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Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying

Updated on May 26, 2009

It seems counter intuitive, indeed virtually anti American to consciously choose to rent when you can buy your property, and if this Hub had been written two short years ago, that would probably be the case. However the real estate world has been turned on its head in the past couple of years and in a market where prices keep dropping with no reasonable expectation of a turnaround for another two or three years, or even more, renting can make more sense than buying for some people!

Let's take an example: If you had owned a property two years ago that was worth $250,000 and now is worth half that, you've lost $125,000. If you had been renting that same property for $1,500 a month, you'd only be out $36,000 and be $89,000 ahead of the game! And that's not even counting what you'd save in not paying for property taxes, repairs and maintenance, and all the other financial responsibilites that fall to the landlord! In a falling market, you're almost always better off renting than buying!

I know a couple who lives in an apartment that they rent for $760 a month. The property was appraised about 18 months ago at $207,500 and the landlord wanted to sell it to them at that time. They were looking at the prospect but couldn't come up with 20% down. Even at the time I had strongly advised them against buying it. Why? Simple: The building had strata (condo) fees of $286 per month, and on top of that were property taxes of $193 per month. Therefore, already built into their $760 rent was a total of $479 in fees they'd have to pay anyway. They were essentially only paying $281 in rent which works out to about $9 a day! That's one heck of a deal, and almost exactly equivalent to the Venti coffees the couple enjoys every morning at their local Starbucks. I figure that when your cost of shelter equals the cost of your morning coffee you're definitely in a great situation!

They argued that they would be building equity (although their budget would be taking a $1000+ per month hit) and as it turned out remaining as a renter was a very wise choice. The unit would barely sell for around $135,000 today which would mean they would have lost their entire down payment and still be underwater to the lender for over $30,000!

CNN Money recently had a superlative article on this topic which showed that the critical factor in determining whether to rent or buy is your area's price-to-rent ratio:

To figure out whether renting is a better value than buying, the best metric to look at is your area's price-to-rent ratio, says Dean Baker of the Center for Economic and Policy Research. To figure it out, divide the price of a home you'd try to buy by the annual rent you'd pay on a comparable home. If the ratio for your market is far above the historical average of 15, says Baker, renting may be a better deal.

The longer the price-to-rent ratio stays in your favor, the more benefit you'll gain from renting. To get a sense of where your local market is headed, look at trends in home prices and foreclosure rates.

Use the Stats & Trends tool on Trulia.com to get average list prices and median sales prices within your zip code. You can find out how the rate of foreclosures is changing by county on RealtyTrac.com. Finally, consider the local economy - if your area's major employer just announced mass layoffs, home prices will probably fall further.

Did you think that you'd ever live to see a time when renting would make more financial sense than buying your home? Heck, neither did I!

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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