BusinessWeek comes out with a Top 10 list of best places to buy vs. rent. This is their formulation in their words:
“To create a fair match-up between owning and renting, we calculated ownership costs assuming a fixed 30-year loan for 100% of the purchase price with no down payment. If they had instead decided to factor in a 20% down payment, owning would have been the cheaper option for the top 10 metros on our list.”
BusinessWeek Best Places To Buy Problem
The problem I have with this list is that I don’t see the words “Honolulu”, “Newport Beach,” “Malibu”, “San Francisco”, or “Paradise”! Everywhere one wants to live is expensive, and everywhere one doesn’t really prefer to live is cheap. Things are cheap for a reason, and real estate is no different.
Think about prime real estate sitting a top a triangle. The triangle’s base always gets wider as demand continues to grow. Meanwhile there’s only one prime location. Is it no wonder why Realtors always talk about “location, location, location”? You can also think of your sub-prime location as an inverted triangle ready to topple over. Only a very few want to buy, and the supply is overwhelming.
During this real estate correction, you’ve seen expensive areas such as San Francisco correct 15-20% from the peak, however, drive out 1 hour east and places such as Antioch and Pittsburgh have gotten crushed by 40-60%.
If you’re an investor, focus on places where you’d actually see yourself willing to live in. After all, if you wouldn’t want to live in your property, why would someone else?
A similar purchasing analogy can be made with cars. You may think that someone buying a limited production Lamborghini Gallardo Spyder for $210,000 is foolish with his money.
But, after one year later, he’ll sell that Lambo for more, or at the least recoup more than if he had bought a brand new Ford Expedition for $48,000. Obviously this example is extreme here, given most don’t have $200K to splurge on a car, but you get my point.
Things are cheap for a reason. Only if you have the financial means, and are already living in one of these 10 cities should you consider buying. Otherwise, just focus on buying or renting in that tropical paradise in the best location possible.
Read more to see what paradise cities lie in BusinessWeek’s Top 10 list!
BusinessWeek: When It’s Better to Buy Than Rent
1. Detroit Metro (Mich.)
Own/rent ratio: 94%
Annual cost to own: $8,519
Annual cost to rent: $9,072
Detroit is best known as the home of the Big Three automakers: General Motors, Ford, and Chrysler. The city has been hard-hit by the recession because of its dependence on the struggling auto industry. Detroit was the 11th largest metropolitan area as of 2007, with a population of nearly 4.5 million. It had and unemployment rate of 17.1% in June, the worst of any metropolitan area with a population over one million.
I’m not sure what BusinessWeek is thinking. Perhaps Detroit is #1 simply because it is so cheap.
2. Pittsburgh Metro (Penn.)
Own/rent ratio: 97%
Annual cost to own: $8,947
Annual cost to rent: $9,252
The Pittsburgh area, located on the west side of the state, has a population of about 2.3 million. This former steel town now has large employment in the education and health-care industries. Heinz and United States Steel have headquarters there. The area has escaped the worst of the recession and had a 7.7% unemployment rate in June.
3. Rochester Metro (N.Y.)
Own/rent ratio: 113%
Annual cost to own: $9,523
Annual cost to rent: $8,448
Located near Lake Ontario, the Rochester metropolitan area has a population of more than 1 million. Rochester is home to Eastman Kodak and the University of Rochester. The Rochester unemployment rate was 8.4% in June, not seasonally adjusted. In the first half of this year, one in every 276 houses received a foreclosure notice in the Rochester area, according to RealtyTrac.
4. Memphis Metro (Tenn.-Miss.-Ark.)
Own/rent ratio: 114%
Annual cost to own: $8,593
Annual cost to rent: $7,524
Memphis is located on the Mississippi River and the metropolitan area has a population of more than 1.2 million. The city is known as the birthplace of rock and roll. Elvis’ estate, Graceland, is in the area. FedEx, AutoZone and International Paper are headquartered there. The Memphis area ranked 43rd in the nation in foreclosure notices in the first half of 2009 according to RealtyTrac.
BusinessWeek has Memphis right here. I’m focusing my real estate crowdfunding investments on Memphis and Charleston.
5. Tampa Metro (Fla.)
Own/rent ratio: 115%
Annual cost to own: $10,823
Annual cost to rent: $9,444
South Florida is has been hit hard by the recession, and home prices in Tampa have taken a dive. The metro was the country’s 19th-largest in 2007, with a population of more than 2.7 million. OSI Restaurant Partners and WellCare Health Plans are headquartered there. The Tampa Bay area also relies on the tourism industry.
6. Cleveland Metro (Tenn.)
Own/rent ratio: 119%
Annual cost to own: $9,934
Annual cost to rent: $8,364
Cleveland, Tenn., is located in the southeast corner of Tennessee, near Chattanooga. Major employers include Johnston Coca-Cola Bottling, Whirlpool, and Rubbermaid. With a population of approximately 112,000, the Cleveland area is among the smallest on this list.
7. Dayton Metro (Ohio)
Own/rent ratio: 119%
Annual cost to own: $8,420
Annual cost to rent: $7,056
Home prices and employment in Dayton have both taken a hit in the recession. The unemployment rate in the area was 12.1% in June. The Wright-Patterson Air Force Base is a large employer in the area.
8. Columbia Metro (S.C.)
Own/rent ratio: 123%
Annual cost to own: $9,885
Annual cost to rent: $8,016
Columbia is the state capital and home to the University of South Carolina. The metropolitan area had about 700,000 people as of 2007. The city’s large employers are the state government and University of South Carolina, two industries that are more recession-proof than others, and so it has been spared from the worst of the crisis. However, the unemployment rate still reached 10% in June (not seasonally adjusted).
9. Orlando Metro (Fla.)
Own/rent ratio: 124%
Annual cost to own: $12,107
Annual cost to rent: $9,756
The Orlando metro area, in central Florida, has a population of more than 2 million. Orlando’s economy relies heavily on tourism from Walt Disney World, Universal Studios, and SeaWorld amusement parks. The metro area ranked 10th in foreclosure notices in the first half of 2009, according to RealtyTrac. It had an unemployment rate of 10.8% in June, not seasonally adjusted.
10. Dallas-Fort Worth Metro (Texas)
Own/rent ratio: 124%
Annual cost to own: $11,037
Annual cost to rent: $8,880
Home sales in the Dallas-Fort Worth area were flat in the second quarter of 2009 after several declines, according to the National Association of Realtors. Mortgage rates are low, making this a good time for home buyers. The Dallas-Forth Worth region was the fourth-largest metropolitan area in 2007 and the largest city on this list. It had a June unemployment rate of 8.2%. American Airlines and ExxonMobil are headquartered in the area.
BusinessWeek Editor’s Note: We also factored in tax rebates assuming an annual income tax rate of 30%. The ownership costs were calculated using a 30-year fixed mortgage with an interest rate of 5.5% and maintenance fees and property taxes were assumed to be about 3%. The second-quarter rental data, which was provided by REIS, is a blended average of all rental types and includes rent concessions. The second-quarter home value data comes from Zillow.com.
Wealth Building Recommendations
Explore real estate crowdfunding. If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today.
They allow everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
Shop around for a mortgage. Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.