Part 6: Let’s emphasize the important stuff (cont.)
I talked about this in July 2008 (posts 35, 36 and 37). Go back and re-read the posts before we go further. I’ll wait until you are finished.
OK, are you finished reading those old posts? Great. Now let’s go to our new bible, “The Investor’s Manifesto”, written by William Bernstein. He approaches the issue from a straight dollars and cents angle. I could go through the math, but it’s boring. However, he boils it all down to a nice rule of thumb which all of us can use.
If you are thinking of buying a house, find out what the monthly rent would be for a similar house in that area. Don’t trust the realtor’s answer, double-check. Multiply the monthly rental number by 150. The resulting number is a reasonable price to pay for the house. If the house price is too high, then rent one of the other places for a few years until the market gets back to normal. If the market doesn’t cool down in your area for ten years keep renting. Once the market gets to a point where the rule of thumb says the price of your prospective house is reasonable, go ahead and buy.
Example: You look at a condo that is selling for $675,000. A few other condos in the same building, with similar floor plans, rent for $4,000 per month. Multiply the rental price by 150 and the result is $600,000. This means a realistic price you should pay for the condo is 600,000 or below. Try to negotiate the $675,000 price downwards. If they don’t budge, rent a condo instead of buying that one.
If Dr. Bernstein was looking for a house during the years 2000 through 2007, he wouldn’t have bought anything. His rule of thumb would have told him that it was better to rent during that time period. But in 2008-2009, after the market had crashed, he would have swooped in and gotten a really nice house for half the price it would have cost just a few years earlier.
I recommend that you use Dr. Bernstein’s rule of thumb for future rent versus buy calculations. It’s much easier and based on a lot more sophisticated math then my analysis in posts 35, 36, and 37. Tell all your friends about it too. Better yet. Tell all of them to buy his book. It’s all they need to do a good job of saving and investing.
So why did I make you re-read those three posts and then tell you to disregard them? I just wanted you to appreciate the beauty of my prose.
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