29T10:17:00Z

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…

drebin

2004-07-29T10:34:00Z

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.

Mark Vejvoda

2004-07-29T10:37:00Z

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.

Luca Bolognese

2004-07-29T11:17:00Z

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).

Alan Yeung

2004-07-29T12:41:00Z

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)

Luca Bolognese

2004-07-29T14:56:00Z

At least he did­n’t loose any money :)

drebin

2004-07-29T19:54:00Z

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!!

Luca Bolognese

2004-07-30T11:07:00Z

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