The Role of Hurdle Rates in the Rent vs. Buy Decision

Jumping through hoops, overcoming obstacles, tackling hurdles – this is either Field Day at Brackett School, or the past few years in real estate. Luckily, most signs are pointing to a recovery – although it looks like slow and steady will win this race.

As the market regroups and recovers, the rules of the game are also changing with it. Tactics for securing homeownership that might have worked a year ago (i.e., the lowball offer) are shifting.

One of these shifts involves the Rent vs. Buy dynamic. There are a number of reasons why one might rent rather than by, and vice versa, and there can be tangible and intangible benefits to both. For example:

It can make sense to rent when home values are falling (and will do so for some time). This will prevent a loss on the purchase of a home. Or, renting is an alternative when short-term housing is needed. For example, you’re relocating for a job, or you’re saving for a down payment. And of course it makes sense to rent if you’re unsure of a new location and want to test it out to be sure it suits your lifestyle.

On the flip side, it can make sense to buy when home values are low but on the upswing. Then the home you purchase will likely increase in value and build equity long-term.  Homeownership also offers benefits from tax breaks that you are not eligible for as a renter. And, there’s a sense of pride in owning a place that's yours, where you get to call the shots.

The ‘hurdle rate’ is one measure which people rely on to determine whether to rent or buy. A hurdle rate is the point at which it’s equally smart to rent or buy if your only criterion is to build wealth.

Experts have declared that today’s hurdle rate is lower than average past property appreciation rates, making Buy vs. Rent the preferred option for prospective homeowners. Why? Because things are looking up:

• The real estate market is just beginning its recovery
• Interest rates are at historic lows
• Home values are only just beginning their ascent

Therefore, future property appreciation should allow you to create more wealth through owning rather than renting.

Housing affordability is at levels not seen since prior to the early 1990s, and rental price expectations for the next year are expected to continue to rise. The question of whether to rent or buy is clear – the next hurdle is to begin the search for your new home.