Buy Or Rent – What Can We Learn From The Rent Ratio?

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

  • inflation of rent costs
  • opportunity costs of down payment funds that could have been invested elsewhere
  • return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
  • tax implications of owning real estate
  • appreciation of housing as an asset

Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it’s not only expensive to own, but also to rent in that city.