Evaluating Home Purchase Prices
As the real estate market continues to be depressed and with the interest rate near record lows, it is a good time to think about home purchase for those that are renting. There are many ways to evaluate home prices and how low they need to be for them to be attractive. I recently read an article in “Smart Money” (December 2009 edition) that gives a good way to evaluate home prices. Let’s say that you are looking to purchase a 3-bedroom single family home. Find the comparable annual rent in the similar area. Divide the purchase price of that home by the annual rental price. If the result is 15 or below, then the home purchase price is very attractive. For an example, let’s say the price of a home is $300,000. If the rental of a comparable home is $2000 per month, we multiply that number by 12 to get the annual rental price, which is $24,000. We divide $300,000 by $24,000 and get 12.5. The purchase price of this home is very attractive. I personally think that this is one good way to evaluate home purchase price, but don’t forget your due diligence in determining the “right” price for the home that you are considering. We also provide the Rent vs. Own analysis that compares the total cost of renting versus owning so that you may know the benefits of home ownership in dollar amounts. This analysis can also help you to decide whether you should use the cash that you have for investment (and keep renting) or for home purchase. Check it out!
