Should you rent or buy a home? Use the ‘BURL’ Rule to Avoid Financial Regret, Says the Real Estate Investor

When it comes to maximizing your lifestyle and net worth, the question “should I rent or buy” is one of the most controversial. Even if you already own your own home or apartment, it is a good idea to regularly consider whether living there is the best move.

Taking on debt to buy is always a gamble. But if you go this route, your goal will be to use debt to live a better life than you would if you had to pay cash. The first years after borrowing debt to buy a home are usually the riskiest.

In contrast, the return on the rent you pay is essentially zero. Yes, for the rent you get a place to stay. But you have little chance To build property rights.

BURL: The rest of the real estate investment rules to follow

As a real estate investor, I always recommend using the “BURL” rule – which stands for “buy utilities, rent luxury properties” – to avoid financial regret.

Utility can be defined as something that you absolutely need, with very little unused space. Luxury is something beyond what you need, like an empty third bedroom, a huge balcony, and a backyard with a swimming pool.

BURL helps you realize that the true cost of living in a home you own isn’t just the money you spent living there. It is the opportunity cost of not renting it at the market rate.

A case study of the BURL . rule

I once knew a couple in San Francisco who decided to downsize once they realized they could rent out their 2,600-square-foot, four-bedroom, three-bathroom home for $7,500 a month.

Before the pandemic, they purchased a second, smaller home in a less central location at 40% less cost than they paid for the first home. Their new home held a $3,000 mortgage and could be rented out for $4,500 a month.

For them, a smaller house with a rental value of $4,500 was more in line with their budget and family size. So they rented out their old home for $7,500 a month and boosted their monthly cash flow by at least $3,000.

By following the BURL rule, they chose to buy – and live in – the most utilitarian three-bedroom, two-and-a-half-bath home, and let someone else rent out for the sake of luxury.

If you’ve owned for a while, it never hurts to do some research and see how much rent your home can command in the current market. You might be surprised. As of June 2022, the national average rent price is up 14.1%, according to apartment listing data.

Thanks to inflation, population growth and demographics, rents will likely continue to rise indefinitely.

What smart real estate investors do

In my experience, the issue of “rent or buy” boils down to this:

  • If you have the money to make a down payment on a luxury home and want to avoid economic waste, buy a property and only live in it if you are willing to pay fair market rent.
  • If you want luxury but don’t have the down payment, you can rest as a renter knowing that you are getting a better deal on your rental home or apartment than its owner.

Smart real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the above couple, an investor following the 100 times monthly rent rule would not pay more than $750,000 because the monthly market rent was $7,500.

Spending $7,500 a month ($90,000 annually) on rent may seem expensive, but paying $7,500 a month in rent is actually relatively good value, since you’d need to spend nearly 360 times your monthly rent to buy that home at market price. About $2.7 million at the time.

It can be difficult to follow the BURL rule for real estate investing in expensive cities like New York, Los Angeles, and San Francisco. There are people who pay a six-figure rent a year, but they’re actually getting ahead thanks to the BURL rule. These tenants invest in different properties in other parts of the country to get higher rental returns.

Honda Civic takes you for a ride just fine, but some people like to drive Ferraris. The BURL rule states that if you can buy a Honda Civic and rent a Ferrari on the weekends.

The other side of BURL

In the Midwest, there are real estate around $200,000 could Rent for $2000 per month based on a 100 times monthly rent rule. Amazing value for investors but not so much for renters, even if the dollar rent amount is low.

If you were to buy a home like this with a $40,000 down payment, a $160,000 mortgage, and a 4% interest rate, your annual costs of ownership would be around:

  • $6,400 mortgage interest
  • $2,400 property taxes
  • Insurance of 1200 dollars
  • 3000 dollars for maintenance

= $13,000

Add $800 per year in the opportunity cost of not earning a 2% risk-free return on your down payment of $40,000, and your cost is only $13,800 per year on rent of $24,000 per year.

Even if the landlord can only charge $1,200 (versus an expected $2,000) per month in rent, making the $200,000 property purchase equal to 167 times the monthly rent, owning is still a better value proposition, especially if the property’s value continues to rise.

If the area you live in, or want to live in, has market rates that look like this, you should buy rather than rent, as you can get a positive cash flow immediately if you are going to rent out the property someday.

In the end, where we choose to live is a very personal decision. We all want to live close to friends and family. We also want to live in an area with great food, great entertainment, and nice weather.

But we can’t have it all! What we can do, however, is pick the best options with the money we have.

Sam Dugin She worked in investment banking for 13 years before she started financial samuraiHis personal finance website. It has appeared in major publications including The Wall Street Journal, Sydney Herald, Chicago Tribune and Los Angeles Times. Sam’s new book “Buy This, Not This: How to Spend Your Way to Wealth and Financial Freedom” out now.

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