Is it better to buy or rent my first home?

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In some places of the country renting can actually be more expensive than the monthly mortgage payments. You do, however, have to be approved for a mortgage first. Many people have difficult with that step because of poor credit scores or lack of a down payment. Also with home ownership, you want to consider location permanency, property taxes, maintenances costs and other expenses associated with home ownership. There may also be some tax benefits from home ownership.

On the other hand, the benefit of renting an apartment gives you a choice to move after lease term. You also can benefit by not having to pay property taxes or association fees. Additionally, your landlord is responsible for the maintenance of your residence.

Okay, there is a mathematical way of figuring this all out. Check the price-to-rent ratio. This ratio gives you an idea of whether homes are priced correctly. Figure out the P/R ratio by:

  1. Locate 2 similar apartments. Find one for sale and one for rent.
  2. Divide the sale price of the apartment for sale by the total annual rent of the other.
  3. The number you get is the P/R ratio.

For example you find an apartment for $160,000 for sale and you find a similar apartment for rent at $800 ($9,600). Divide $160,000 by $9,600 and you get the price-to-rent ratio of 16.67.

Well what does that mean? Typically a ratio above 20 percent means it’s cheaper to rent than to buy. But this 20% ratio varies based in the area and economic times. It’s best to reach out to a real estate agent to get a better understanding of the home sale prices and rental prices of the area you want to live in.

Asked in Elizabeth, NJ on March 29th, 2015 in Money.
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