Market Often Dictates Buying Versus Renting
Posted by: Carleton Sheets in Rent vs Buy, Real Estate Market, Real Estate, Property, Market Value, Housing Market, fair market value, Buy vs Rent on May 18, 2009.
When I was reading Forbes magazine the other day, I found an article that compared renting to buying a home in this market. The article stressed that every market is different, and that your local real estate market may dictate if buying or renting is the smartest for your investment dollars.
I've always been an advocate of responsible homeownership, and I also encourage investors to practice responsibility when adding to their portfolios ... my personal insight is that sometimes more is not better! The guideline I generally follow when buying a property---which I share in my online real estate programs and my Personal Coaching programs---is referred to as the 1-1 1/3 rule. And although it applies primarily to rental properties, it can also be used as a rule of thumb on a personal home as well.
The rule states that, in most cases, the fair market rent should be approximately 1-1 1/3% of the price of purchasing the property. This means that if you can purchase a property for $100,000 (which includes any necessary rehabs), the fair market rent you need---to break even or make a profit---should be approximately $1,000 to $1,300 per month (including taxes and insurance).
Why is this important? If the property doesn't fall into the 1-1 1/3 rule, it can't provide a positive you with a cash flow.
There are a number of factors that can "skew" this rule: higher taxes, higher interest rates, or a pay-down of principal can affect your payment. However, if you keep this rule in mind when purchasing a property, you'll have the option of renting it and receiving a positive cash flow ---if it doesn't sell right away.
Does your local investing area fall into the 1-1 1/3 rule?
