Yesterday Colin Cowherd, ESPN Radio-The Herd, expressed his concern that many professional athletes were sending the wrong message to our country’s youth. He outlined several case studies where some athletes who earned over $100M are now broke.
According to Mr. Cowherd, it is not only how much these people spend but the choices they make on where to spend their money. He hammered home the theme that “cars are not assets,” especially those which are grossly over customized. Such cars have little or no resale value. The same can apply to overly decorated $9M homes. Today it is difficult enough to sell such a home, but almost impossible if it contains dozens of gold adorned TVs and swimming pools inscribed on the bottom with “The Player.” Mr. Cowherd went on to suggest that, in many cases, these athletes would be financially better off renting a home instead of buying one.
How perceptive he is! The New York Times recently published the results of an analysis it did on a decision criterium it refers to as the “rent ratio.” This ratio is described as: “the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.”
Interestingly, I have received several e-mails from people asking how they should go about purchasing a home in high priced areas such as Los Angeles and San Francisco. Given their salary, and their respective rent ratios, they should seriously consider renting instead of buying. For example, in 2009, the rent ratio for San Francisco was 28.4 albeit down from 40.4 in 2005.
For those who are truly interested in building lasting wealth no matter where they live, they may have to consider renting instead of owning, especially in this current economic climate. In such cases, one’s ego enhancement will come from taking affirmative action, i.e renting not owning, with the goal of becoming financially independent as a result. As I said in Stop Acting Rich, “Happy people tend to live in homes that they can easily afford.” And, for some, renting provides a much more affordable option.