patrick.net

Not strange at all! That's exactly how you should look at it.

You have to make some assumptions, most importantly whether you think the price of the house will fall or not over the time you own it, but in general, I say 6% rent per year is borderline.

So in the case of $650K, the rent should be $3,250 per month or more to make the house worth buying.

If the rent is less than that, don't buy the house, rent it.

Here's my calculator for more details. It asks for a specific address though:

http://patrick.net/housing/calculator.php

It's funny how messed up the housing market is. I'm not sure if 650k is a mansion in beverly hills or some average 3bd in the middle of some random neighborhood.

depends on where this house is. IF it is in certain parts of Beverly Hills, you won't have any problems renting it out. I have 2 rentals and I decide to buy a place depending on many factors, but a big factor is WHY would you rent out a house in a certain place??? One thing that has keep my rentals full is location, location, location! If you rent out in an area where there is a sought after public high school, or university then you should not have problems. Of course, do extensive research on how much rents are in that area, so that you don't overpay for the house.

I rent a place that would sell easily between $650k-700k. It's a townhouse in sf peninsula.

my rent, $2200/mo. that's why i rent and wait to buy.

I'm actually curious if such a person physically exists on this planet who would give 650k for a townhouse.

ChrisLA says

I’m actually curious if such a person physically exists on this planet who would give 650k for a townhouse.

Sure, and many times more. On Manhattan.

ChrisLA says

I’m actually curious if such a person physically exists on this planet who would give 650k for a townhouse.

I'm guessing you haven't seen the SF Peninsula home prices. Look anywhere between Millbrae to Palo Alto and you'll find buyers for good condition townhouses for $425/sqft. SFH usually goes for $500/sqft. I am sure these insane prices is what drive Patrick to start this site and also the reason why people need to be educated about home prices.

Patrick, I've been following your site since the crash, at least when I became aware of it, in late 2007. This is my first comment but since day one I've always had reservations on your math regarding rent vs. Buy prices. Don't get me wrong I respect what you're doing and I've personally learned quite a bit from your site but how do you justify paying $650 clams for a monthly rent of $3250? I guess if you're an all cash investor 6% beats a money market account but for a regular Joe this does not make sense to me.

My math:

$650,000 purchase price.
-130,000 20% down
$520,000 principal
30 year mortgage at low 5% rate(this is low no matter today's rate)
$2780 PI mo
1.25% PTax $8125/12=677mo
$154 mo insurance ( arbitrary guestimate from experience)
$3607 PITI mo
$245 mo HOA fee where I live. That's $3852 plus maintenance which means a considerable loss at the suggested $3250 rent.

"I’m actually curious if such a person physically exists on this planet who would give 650k for a townhouse."

In New Jerey, we have townhouses selling for $1 million + all the time. This townhouse in Manhattan is currently listed for $90 million:

http://www.bhsusa.com/manhattan/upper-east-side/east-80th-street/townhouse/1207017#

Leon says

how do you justify paying $650 clams for a monthly rent of $3250?

Take the address of a place asking $650,000 and put it in my calculator:

http://patrick.net/housing/calculator.php

That will make clear my own calculations. 6% is just a crude rule of thumb.

I think the rent on a $650k house would also depend on what fixed costs were incurred. For example, I just bought a condo for $65,000, or 1/10 of $650,000, and I just rented it out for $1,600. The price was low because of high fixed costs. In my case, the fixed costs are over $700 per month, so my net rent before maintenance and taxes is just over $800.

Bernie says

I just bought a condo for $65,000, or 1/10 of $650,000, and I just rented it out for $1,600. The price was low because of high fixed costs. In my case, the fixed costs are over $700 per month, so my net rent before maintenance and taxes is just over $800.

Where would that be, may I ask?

What most people have not factored is 1) After buying 650K house where will be price of it in near future(5 years at least) 2) Use this to justify the rent/purchase.

http://patrick.net/housing/calculator.php

bubblesitter says

What most people have not factored is 1) After buying 650K house where will be price of it in near future(5 years at least) 2) Use this to justify the rent/purchase.
http://patrick.net/housing/calculator.php

I think they probably have factored it in--they just have a different view of the future price than you do...

dcllee says

I’m guessing you haven’t seen the SF Peninsula home prices. Look anywhere between Millbrae to Palo Alto and you’ll find buyers for good condition townhouses for $425/sqft. SFH usually goes for $500/sqft. I am sure these insane prices is what drive Patrick to start this site and also the reason why people need to be educated about home prices.

Thanks for the info. Just looking at that, kind of depressing in a way. Huge flag/symbol of economic and national decline.

ChrisLA says

Thanks for the info. Just looking at that, kind of depressing in a way. Huge flag/symbol of economic and national decline.

I agree. Gigantic increases in inequality are a sign of national decline. The United States becoming more like Latin America every day. Banana Republicans are turning America into another Banana Republic.

Ironically, Brazil is getting more equal and its economy is growing much faster than ours. Those two things are cause and effect: when the common people see that they are not doomed to be slaves to the ultra-rich forever, they start businesses and they work hard, and the economy does well.

But in America, the ultra-rich have already ended the chances of the common people by their control of government via corporate lobbyists and their legions of Fox News zombies who mindlessly chant "socialism, socialism" whenever the stranglehold of the ultra-rich is questioned.

Thanks for the info. Just looking at that, kind of depressing in a way. Huge flag/symbol of economic and national decline.

I agree. Gigantic increases in inequality are a sign of national decline. The United States becoming more like Latin America every day. Banana Republicans are turning America into another Banana Republic.

Ironically, Brazil is getting more equal and its economy is growing much faster than ours. Those two things are cause and effect: when the common people see that they are not doomed to be slaves to the ultra-rich forever, they start businesses and they work hard, and the economy does well.

But in America, the ultra-rich have already ended the chances of the common people by their control of government via corporate lobbyists and their legions of Fox News zombies who mindlessly chant “socialism, socialism” whenever the stranglehold of the ultra-rich is questioned.

Yes yes! great thread! More please!

Yes, your calculator makes much more sense to me, thank you. In response to the original question, above, I live in Chula Vista, CA where $650k is asking price on a 4300 sq ft home (sold at peak for $1.4M)with slightly a half acre parcel. Asking rents start at $4500 and after several months drop to $3700 which is fair. Problem is most people are downsizing so properties sit empty a bit longer than investors would like and pressures are pointing down.

I believe that the housing market will continue to correct itself back to pre-Y2K to about $100 sq ft. Most people disagree with this prediction but my recommendation would be not to buy anything right now especially at this price range. Ignore the temptation save your money and 3-5 years from now if you really must than buy after the dust has settled, the rubble has been cleared and prices have remained flat for at least a year or two.

Leon,

I not only agree with you. BUT in the Bay area Ca. (east bay, Brentwood and surrounding) I see the prices going down about another 20-35% of late as they come down since my last post about %

I say the most high end of Brentwood will price out around 379,000 and those are 3K Sq Ft. homes with lots on Avg. of 16K - 20K Feet, with pools and 3 car garages. These are the very homes that in the Summer of 2006 sold for 1.1 Million, and many many took out loans of 95% and even with 30% DOWN BACK then, are now underwater 200K and I just can't figure how long and or how many are going to just keep on paying when they realize they are that far or more upside down, that will then move the market to where I am thinking it should wind up and maybe even past that, after all if Gas is 4.50 a gallon, who can afford to live 50 miles from work? 100 miles a day, round trip, 2000 mi a month, at say 20 mpg so 450 a month in gas, kinda of hurts reason to go out that far to buy a home, when in Livermore you can find a nice home for 450,000 might as well spend on a MORE expensive home closer in then a less expensive home far away, and we KNOW GAS is going to be 4.50 a gallon for ever sooner or later. So I see all FAR OUT Sub's suffering greatly and may become cheap cheap homes if gas goes over 6.00 a gallon, and that is as SOON as USA Economy and China, and India all are back on Track, OIL will go straight to 200-300 a bbl and it will seem like over night yet it is SO Obvious that, here is your warning in my opinion. What do you all think?

You're surrounded by Perma-Renters here, so nobody has bothered to tell you that with the information you've provided is inadequate to make an informed decision. You forgot to provide this data:
1. What's the best fixed 30 year mortgage interest rate you can get? What's your downpayment? This is needed to compare the Principal + Interest to renting.
2. What's your income (to determine your income tax deduction savings above the standard deduction)? What's your tax filing status (Married Filing Jointly, single, etc)?
3. What's the property tax rate?
4. What's the insurance rate?
5. Is the home located in an area like Las Vegas, Detroit, Phoenix, rural anywhere, where the bubble has finished deflating and there's little risk of home prices being lower 5 years from today? If so, then you can remove the Principal repayment part of your mortgage from the comparison, since that's nothing more than "Forced Savings"...and don't believe the Perma-Renters...they never, ever have the discipline to save that money on their own via cheaper rent...otherwise they wouldn't be Perma-Renters.

Cvoc13 says

I say the most high end of Brentwood will price out around 379,000 and those are 3K Sq Ft. homes with lots on Avg. of 16K - 20K Feet, with pools and 3 car garages. These are the very homes that in the Summer of 2006 sold for 1.1 Million

If such events keep unfolding, it will certainly trickle down and sap out buyers from other counties across the BA.