Rent Multiplier = 160?? Maybe a little higher.

NEW -> Contingent Buyer Assistance Program
G

Gemini_IHB

New member
Hello everyone, new member here. Thanks for the nice blog and helpful people.



Sometimes people around here (IHB) mention a rent multiplier of 160, but I did quick calculation on how much a house is worth (buy value) if you can rent it for a specific ammount, and I am getting multipliers as shown below:



Assuming HOA=$350/month, and 2% Propert Tax including MeeloRoos

Monthly Rent ($) Multiplier

$1,000 145

$1,200 156

$1,400 164

$1,500 168

$2,000 179

$2,500 186

$3,000 190

$3,500 194

$4,000 196

$4,500 198

$5,000 200

$5,500 201

$6,000 202

$6,500 203

$7,000 203

$10,000 206

$20,000 209

With HOA=$0/month, all multipliers=213



Now when people mention a multiplier of 160. Is these a quick guess, or some solid analysis?



You can find my calculations here:

http://spreadsheets.google.com/pub?key=pNyVCcy2TveeKcHer83feTA



Note that I take into account HOA (it makes the multiplier variable with rent), and also consider the Tax advantage of buying (Tax Return).

It comes down to on thing: How much are you willing to pay above rent to own the place and have the option to sell it/profit from it in the future.

I gave that option a value of 10% above rent (this is just my personal opinion, as I do not mind paying up to 10% more than what my rent should be to own the place).



The link above I show examples from the Plaza Irvine, and also do 'Goal Seek' on them using excel to find their TRUE value for me assuming my 10% above rent.

Also showing examples of my house in chicago (currently rented out). I see Chicago is way more reasonable in terms of Rent vs Own analysis.

(I recently moved to Irvine, so I am exploring the market).



So, my current comfortable rent level is around $3500, thus my multiplier is 194, meaning I can own a place (similar to what I can rent for $3500) but only at a price of 3500*194 = $679,000

I am not sure if I can 'now' find a place that rents for 3500 but sells for 679,000. Or can I?
 
There is a post coming out on Thursday with more calculations on the GRM. The number you get depends on the assumptions you use.





I looked at your spreadsheet. I don't know if you can still find a 6% interest rate, particularly on jumbo loans. I used 6.75% in the calculations coming out Thursday. Also, you said you used 2% for a tax rate, but your spreadsheet shows 1%, and what about your homeowners insurance rate?
 
<p>IMO, 3300 for the plaza 6b floor plan is WAY TOO MUCH!!! </p>

<p>The amount you use for rent is where the discrepancy is between the 160 multiplier and your multiplier. You are assuming people are willing to pay that for rent. </p>

<p>To calculate the 160 number, it is assumed that you do not pay more than 1/3 of your income to housing (renting/mortgage). Since the ave income in Irvine is 85k, ave rent should be around $2300 (Math is just an estimate). Do your math using this rent and you should be closer to the 160 multiplier. </p>
 
Welcome to Irvine Gemini...my Wife grew up in Park Ridge....



But back to Irvine rental rates...I don't see how it would even be possible to afford $2300 pm on a $85k HOUSEHOLD income...please tell me that's net not gross income!

I don't mean to derail the thread but I'm just asking after a year living and working in Irvine so I have first hand experience...
 
It's my understanding that's gross income. I've always wondered the same thing, Peter. I think those calculations don't take into effect all the other things that go along with the "lifestyle" of living in Irvine. You know things like $500+ car payments, gym memberships, and god forbid if you still have student loans!
 
<p>Okay so, my math was off... oops</p>

<p>This is how I calculated it, please correct me if I am wrong, I am no expert.</p>

<p>85k * 3 times income = 255K price for a house


This is what the ave price for a home should be since ave income is 85k


This is also assuming people max themselves out at 1/3 their income</p>

<p>A mortgage for a house of 255K at 6% comes out to 1529.


So average rent should be around 1500 and this is from gross income. </p>
 
<p>Average house price in Irvine is closer to 655K than 255K.</p>

<p><a href="http://irvineretail.freedomblogging.com/2007/11/26/irvine-homes-prices-and-sales-by-zip-code/">irvineretail.freedomblogging.com/2007/11/26/irvine-homes-prices-and-sales-by-zip-code/</a></p>
 
<p>Halfnote, it seems you're mixing and matching rules of thumb to close in on a tight range. Don't confuse the median family's ability to afford housing with the price determined by all factors of the market.</p>

<p><em>85k * 3 times income = 255K price for a house</em></p>

<p>Where did the 3X come from? </p>

<p>(1/3 * income) as a rule of thumb for the max housing portion of gross income is a bit high for me, but not completely unreasonable. 28% was the norm not that long ago.</p>

<p>$85k/3/12 = $2,361/month. This is the maximum monthly payment that the rule of thumb allows for a median gross income of $85k, including all taxes, mello-roos, HOAs, etc. It can be mortgage or rent, although it can be argued that rent should be less, since you don't get several good years of tax benefits from writing off the interest that you do with a mortgage, during which time your ability to pay will likely go up. A person setting a budget for themselves and their family would determine how much they can afford using bottom-up calculations similar to this.</p>

<p>An investor looks at housing from the top-down. What kind of rent does the market support? This requires a look at close rental comps. If you're buying a 3/2 to rent out, you want to know how much the other 3/2s in the area are going for. If you're confident you can rent out the property for $2,000/mo, then you'll pay about that at most, unless you're an investor who's OK with losing money every month. The 160 multiplier is a rough estimate to find a price point where the cost of owning is close to the cost of renting, because this is the price at which investors tend to step in and provide a price floor. Right now mortgages and rents are completely out of whack. If you believe they will eventually revert to be much closer together, as they have in the past, then you would recognize that either prices have to fall and/or rents will have to rise. Since the economy seems unlikely to support much rise in rents, it can be argued that prices still have a long way to go.</p>
 
Thanks everyone for replies.

I see IR got a nice post on the main blog about multipliers.



My way or your way, buying is very expensive vs. renting :)
 
You must log in or register to reply here.
Back
Top