Last week we fell into conversation with a fellow who’d recently relocated from the San Francisco area, an area known for its high cost of living. He was basking in our low rental rates and his increased ability to save. He explained that even though his prior rent was split five ways, he was still paying $2200 a month and that’s not the worst of it…they shared one bathroom! He said that when they had a vacant bedroom to fill, successful applicants were those with odd-hour work shifts which helped to diffuse the bathroom schedule. For a fraction of the cost, he now has his very own bathroom!

Today in Tucson, rental rates are increasing, particularly in the downtown area. A recent ad caught my attention. The upper floors of the stately bank building at 2 E. Congress (Chase Bank is their ground floor tenant) have been converted to rentals: 398sf to 845sf renting at $916 to $1755 a month. Seems high. A recent article in the Arizona Daily Star noted that downtown rents are the highest in the city and 13th highest statewide.

So does that mean you should buy instead of rent? The price-to-rent ratio will give you a quick and dirty answer. It divides the price of the home by the monthly rent. If the answer is less than 20, consider buying. In the Barrio Viejo neighborhood just south of the Convention Center, the average rent for a two-bedroom home is $1240 a month or $14,880 a year. The price-to-rent ratio would say that if you could buy a home in Barrio Viejo for $297,600 or less, it might be a better deal than renting ($297,600 divided by $14,880 = 20).

But there’s more to it than that and an article from Fidelity does an excellent job of fleshing out these points:

  1. Unless you plan to stay in the home long term, you’ll be hard pressed to make up the costs of the buying and selling transaction and, even if home prices are increasing, you won’t have given them enough time to work their magic.
  2. Speaking of home prices, they don’t always go up – we experienced this first hand in the recent housing bust. We’d prefer you buy a home not for its investment potential but, instead, because it suits your budget and needs.
  3. Comparing the mortgage payment to the rent payment isn’t comparing apples to apples. There are lots of hidden and not so hidden costs of home ownership – ask any homeowner.
  4. Most homeowners don’t benefit from a tax savings. As mortgage rates have decreased, most taxpayers find that they are better off taking the standard deduction rather than itemizing.
  5. The true costs of homeownership may prevent you from savings and investing in other assets that might enjoy a higher rate of return and diversify your risk at the same time.

But, it still is “home sweet home” if you make the right choice for all the right reasons.