Contrary to popular belief, renting your home is often more financially attractive than purchasing your home. We discussed in the article entitled "52 reasons rent your home instead of buying . Purchase prices rise or fall, the rental rates fluctuate, depending on times and locations. How do I know in your specific case if you have more interest in renting or buying today? What a simple calculation you can do to find out?
Compare expected returns In a previous article, we had seen that it is better to rent if you can put your money (I think by your initial contribution and the difference between your monthly repayment of loan and the rent on your lease) with a yield that would double the gain with the purchase of your home. If the price of your home rises averaged 3% per annum over the period in which you own and that over the same period of investing you would have earned more than 6% per year, you had better not buy.
is a rule that is true in theory but in practice it seems difficult to apply to make your decision. You know that on average shares relate 5% more than real estate over the long term. This confirms that the rule would often be verified. But in your case, this theory does turn into hard cash? How to know in advance the date when you resell your home and how much? How do I know this time what actions you have purchased and how much you have reported? Impossible!
Calculate the ratio between purchase price and rental rates, the ratio Price / Rent
What you need is a rule you can apply with numbers that you know today, with numbers that are those of your specific case, and not those of the national average over the long term. To find out if today, in your neighborhood, you'd better to rent or buy, divide the amount of property you wish to purchase by that of the same type of property to rent on a year in the same area . It is the ratio Price / Rent.
Example: I'll take real figures from price per square meter, sale and rental, available on the internet . In Neuilly-sur-Seine, a square meter in March 2010 was EUR 28 leased and sold 8229 euros, a ratio of 8229 / (28 * 12) = 24.5. I entered the price per square meter for use a database of interesting and not a particular ad but questionable. When you take the price of similar homes in the same place for rent and sale, calculate what you need is the same. Another example, in Bourges, a square meter has leased and sold for 10 euros 1633 euros in March 2010, a ratio of 1633 / (10 * 12) = 13.6.
This ratio Price / Rent tells you if the property is overpriced or not in your area. If this ratio is above 20, as an owner you will pay 20 to harvest 1. No doubt, it is better to be a tenant. The higher the ratio, the lower it is worth buying. It is much more interesting to buy at Bourges at Neuilly-sur-Seine, financially speaking: you need 24.5 years to pay your rent housing in Neuilly while 13.6 years in Bourges you enough! I speak from years of rent and not in years to repay your loan. To pay that amount, you will need more time. It also shows that housing is very expensive to rent a low rate compared to their value. A ratio of "normal" (with all necessary quotation marks because what is normal for a while longer is not necessarily 10 years later), for which it is more interesting to be a buyer, is between 10 and 14.
The calculation that I have proposed is simple in the extreme. In reality when you own and you rent your property, you have expenses and accrued liabilities: you do not collect the rent received in its entirety. Your profitability will be lower. By integrating these charges, this calculation is the same as calculating P / E that you perform before you buy your shares.
ratio Price / Rent is only an indicator to make your choices and decide on the financial interest of the purchase you are considering. It offers the advantage of being simple to calculate, relying on local figures and concrete. But this is only an indicator. It does not assure you that your purchase will be profitable or not. There are other reasons than financial reasons for deciding to purchase your home.
This calculation reinforces my decision not to buy now in the city where I live, with a ratio price / rent well above 20. On your side, what is the price / rent your neighborhood? This information exchange does your real estate strategy? What other method do you know whether you would do better to rent or buy your home?
Credit: Fr Antunes
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