|
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.
|
