Ever hear of the real estate Rule of 15? I mentioned it yesterday on a segment with Al Roker on the TODAY Show as we discussed a question tossing and turning through many American heads these days: “Should I buy or rent?”
Here’s how the rule goes: Let’s say you’re looking at a 2-bedroom house or apartment:
1) Find the going rent in the neighborhood or location you’re interested in—which you can track down through sites like Zillow.com and Trulia.com—and calculate how much you’d spend in rent a year. Say, $2,000 a month would mean an annual rent of $24,000.
2) Multiply that number—your annual rent—by 15. (in this case: $360,000)
3) Now look up and compare the going price of a comparable space in the same area, to buy.
4) If that number is much greater than your annual-rent-times-15, the location probably still has a way to go down in home value. The bubble here ain’t done burstin’ and you should rent for a while. The last thing you want to be is upside-down on a mortgage—owing more than your new home is worth.
Keep in mind that some bubbles burst more quickly than others. So if you’re going to stay put for 10 to 30 years and you need to buy now, then buy. Just be very well informed about where you’re buying, what property values are and, should you dip into the cheaper well of foreclosures, do your research. You want a ‘merit’ badge in your local market before you buy these days.
You can calculate your own “Rule of 15” numbers using the Center for Economic and Policy Research’s report on ownership vs. rental costs in 100 metropolitan areas. Click here for the PDF.
But just as important as rules and research is the need to clean up your credit score and credit history. The difference between a 680 and a 780 can mean hundreds of dollars in monthly mortgage payments and thousands over the life of your loan. Not to mention that it can bring you to the front of the line when you’re vying for a rental.
If I were to sell my home today, I’d rent for at least a year. And I’m in New York City.
Let me know what snags you’re running into in your housing market in terms of buying and/or renting. Are you having trouble deciding? What’s your timeframe? Write me below!