How to tell if your market is in a bubble or not

[Bojan Kovacevic]

Something I heard a while ago is that if renting a home is cheaper than buying it in an area, then most likely that area is in a bubble. For example in my area a single family detached home (4 bedroom, 2-3 bathroom) starts at around $750,000. The same home rents for approx. $2500/month. Buying the home with a 10% down payment and at an interest rate of about 2.5-3%, monthly payments are approx. $3,000 over 35 years. If mortgage alone would cost more than renting a home, isnt that a sign that the market is in a bubble? What do you guys think?

I live in Vancouver, BC and it is very hard to find a single detached home in the area for less than $700,000. Although I know the area is nice, I still can't see the value in the home or the land. I'm looking to start renovating homes in the area. Would you guys recommend for a beginner to start further out where homes start around $350,000-500,000? Or try to find a private lender and start in a high priced area like Vancouver?

[Jack Butala]

How many times have you heard somebody say some version of this statement: “We made 100,000 on the sale of our house and we only lived there for five years. Can you imagine if we continued to rent the apartment we used to live in all that time? We would have lost all that money…

What they really mean is that they sold the house for $100k more than they paid for it.

Most of us here on BiggerPockets chime in to help new investors, so I put this post together hoping to help them on this topic.

I have long been an advocate of renting your primary residence vs. owning it. A lot of years ago, I wrote a technical paper on this topic (long before there were blogs or MicroSoft Word). It turns out I was right. Well in most circumstances, anyway.

For the record, I own two homes (I paid cash for the both).

Of course there are several financial factors that are involved when making a decision like this.

Home price

How long will we live there?

Down payment amount

Future economic factors

Maintenance costs

And that concept call Opportunity Cost

I ran across this Post in the New York Times today and I’ve spent two hours analyzing it.

NEVER HAVE I SEEN SUCH A CONCISE WAY TO REVIEW THIS TOPIC.

It confirms what I have what I have been saying for many years.

Please take a look:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0&abt=0002&abg=1

Here’s my synopsis: We are all involved in real estate because we know how to, or we are trying to learn how to, generate a secure and attractive rate of return on our money.

I regularly double or triple my money or more buying and selling vacant land. Usually in less than 30 days (or I don’t do buy in the first place).

The input in the post only allows for a 20% annual return. If it went any higher the argument for renting would become even stronger.

The opportunity cost of tying up all that cash, time & energy is almost never worth it.

One of the only times it makes since to finance your primary residence is when you know you are buying a property substantially under market, and reselling it. Some folks call that flipping. Or if you buy a duplex, live in one side, and work the deal so the tenant is paying all or most of the mortgage (some circumstance like that).

Buying a rental house (or 20) the right way, and renting them out forever is one of the best passive business models I’ve ever experienced. This discussion is only about your primary residence.

And that’s just half of the decision. The other half is location. Every apartment or townhouse I’ve ever lived in centered around a ton of fun. Every house I’ve lived in was in the quiet suburbs where we did chores on Sunday.

A few years ago, I sold my primary residence and paid cash for a townhouse in Old Town Scottsdale, Arizona smack in the middle of all the fun. We completely renovated it and I can’t imagine living anywhere else.

It was one of the best financial and lifestyle decisions I’ve ever made.

Renting is almost always better, when you consider every aspect.

@Bojan Kovacevic

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