If you are looking to move to a luxury resort community you might be asking yourself whether to rent for the time being or to plunge in and buy a place to live. This decision obviously only comes into play if you have the required means to purchase real estate in the first place. Only after that do the financial implications of this decision matter.
This conundrum is best explained with the help of a few examples. Take a luxury resort town like Aspen, world famous playground of the rich and famous, add a little bit of normalcy to it (you) and shake well. You will find that even in high priced towns like Aspen or Snowmass the economics of the free markets still play out even under the distorting influence of the super wealthy. Lets use an off the shelve two bedroom condo with 2 baths in a nice central core Aspen location. In the current market condition it is not unreasonable to expect to pay about $1,5 million for a 1,000 square foot apartment. OK relax, take a deep breath. You said LUXURY resort, didn’t you?
Once you regained your composure just have a look at what it will take to rent the same place.
Believe it or not it takes a mere $4,500 per month plus utilities to call the same condo your home. Sounds more manageable, doesn’t it? The mathematical skilled will argue that this is a no-brainer. At a current interest-only mortgage r
ate of about 6.0% the purchaser would have to fork over $7,500 per month in interest alone. This does not take into account property takes and monthly HOA fees that can easily add up to another $500 per month or more. So on paper it looks twice as expensive to buy than to rent.
This is correct would it not be for the tiny little oversight of APPRECIATION. Only the property owner will gain from an increase in the value of the asset. It happens to be that Aspen has seen steady value increases over the last half century with intermittent calm periods of steady prices.Since the rent represents about a 3.5% return on investment and the mortgage rate and taxes add up to about 6.5% of the purchase price, the difference is what it will take in appreciation to break-even. In this example, if the market sees more value increase than 3% annually it would be better to buy in the long run. If the value increases by less it is better to rent.
All of this only holds true with at least a 3-year time horizon since transaction costs and compounding effects are neglected in this analysis. We also do not take into account that owned real estate can be improved with a little elbow grease and disproportionate gains can be achieved through this. The above considerations are applicable to any market. The decision process hangs on the future expectation of market movements, which are hard to guess. But sometimes it helps to let the past be guidance for the future.