Shomer Shekalim

Home » Other Topics » housing » … just paying the rent

… just paying the rent

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 166 other followers

legal warning

legal warning: The information here should not be understood legally as financial advice. If you believe anything on this site is in error, please contact me. I am always open to corrections, new ideas, and new opinions...

I was recently considering the pros and cons of buying and renting when I saw that Getting Rich Slowly, one of my favorite blogs wrote about the subject.  Here are some highlights:

“The housing industry is huge, and it spends a lot of time propagating certain myths about homeownership, myths like:

  • If you rent, you’re throwing your money away.
  • Owning your home is a forced savings plan.
  • Home ownership is a path to wealth.

In an editorial in the June 2007 issue of Kiplinger’s Personal Finance, Knight Kiplinger wrote, “It often costs less to rent. The annual cost of owning a property, be it a house or a condo, is usually greater than the cost of renting, after taxes.” And there are other advantages to renting.

For one, you have flexibility; you can move at a moment’s notice. For another, you’re not responsible when things go wrong. If the shower starts leaking before you leave for your vacation in Duluth, you don’t have to worry about it — you call in the landlord.

Renting by the numbers
One way to tell whether it’s better to rent or buy is by checking out the price-to-rent ratio (or P/R ratio). This number gives you a rough idea whether homes in your area are fairly priced. Figuring a P/R ratio isn’t too tough. All you need to do is:

  1. Find two similar houses (or condos or apartments), one for sale and one for rent.
  2. Divide the sale price of the one place by the annual rent for the other. The resulting number is the P/R ratio.

For example, say you find a $200,000 house for sale in a nice neighborhood. You find a similar house on the next block for rent for $1,000 per month (which works out to $12,000 per year). Dividing $200,000 by $12,000, you get a P/R ratio of 16.7.

But what does this number mean? Writing in The New York Times, David Leonhardt says, “A rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting.” That’s \a little opaque, but what Leonhardt means is that the higher the P/R ratio, the more it makes sense to rent — and the less it makes sense to buy.

During the housing bubble, the national P/R ratio came close to 20 (and went far above that in some cities). In other words, you could rent a $200,000 house for $10,000 a year (or just over $800 per month), which is a pretty good deal.

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2.

These numbers may not mean a whole lot on their own, but they can give you some sort of idea whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income. (So, if your family makes $80,000 a year, you can afford our theoretical $200,000 house.)

Note: I’ve shared it before, and I’ll share it again: The New York Times has a great rent vs. buy calculator that can help you decide which is best for you. Just plug in the numbers for your situation, and the calculator tells you how long it would take you to break even if you bought a house.”

What do you think?


4 Comments

  1. Hannah says:

    The myths are even stronger here. Even young couples are pushed to buy right away.
    Reason #1 for renting, being able to move, means more job flexibility. Apparently worldwide, unemployment is correlated with places that have a high rate of home ownership.

  2. LeahGG says:

    There’s more to it in Israel. Unlike in the US, there are very few properties that are really rental properties here. In Israel, they’re almost always privately owned, which means that they can be sold out from under you at the drop of a hat, which means that I’ve known many renters who ended up moving three summers in a row when they didn’t want to. Not only that, but each move meant a rent increase.

    Each move means at least one lost day of work. There are always some moving costs, there are always some meals of convenience foods or eaten out. Plus there’s the inconvenience of suddenly being forced to move when your wife is 8 months pregnant (has happened to more than one friend of mine), the scramble for a new place, etc.

    On the flip side, if you don’t have substantial savings to put into a down payment, your rent can be less than you’d be paying ininterest on your mortgage. Right now, market prices in Israel seem to be high, so it’s probably a poor time to buy in general.

    There’s a final issue here which isn’t financial at all, and that is that when you buy your own place, then you make it a home. When you live in rentals, you adjust them, but you never really fully dig in. You might paint the walls or add shelves, but you won’t redo the kitchen to suit your needs. You’ll never make your full mark on it and make it a real home. As someone who always lived in ‘quarters’ (I was an army brat), I can honestly say that it totally sucks to grow up and never get to really dig in and make a home.

  3. Devorie says:

    Great post!

    I agree with a lot of LeahGG’s comments – I’ve never lived in a rental apartment for more than 2 years in a row, forced to move for one reason or another. Moving is very expensive – you need to pay the movers plus there are the “small” expenses that LeahGG mentioned, such as lost work days.

    Rent is very expensive here, and in many cases, monthly mortgage payments would be less than rent.

    The quick-and-dirty calculations only served to emphasize what I find intuitive. Paying 1.2M NIS (or more) on an apartment that you can rent for 4,000NIS (or less) is not a great idea, especially if you have less than 30% to put toward a down payment. You’re looking at mortgage payments that are 1,000-2,000 NIS above rental prices, and that is without taking into consideration changes in interest rates and “hatzmada.”

    However, there are places where you can buy for much less than that – and still be in the Center (or close to it), where there are plenty of jobs. Israel is so small that you don’t need to live in the same city where you work, so owning a home does not mean that you have less flexibility. It won’t be as exciting or convenient as living in Jerusalem or Tel Aviv, but you won’t break the bank, either.

  4. for me, it is nice to rent if you will not stay much in the place. i mean, renting a house is better if you are just having a vacation in the place not that long. in case with Tel Aviv, this one is a great place where you could spend your vacation right? and it is better if you will just ask for assistance from some tel aviv apartment rental if you will just stay in the place for some quite time. but if you want to be a part of the place for your lifetime, you can try purchasing an apartment instead. that way you are already saving a lot of money.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: