There’s a small rule of thumb that I’ve always used in my career to help clients make a good decision when it comes to this exact question—and it feels topical now as many markets across the nation have rents that seem to be cheaper than investing in a mortgage. I use an equation called the price-to-rent ratio and it helps you look beyond the short term when it comes to financials.

In this equation, you multiply your monthly rent amount by 12 to get an annual number. For example, I’m in the greater Indianapolis metro market and our average rent price right now for a 900-square-foot apartment is $1,200. If you annualize that out, the amount you’re paying is $14,400 a year. The average sale price for a home in the Indianapolis market that is comparable to that type of a rental is $275,000. So, if you divide the $275,000 by the annualized rent payment of $14,400, that gives you a ratio of around 19.

The rule of thumb is if it’s 20 or higher, you’re in a good position to stay renting. If you’re 20 or lower as a ratio, this is probably a good time for you to take a look at buying. So in this case, at 19, it would make more sense for you to start seriously thinking about buying a home.

Another question I tell potential homebuyers to ask themselves is, do you see yourself staying in this home for five to seven years? If the answer to that is yes, then it’s usually a good sign you’re ready to commit to making the investment in an asset of your own home over renting.

In March of 2022, we felt a drastic shift in interest rates as historically low rates started to climb prett y rapidly, and we have yet to see those come down even close to where they were. So this is making many folks feel trapped while challenging how they get what they want when they want it.

So what’s that homeowner to do? Well, they should start by taking an honest assessment of their current home’s form and function. Does it still work for their family? Maybe at this point you stay and you do a mild remodel or a makeover. But on the other hand, if you’ve absolutely outgrown your home, there are options. 

If you have some equity in your home, you can do a couple of things. One strategy I’ve seen many people in my market use is opening a home equity line of credit—which is called HELOC in the mortgage industry—and use this line of credit to serve as a down payment on a new home while keeping their departing residence as an investment property. If the fi nancials make sense for your family, this strategy could off er an opportunity to earn an income on that original home that hopefully balances out what that new mortgage payment on the new house would be.

Honestly, I don’t predict there to be any bubble. Last year, we had close to a 30-year low in the total number of units sold in the real estate industry. In my market in particular, we’re seeing small appreciation. We don’t have the same economics that we had 15 years ago during the previous recession. I also don’t see the crazy infl ation that we experienced in the past few years continuing either. 

For Boomers specifi cally, who live in their home mortgage-free and want to downsize, it’s going to depend on how much time they plan to spend in the market. For instance, if they’ve got 10 years that they anticipate living in their next home, there’s plenty of time for them to see market cycles and see a signifi cant appreciation that would mitigate any worries about overpaying for a property. 

If you’re only planning on owning a home for three years, that’s a much shorter window and a slightly greater risk. Your fi nancial ability to stay in the house versus your overall health ability to stay in the house is what’s really important when Baby Boomers are considering their next real estate move. If you’re going from a mortgage-free home that’s just too much space and downsizing into a smaller home, which I would suspect would also be mortgage-free, you’re going to have enough equity in the home you’re selling in order to put that money into the next house. Since both houses are mortgage-free, we’re not really talking interest rates at this point. What we’re talking about is the ability to sell and recoup the costs that they used to purchase the home. If health concerns may fi nd you selling that home in, say, three years, the appreciation on the home might not equal the amount you paid in fees such as closing costs.