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One way, but by no means the only way, to decide whether you are better off financially renting or buying a single family residence (SFR) is to consider the property’s price-to-rent ratio. This rule of thumb figure evaluates the sales price of a property, but is more commonly referred to by real estate agents as the gross revenue multiplier (GRM).

The GRM is calculated by dividing the asking price for a residence by the annual rent it or a comparable property commands.

The cusp of a buy or rent decision historically is a GRM of around 14, if not lower. If a GRM for a property is at or above 14, a tenant may consider buying if he is motivated by pride of ownership amenities or is driven by pressure from friends and family to own rather than rent.

To make financial sense, a great deal of sweat equity must be continuously invested in a property for a purchase at a GRM of 14 or greater. The owner must keep maintenance costs low enough to break even when matching his after-tax, out-of-pocket costs of ownership against the property’s implicit rental value.

For the owner purchasing a SFR at a GRM of 14 to be able to recover his cash investment on the resale of his property, the price of the property must first increase more than 10% beyond the price he paid just to cover all his purchase and resale costs, exclusive of the investment. This price increase necessarily covers transactional costs of around 2% of the purchase price incurred to initially buy the property.

Also recovered in any price increase are the costs of a resale which generally run around 8% of the sales price to pay for broker and escrow fees, and well as any repair costs associated with mitigating deferred maintenance. The costs of a resale are often far more when the sale occurs in an average or strong buyer’s market since sellers must be much more competitive. In strong buyer’s market conditions, sellers often pay an additional 3% to 6% of the price to cover the buyer’s non-recurring and recurring closing costs.

Thus, a property has to appreciate in price by 10% to 15% just to get back the original downpayment and the equity built up through loan amortization, with no return on the amount of that investment. The current outlook for inflation’s future impact on the value of property is comparable to the post-WWII rate of increase in home prices which limited annual price increases to consumer price index (CPI) inflation, this time around 2% and only after prices of individual properties finally reach their bottom point in this trough.

A buyer will have to stay in the property for a minimum of six or seven years just to break even on a resale and get his downpayment and principal reduction returned to him. This then leaves him with no net gain from the property with which to consider an upgrade or compensate for inflation on his invested dollars.

Rather than blindly believing buying a home is always the right thing to do or that now is always the right time to buy, buyers tend to make better decisions when they understand current market trends and the GRM of properties in the neighborhood they want to live in.

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