Hurdle Rate’s Home Ownership Buy Signal

A new report published by researchers from several universities examines what they refer to as the hurdle rate,  the point at which it’s equally beneficial to rent or buy real estate if your only criterion is to build wealth.  According to “The Rent vs. Buy Decision,” released about two weeks ago, today’s hurdle rate indicates it’s a better time to buy than to rent, because more wealth can be achieved owning than renting.

The indifferent renter is someone who is just as happy renting as buying, depending on which option is better at building wealth over a holding period.  The study presupposes the renter saves money by renting, and invests that savings to earn a return.

The hurdle rate is the balance point between renting and buying, where in terms of wealth building neither option has a significant advantage over the other.  A hurdle rate lower than the average past real estate appreciation rate for a particular market would be considered a “buy signal,” with the expectation that future property appreciation should, on average, create more wealth for a home owner than a renter.  Conversely, a hurdle rate higher than the average past property appreciation for a particular market would be interpreted as a sign that ownership could stifle wealth creation.

According to Ken. H. Johnson of Florida International University in Miami, one of the authors of the study, "[It’s] not a perfect reason to buy...it’s just a test."  Nevertheless, he says, "It's a sign that the market's turning."

The study, part of a series Johnson and some other researchers have conducted on the rent vs. buy decision, looks at the narrow topic of the hurdle rate; other papers take a broader approach, examining whether it makes sense to rent or buy based on financial considerations.  An earlier paper suggested renting can make more short-term sense in some instances, provided renters invest all of their savings over a period of time in an instrument that generates a return on investment comparable to what they would earn in appreciation on real estate in their market. However, few renters could realistically invest all of their savings from renting.  And in these cases, owning is incomparably the better investment choice over the holding period.

To learn more about “The Rent vs. Buy Decision” study, watch this two-minute video.

Search Your Own Property Address Online

If you're considering buying, selling, or renting a property, it makes sense to search the property's address online.  It's a quick way to see what other homes in the neighborhood are selling or renting for (though for true comparables it's always best to get a complimentary Competitive Market Analysis (CMA) from your favorite real estate agent (shameless plug)).  But there are other important reasons to do internet searches of a property address.

Sites like zipskinny.com or city-data.com can provide some demographic information for a zip code, but searching an address along with "crime data" may turn up results that include your local police office's crime map, and sites like Trulia even display crime maps for cities, zip codes, and neighborhoods with color-coding to differentiate the intensity of crime.  Search your street or zip code along with "Megan's Law" to find out if there are registered sex offenders in the area, with offenders' names, addresses, and perhaps even photos.

Additionally, searching the address with the term "schools" can provide valuable information in selecting a home to buy or rent, or in marketing your home for sale.

Other benefits of searching a property address online include: 1) finding what neighboring homes have sold for, which may assist you in petitioning your county to lower your property taxes, 2) view your home's property records, and update them to include recent upgrades or renovations, 3) see the Google street view of the home (which may very well be an outdated view), and 4) discover if scammers are attempting to rent or sell your home via fake home listings on the internet (I've even seen my own rental listings copied and re-listed on craigslist at unbelievably low values by overseas scammers posing as the home owners in an attempt to make quick money from less-savvy home seekers).  In the event you ever find your home falsely listed, contact the site it's on, identify yourself as the real homeowner, and request the listing be removed immediately.  If you're looking for a property and see a listing where the owner is overseas, be very cautious.  Legitimate owners who have been transferred internationally would most likely have a local representative (i.e., a property management company or real estate agent) handle the process on their behalf.  Never send money hoping they'll send you the keys!