Rent or Buy: Economist's Formula
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Richard Kent Green, a professor of real estate, finance and economics at George Washington University, looked at renting vs. buying when he decided where to live.
Green said the active rental market in the Washington area can help you find a rental property to compare with a potential purchase. The key is that the properties are comparable in size, neighborhood, age and all other factors.
For Green, the magic number is six at current interest rates.
Here's what that means: Find a rental property that's comparable to the property you're thinking of buying. Figure out how much it costs to rent annually; if the rent is $2,500 a month, you're spending $30,000 a year, or 6 percent of $500,000.
So by Green's math, if the house costs $500,000 or less, it's a decent bet.
Say the cost of renting is less -- $1,700 a month, or $20,400 a year. That's just over 4 percent of the cost of the $500,000 house.
In that case, Green said, renting looks cheaper than buying. If the percentage is closer to 5, the decision on whether to rent or buy depends more on individual factors, such as your appetite for risk and how long you're planning to stay in the house.
But be sure to look at all the costs of buying a house; the closing costs take a while to amortize.
