Rent vs. Buy – What’s Better?

The last four years have treated landlords quite well. And it’s obviously the housing bust we have to thank for that. As displaced homeowners move out and on, they’re increasingly choosing to rent. That’s meant high demand for rental properties and the ability for landlords to raise monthly rates.

So let’s look at two charts today…

First, we see the Rental Vacancy Rate has continued to drop since peaking in 2009…

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Next, we see the Bloomberg Apartment REIT index has gone up three-fold in the past three years. When this index goes up, it generally indicates renters are paying more to rent.

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The shift in where we live has reignited the rent vs. buy debate. Trulia, the property-tracking company, put out a comparison study showing that it’s now cheaper to buy a house than to rent in 98 out of 100 metro areas they considered.

The Price-to-Rent Ratio generally compares what it costs to buy a house versus what it costs to rent. High ratios suggest renting is a better option, while low ratios point to home purchase as the better move.

Home prices are 30% or more off their peak and displaced families are flocking to rental properties. So, Trulia’s conclusions are fairly obvious. But the price-to-rent ratio accounts only for the financial factors related to the rent vs. buy decision, while ignoring other important factors.

People with lingering credit problems can’t even consider buying as an option… they must rent.

Even for those who do have a choice, renting still has its advantages. Renters have the flexibility to move – either across town for cheaper rent or to another state for a job opportunity. Renting also shifts responsibility and liability away from the inhabitant and onto the landlord. It seems there’s a “freedom premium” in rental rates that many are willing to pay.

“Rational actors” will continue to weigh the benefits (and risks) of buying versus renting, but they’ll look at all factors involved – not just the dollars and cents of it.

If you haven’t done so already read the Survive & Prosper issue on “The 3 Best Places to Buy Property.”