Buy or Rent? Learn the Rule of 15
Ever hear of the real estate Rule of 15? I mentioned it yesterday on a segment with Al Roker on the TODAY Show as we discussed a question tossing and turning through many American heads these days: “Should I buy or rent?”
Here’s how the rule goes: Let’s say you’re looking at a 2-bedroom house or apartment:
1) Find the going rent in the neighborhood or location you’re interested in—which you can track down through sites like Zillow.com and Trulia.com—and calculate how much you’d spend in rent a year. Say, $2,000 a month would mean an annual rent of $24,000.
2) Multiply that number—your annual rent—by 15. (in this case: $360,000)
3) Now look up and compare the going price of a comparable space in the same area, to buy.
4) If that number is much greater than your annual-rent-times-15, the location probably still has a way to go down in home value. The bubble here ain’t done burstin’ and you should rent for a while. The last thing you want to be is upside-down on a mortgage—owing more than your new home is worth.
But just as important as rules and research is the need to clean up your credit score and credit history. The difference between a 680 and a 780 can mean hundreds of dollars in monthly mortgage payments and thousands over the life of your loan. Not to mention that it can bring you to the front of the line when you're vying for a rental.
If I were to sell my home today, I’d rent for at least a year. And I’m in New York City.
Let me know what snags you’re running into in your housing market in terms of buying and/or renting. Are you having trouble deciding? What’s your timeframe? Write me below!
The decision to buy versus rent really depends on your time horizon. If you have a long enough outlook, it's likely that buying is the better way to go. While buying a depreciating asset isn't the best investment (though for some reason are happy to pay exorbitant amounts for cars that depreciate the minute they leave the lot), considerations should come down to "can I truly afford to bear the cost of living in this home for the next 5 years" and "does this home represent a high quality of life for me". It's impossible to accurately predict when we've hit bottom. So make a rational buying decision and remember that, in the long run, a home purchase can be the most productive investment most of us will ever make. --Ashleah, Vancouver, BC
Posted on: 15 Jul 2008 12:04 P.M.
That's a great, easy tool to help with this question. And let's be honest, it's getting asked more and more these days. If you're looking for another source for rental information and comparables, check out recently re-launched Cyberhomes.com. We have a large amount of information becuase we are backed by Fidelity National Financial. This information gives visitors all that they need. Using this site and the "rule of 15" can really bring some valuable insight to your purchase/lease decision. --Bret, IN
Posted on: 13 Jul 2008 8:41 P.M.
The rule of 15 doesn't really work by itself. In the professional world, we use "Gross rent multiple" as the term, and it is one of many factors that should be used in evaluating a real estate investment. You can find lots of properties that meet the rule of 15 in Fargo, North Dakota or Dayton, Ohio, but that does not mean that you should buy properties there. Generally, the LOWER the gross rent multiple the WORSE the perceptions are about the market. --Rick, IL
Posted on: 11 Jul 2008 7:14 P.M.
I live in Seattle and I continually hear we are not affected by the market down turn and daily there are local news stories how our home prices continue to rise. I don't get it - homes are on the market for months now and people are even lease optioning there properties. So which is true: are we bubble proof or is the worse yet to come? I would love some facts to use when I talk with these property owners, or maybe I'm just missing something. --Dazed and Confused, WA
Posted on: 11 Jul 2008 4:21 P.M.
I am currently a renter and would like to buy. I am very qualified - good job, great credit and can afford a 20% down payment. However, sellers have not faced reality. They are listing their homes at prices too high and are expecting significant appreciation. Those who bought homes over the past 2-3 years are in trouble. Realtors, who are very hungry, are deluding their customers with high selling prices in the hopes of getting the listing. Guess what - it ain't coming back for at least 5 years. Prices can't come back with all the supply and lack of aggressive mortgage financing that used to be avaialable (no interest, no money down, etc.). --Jeff, GA
Posted on: 11 Jul 2008 3:42 P.M.
I am in the National Guard and currently stationed in Iraq. I will be returning from this tour at the end of '08 or beginning of 2009. I sold before this deployment and trying to decided whether to buy or rent upon returning. I have never heard of the "Rule of 15" and will consider this method while on leave from theater and studying the real-estate market and future housing opportunities in Little Rock. Thanks CNBC.com! --Marc, AR
Posted on: 11 Jul 2008 4:10 A.M.
My wife and I sold our custom built house in December '06 because we felt we'd get the most money for it. The new owners put it back on the market six months later. After ten months on the market it sold for $30,000 less than what we'd sold it for. I feel we made a good decision. We've been renting while waiting on the side lines to jump back in, but haven't found the deals we'd anticipated.
Although homes are sitting vacant and prices continue to drop, we still feel they have a ways to go. We're now in our 18th month of renting and are debating on building or buying a foreclosure. We're not in any hurry except for the fact my wife is getting impatient and is ready to move and get settled. Shes complains that I'm too picky, but I know we've sacrificed a lot and I just want to make the best decision for our family. I keep telling her this is a huge opportunity and we need to make the best of it. We've made offers on both houses and lots, but the sellers sa y they're too low.
I wish I could predict where the bottom will be. I'm still afraid to jump in at these prices. However, since renting we've saved a tremendous amount of money (including every dime of our stimulus check) on top of what we made off the sale of our house, which helps me sleep good night! Thanks for the Rule of 15 tip! --Scott, TN
Posted on: 11 Jul 2008 12:28 A.M.