Moving To A Luxury Resort Decide If To Buy Or To Rent Is Best For You
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 15 million for a 1000 square foot apartment. Ok relax take a deep breath. You said LUXURY resort didnt 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 4500 per month plus utilities to call the same condo your home. Sounds more manageable doesnt it?
The mathematical skilled will argue that this is a nobrainer. At a current interestonly mortgage rate of about 6.0 the purchaser would have to fork over 7500 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 breakeven. 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 3year 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.
About the writer: After a 10 year career in derivatives trading Toby Munk relocated to Colorado to pursue a career in Aspen Real Estate. Explore more information on Aspen MLS search and Snomwass Real Estate listings.
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