With all the talk over a real estate bubble right now, it is very hard to determine a rule that would carry over well to understand whether a local market is oversold or undersold. Reading the Motley Fool today, they had a nice simple rule that seems logical.
Bringing it home: The 150 to 200 rule
If a home is selling for 150 times the monthly rent (or less), it’s generally a good deal. If it’s selling for more than 200 times the monthly rent of a comparable property, you’re better off renting. I ran this little test for a house near Fool HQ in Alexandria, Va. House A has five bedrooms and 4.5 baths, and it sits on one pristine acre. You can rent House A for $3,900 per month. Based on comparable sales, this home would sell for approximately $2 million. Therefore, it’s selling for 512 times the monthly rent! Put another way, if you mortgaged the whole $2 million at 5.42% over 30 years, your monthly payment would be more than $11,000.
Let me know how this applies to your local market.