My quest for a new home - Luca Bolognese

My quest for a new home

Luca -

☕ 1 min. read

I’m re­fin­ing my un­der­stand­ing of how to value res­i­den­tial prop­er­ties. There is this rule of thumb: buy when you can get a rent for the prop­erty which is at least 1.2% of the prop­erty price (or in an­other form, when the home price is 7x the an­nual rent). This is an ap­prox for a more for­mal spread­sheet (which I have).

 

This is fine and dandy, but in the area I’m in­ter­ested in a typ­i­cal one bed­room condo sells for around 200,000-300,000 and you can get a monthly rent of $1,000-1,300. This does­n’t work by a very large fac­tor. Hmmm

 

Let’s change the tar­get to a cheaper area. Now I can prob­a­bly get around 800 monthly. To make things work I need to find a condo for $67,200. Not an easy task, al­most im­pos­si­ble.

 

It looks like for me it is hard to find a house in an area I like and at the same time make a good in­vest­ment (unless the mar­ket bails me out by rais­ing home prices at a high rate). There is quite a large dis­con­nect be­tween house prices and rents now. Maybe the res­i­den­tial mar­ket is re­ally on the brink of a fall Time to rent again?

14 Comments

Comments

Dennis

2004-07-29T10:13:00Z

I saw an article a while back in either Forbes or Fortune, about this. They argued that we're in a real estate bubble, for exactly this reason - prices much too high compared to rents.

Luca Bolognese

2004-07-29T10:17:00Z

Yeah, I just bloged on that here http://blogs.msdn.com/lucabol/archive/2004/07/28/199712.aspx
It looks like all the hints point in that direction. Plenty of for rent signs as well...

drebin

2004-07-29T10:34:00Z

The worst possible real estate situation you could ever get in.... is still better than renting.
When you rent, 100% money goes away.
With buying, hopefully house prices go up, but even if they don't - you can write off interest and you are also building equity.
The second you can afford to be in a house (or even a condo) you should do it, hands down.

Mark Vejvoda

2004-07-29T10:37:00Z

I am in the middle of closing a house purchase. We waited patiently for over 6 months. I live in Canada (Kelowna) and unfortunately because of last years major forest fires this region is Canadas #1 active region. However check mls.ca daily I found a gem. Keep looking and jump on a good deal when you find one. We were blessed with an answer to prayer for this current situation.

Luca Bolognese

2004-07-29T11:17:00Z

But if house prices stay flat or fall and if you invest the difference between rent and mortgage, then you may end up better renting (depending on the rate of return on your investment).

Alan Yeung

2004-07-29T12:41:00Z

My friend bought a house 'cause the only thing he did was to keep his money in a saving account... (= virtually ~0% ROI after inflation)

Luca Bolognese

2004-07-29T14:56:00Z

At least he didn't loose any money :)

drebin

2004-07-29T19:54:00Z

I can't see how you could lose money, unless you make a REALLY bad decision...
Take it even on a short-term basis.
You pay rent $1000/month - that's $12,000 per year GONE.
Let's say you purchase a house and have a $1000 mortgage. If NOTHING else, you will be able to write-off somewhere around $8000 (something like that) in interest in your first year.
Even if the house goes DOWN in value (which it may in the short term but will NEVER in the long term) - even if you broke even and wanted to sell the house, you at LEAST got the interest write-off. With renting, you've lost EVERYTHING. Do not pass go, do not collect ANY money!!

Luca Bolognese

2004-07-30T11:07:00Z

drebin,
I answered you as a post. I thought it could be more generally intersting.

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