Rent, or Buy?

The early 2000s . . . ah yes, the good old days, when home prices were soaring and investors were flipping houses and making money hand over fist. And then, the total collapse . . .

With today’s economy in a state of flux and the real estate market still flat-lining, thousands of wonderful homes are sitting on the market. Homeowners are under water on their mortgages and can’t sell, and are becoming landlords by default.

People are nervous. The banks, who were so crazily free-wheeling a few years back, have tightened the purse strings to the point where applicants who deserve loans are being denied. Even those who are capable of purchasing homes are hesitant:

  • They’re unsure of the direction of the economy
  • They fear being laid off.
  • With the rising cost of education, they’re choosing to put money in their children’s college funds rather than invest in “The American Dream.”

But for those who still lust after that traditional dream, there’s a formula — although a loose one at that — that might help determine if your city is one in which it’s better to rent or buy. It’s called the rental ratio formula and here’s how it works.

You take the cost of the house you’re looking to buy, and find out what the comparable place would cost to rent, for one year. Divide the total yearly rent by the sale price of the home. If the asnwer is less than 15, it makes sense to buy rather than rent.

For example, on the three-bedroom foreclosure I purchased last fall (See “And Speaking of Fortunes Being Made . . .”, October 2010) the rent I receive is $825/month x 12 = 9900. In this Indianapolis market, I bought that home for 35K and with repairs, have a total of 40K in it. But, the surrounding homes are worth (in a normal market) 80K. Either way, when I do the equation, the results are 4 and 8.5, meaning Indy is definitely a city where it’s better to buy.

But don’t be fooled by the numbers or the gurus. Even though this formula says it’s more costly to rent than buy, our Indy rental market is very strong and I don’t see the end in sight. My 27 rental units never stand empty, which tells me there’s opportunity on both ends — both as a buyer, if you can qualify, pay cash or use private money — and as a landlord who rents out your properties.

So don’t be shy . . . now’s the time to buy!

Thinking of Flipping?

Home prices are low right now, as you know.  And from what I’m reading, they’re going to stay low through 2011 and into 2012.

So, are you thinking of snatching up one of these homes at a great bargain price, putting a little money into it, and reselling it for a nice fat profit?  Think again.  Those days are gone, at least for now.

I flipped a few along the way, back in the late 90’s and early 2000’s when the real estate market was booming.  Aaah, those were the days.  Back then, the foreclosure I just bought last fall would’ve been a perfect candidate for a flip.  Purchase price, 35K.  I put another 5K into fixups and it was ready to go.  The homes around it are worth 80-85K.  But!  Who’s going to pay 80K when they can find a nice foreclosure for 30?  No one in their right mind, that’s for sure.

So, I’m renting it out.  And actually, there are thousands of homeowners who need to sell their homes and can’t — for a decent price — so they’re renting them out.  They’re becoming unwilling landlords, poor things.  At least the rent payment should cover the mortgage.  The demand for rentals is strong and is driving the price up in most areas of the country.

So, if you think you’re going to make a fast buck by flipping a property, think again.  Now is not the time and, if I were you, I wouldn’t hold my breath.  If you want to make money, buy the bargain home and rent it out.

You won’t get the fat reward of the one-time payoff of a flip, but you’ll reap the nice tax breaks and steady stream of income the rental  provides.  I know, it’s not glamorous.  But it works.   🙂

Onward and upward!