Thursday, May 29, 2008

What should I pay for that condo?

Renting isn’t necessarily for dummies, according to a new article in the Times. As the article says (apologies for those who can’t access it):

One of the big lies of the real estate business is the idea that renting a home is tantamount to throwing money away. It’s a useful fiction for real estate agents, because they make vastly bigger commissions on house sales than rentals. But the comparison isn’t nearly so straightforward for the rest of us. Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying, on the other hand, involves multiple expenses, some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest. (The mortgage-interest tax deduction reduces this last cost but doesn’t eliminate it.) When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.
So where’s the break-even point? At what point does it become more expensive to rent than to buy? The article says it’s roughly the point where a property costs more than 20 times the annual rent for the same property. So if your apartment rents for $2,000 a month, you shouldn’t pay more than $480,000 to buy it. There are lots of variables to consider, of course, and the Times provides this nifty online calculator to play with them.

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