Calculating the “Rent Ratio”

Sometimes, the decision whether to buy a home or not seems to require an economics Ph.d.

Are interest rates headed higher? How strong is the economy? Are home prices now recovering, or will there be a “double-dip?”

It’s enough to make your head spin — or hurt.

If the foregoing (unanswerable, by the way) questions seem too daunting, try this one instead:

Can I rent a nicer place for less money than it costs to buy?

In many cities, including Minneapolis, the answer is now “no.”

Check out this NYT piece, “In Sour Home Market, Buying Often Now Beats Renting,” for the particulars.

Warning: you’ll need to divide by 20 to calculate the local “rent ratio” — the best yardstick for gauging whether buying is a better deal than renting.
If you need help filling in the numerator and denominator . . . . call me! (612-925-7701)
About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.
3 Responses
  1. Theresa

    I have been wrestling hard and long over the question of whether it
    makes sense for me to rent or buy.

    I wish that you could shine the light on me regarding what I should do.

    After everything is taken out of my paycheck, I have $2,700 a month.
    My only debt is my student loan, about $400/mo. I have 8.5 more years of payments. I'm a widow, 41, and have an 11 year old boy.

    I live in Minneapolis, MN and need to live by a good school. I work
    in Minneapolis. When I look at houses, I worry about where the money will come from when I need to replace something large.

    I can rent a decent place in a great neighborhood for $900 – $1000.

    If I rent an apartment, heat and utilities are minimal, $100/mo max.

    I'm a teacher and always have to bring work home. The whole school
    year, there's not much spare time. I don't know how to fix things.
    There's not many people around who could help me much.

    I've been told that the advantage of buying is that I lock in a cost
    of living that won't increase. Rent will increase. After 27 years,
    I'll only have to cover taxes rather than pay full rent. I'll be 68 then.

    My concern about buying is that after the heat, maintenance, etc,
    buying will take too much of that $2700. I won't have the money I
    need to do thing that I consider important, things like sending my kid to camp or music lessons. If all goes as planned, he'll move out w/in 10 years and be mostly self-sufficient.

    I did the "rent-ratio" and my figure was 12 on a $150,000. My loan officer told me that a $100,000 loan for me would be about $780.

    I think I could find a small, solid home for $150,000. I've looked at
    so many houses below this price and they all need things way beyond
    cosmetics. Condos in this area of association fees of $350 and up,
    which makes my monthly payments closer to $1,200.

    I qualify for a great loan, The American Dream, loan from US Bank.
    I've had competing loan officers tell me that they can't beat the
    rates. I have a credit score of 755.

    SHOULD I BUY OR RENT?????

    Thanks for the input.

  2. Ross Kaplan

    Theresa:

    Well, at 12, your rent ratio would SEEM to suggest "buy" ((over 20, it tilts the other way).

    However, your concerns about maintenance (in a single family home) or association dues (condo) are legitimate.

    I would suggest a smaller home to keep down utility costs, and a home warranty to cover the risk of major appliance failure.

    Condition — and the Buyer's Inspection — will obviously be very important for you.

    Ideally, you can trade size and location (a bit, per your criteria) for something that's got newer windows, roof, mechanicals, etc.

  3. Ross Kaplan

    P.S. to Theresa:

    two more after-thoughts:

    1) regarding "trade-off's," and ways to get into an updated, low maintenance house:

    Maybe you sacrifice some curb appeal for those things.

    It's always great to have nice curb appeal, but: a) it wears off over time; and b) it's primarily for the neighbors, anyways.

    Some of the best deals for Buyers can be homes that are very functional and aethetic inside, but don't "wow" anyone from the street — and therefore tend to get overlooked.

    2) a home on a small lot (less than the standard 40 x 120) is another way to get a discount on a home that has some of the (other) things you're looking for .. .

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