Wednesday, August 16, 2006

The 10% rule in real estate

I say that if you buy a house, and you can't rent that house and cover all your costs with that rental -- then the house you bought was overpriced .

The cost figure I have always used is 10 percent. If you figures the interest lost if you buy the house for cash, and if you figure the mortgage cost when you buy the house "on margin," and then add the costs of repair, upkeep, and taxes, you'll find that the annual cost of any house is 10%, no matter how you cut it.

People are always surprised (some are shocked) when I tell them that the house they buy will cost them 10% annually. They tell me that I'm nuts, and that my calculations are all wrong. So then I say, "OK, let's sit down and figure it out on paper." So we do the math, and my chagrined friend ends up conceding that I was right.

Is real estate ever a good buy? Of course it is -- real estate, like stocks or bonds, is a great buy when it's cheap. Real estate is not cheap today -- so consequently real estate, in general, is not a good buy today.

I need a home. I've got to buy something now."

Hey, the market isn't interested in your finances or your problems or the fact that you "need a home now." You have to have a place to sleep? Your family needs a roof over their heads? Then it's probably better to rent a place. At this time, renting make more financial sense than buying a home. By next year, that should begin to change, at least, that's my view.


Blogger RMays said...

I did the calculation and you are sooo very right . . . damn! I didn't realize, and I bet alot of "investors" today never realized (and still don't). Sad.

12:33 PM  

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