Active Communities – Better to Rent or Buy?

May 30 — For as complicated a question this is, it is amazing how strong the opinions are. The one thing that is clear is hindsight – if you lived in the markets hardest hit by the housing crisis over the last 2 years (Phoenix, Las Vegas, South Florida, and parts of California), renting would have been the superior option. Your living costs would have been lower, and you wouldn’t have lost any capital.

Articles in the New York Times and Seekingalpha.com explored the issue this week. The Times article on “Committed Renter Decides to Buy” used the concept of rent/purchase ratio to try to get a handle on the question. The ratio is basically the price of a typical house divided by the annual rent – and the higher the number the more you should consider renting.

In Miami, for example, the peak ratio was a whopping 28.2. In Pittsburgh, by contrast, the ratio is a humble 13.6.

Seekingalpha’s “Renter Versus Buy” story had a slightly different method – it compared the cost of renting vs. the cost of owning. Generally, whenever the cost of renting is lower than the cost of owning, the more you should consider the renting option.

So how does that apply to the market for active adult or retirement communities? In general retirement real estate has been part of the brighter side of the recent real estate market. That trend depends on location of course – south Florida active adult communities have been particularly hard hit.

Our opinion is that the same principles apply – if the ratios or cost relationship between renting/buying is out of whack – go with the cheaper option. If the ratios are unclear, renting for a year or two in an active adult community might be the smarter thing to do. For one thing, you get to sample the neighborhood at lower risk. You also get to scope out the community – if you do decide to take the plunge and buy there, you will know the best locations and types of housing. You might miss out on the market bottom with that approach, but you also could avoid a further slide in housing prices or choosing the wrong community.