The other day I got an email from my friend Melissa at Mom’s Plans. Her family is going to be relocating from Chicago to Arizona for two to four years. She recognized that it was very similar to when our family moved to California for what was supposed to be two years and turned out to be 6 years.
In her email, she mentioned that the Chicago real estate market makes it difficult for them to buy a house. However, in the Arizona real estate market home ownership is very realistic for them. They want to buy a house, and I can see why with three kids.
In some ways, I had the opposite issue in my move. I was going from a hot Boston real-estate market to an insanely, white hot Silicon Valley real estate market. We could afford a condo in the Boston suburbs, but in Silicon Valley
the house we lived would literally cost a million dollars. We didn’t have that kind of cash for a down payment, and the monthly mortgage would still be huge. However, we could rent the house for $2900 a month.
That may seem like a lot for rent, but for a million dollar home it isn’t bad. In this case it was the only option for us.
If it wasn’t so obvious, or in the scenario that Melissa presented, I would put on my real estate investor hat and try to think like that. Specifically, I would have looked at the Price-rent ratio
mentioned here (see #5).
The price-rent ratio is the cost to buy vs. a year of rent. The house in CA we lived in would have a ratio of around 29. From the article, “As a general rule of thumb, consumers should consider buying when the ratio is under 15 and rent when it is above 20.” At a 29 ratio, it is way above the 20 rule of thumb. It’s a lot of “price” for the “rent”.
In contrast, last year we expanded the our real estate empire, with a purchase of a place that had a price-rent ratio of 6.5. We’ve been getting a lot of “rent” for a low “price.”
My advice was simply, rent if it is the price-rent ratio is closer to 29 and buy if the price-rent is closer to 6.5.
However, all this was with the one huge important caveat. This kind of decision puts the “personal” in “personal finance.” There’s risk that they might not be able to sell the house when/if they want to move back to Chicago. There’s risk that they might not be able to rent it in such a scenario as well. There’s potential reward of owning their own home (which Melissa stated was a big personal draw). There’s potential reward of price appreciation in four years leading to them making money while it is their shelter.
In short, at least 73 different things can happen, and they run the gamut from good to bad. Personally, I think most of them are good, but someone may view them as mostly bad. At the end of the day, I go with what Bill Belichick has said last month, “My crystal ball isn’t any clearer than yours is, so I don’t know what’s going to happen this year.” My crystal ball doesn’t get any clearer looking 2-4 years in the future in the real estate market in Arizona.
I like to think that price-rent ratio helps quantify some of the risk and I hope it was helpful. I know Melissa is smart enough to have gone through all the possible scenarios and confident their family will come up with a best decision for them.
Mario Debtblag says
Perhaps. I think it’s always a better idea to use more information than less when making a decision, but the ratio would have to be pretty off for me to want to choose buying over renting in such a short-term situation.
Different strokes for different folks, of course, but that would be my starting point…
What @Mario said. For a two to four year(*) span, the ratio would have to be a lot closer to the 6.5 ration end of the spectrum, if not even lower.
(*) Sure, anything could happen. But Melissa has to make decisions based on the information she has available at the time.