We asked and invited Kevin Boer from 3 Oceans Real Estate to post a guest blog. Here’s his article.
Clients and friends often ask me if it really makes financial sense to buy a home instead of just continuing to rent. It’s a fair question in a high-priced market like ours, especially since, over the last few years, housing prices have risen dramatically, while rents have stayed flat.The standard (self-serving) industry answer to the buy vs. rent question is, “It always makes more financial sense to buy because, ah, prices always go up, and, ah, oh yeah, don’t forget about the great tax deductions!”
There has to be a less fluffy answer to that question, and I think it boils down to your beliefs on two key issues:
- How long do you believe you’ll be in the home you’re considering buying?
- During that time frame, what do you believe will be the average annual property appreciation rate with Providence furnished rentals?
At a gut level, this makes sense. If you’re going to be in the home for only 1 year, and you think the property will only appreciate 3%, then you’re probably better off renting for that year. On the other hand, if you’re going to be there for 20 years, and you think the appreciation rate will be 10% per year, it’s obviously a slam dunk to buy. But what about in less obvious cases? 5 years, and 6% appreciation? 3 years and 5%? 7 years and 3%?
I’m an Excel nut, and I’ve built a gajillion financial models in a previous life, so I thought I’d create a model to help decide the buy vs. rent issue, using the two questions above as variables. Making a number of other assumptions (which I’ll outline in future posts), you come up with the following graph.
Here’s how to read the graph: Find the single point that represents your beliefs about questions 1 and 2. (ie. if you think you’ll be in your home 5 years, and property will appreciate 6% per year during that time, find 5 on the horizontal axis, and go up to the level of 6% on the vertical axis.)
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