Monday, June 02, 2008

What's your rent ratio?

David Leonhardt wrote an interesting piece on rent ratios in the New York Times (thanks to my youngest brother for sending this to me). Mr. Leonhardt has been a long-time advocate for renting. Though I'm a long-time advocate for buying, I found the article to be very informative with good fodder for discussion. Some that I've given little thought to.

The article's common theme is rent ratios. That is, the selling price of your house (or the house you're looking at buying) divided by the annual cost of renting the house. I figure we could sell our house for around $300,000. I found a similar three bedroom house on Startribune's rental site for $2200 a month ($26,400 annually). That means our rent ratio is around 11.

According to Mr. Leonhardt, any rent ratio above 20 is bad. It basically means you're paying far too much for your house and should look at renting. I think he'd agree that a rent ratio of 11 is pretty good. And given that we plan on staying in our house for five more years (which would be ten total), we made a good decision to purchase.

If you're looking at buying soon, or are interested to see what your rent ratio is, give Mr. Leonhardt's formula a try. Again it's sale price divided by annual rent (monthly rent * 12).

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