The following is a reprint of my column that appeared in Frontiers In L.A. magazine on February 1st, 2011.
I’ve been considering the possibility of putting my days as a renter behind me and joining the ranks of the homeowner, though I’m trying to figure out which makes more sense. I currently pay about $2,000/mo in rent (soon to go up). At what point is it more logical to quit renting and buy?
—Ryan K., Santa Monica
I get this question a lot. There’s no quick answer, and I would need some more information to give you a solid response. But I can tell you this. Real estate website Trulia.com recently released the results of a study of 50 U.S. cities, asking if it made more sense to rent or to buy in each city. When the housing market tanked and the recession began a few years ago, the answer in many cities flipped from one side to the other. According to the report, with massive foreclosures and homeowners unable to stay in their homes, the rental market became flooded with new customers. On the flip side, the sheer volume of homes saturating the market dragged prices down and created an opening for many who thought they would never be able to afford a home.
The rule of thumb Trulia offers in calculating whether renting is more affordable than buying is to divide the purchase price of a home by the annual rent of a similar property. If you come up with anything over a 15, it’s generally considered that renting is cheaper. Anything below, it’s a good market to become a buyer in. Of course this is a very general equation. Not for nothing, but L.A. came in with a 20 (using a median purchase price of $489,700 and an median annual rent of $24,900). That said, I still believe that given the deals out there right now that fall under that price range, it is a great time to buy. Renting, you spend your money to fatten someone else’s kitty. It’s money you will never see or hear from again.
There are many factors that have to be taken into consideration. First, do you have a down payment available, and do you qualify for a loan? Let’s assume for the sake of argument, yes and yes. Great! But there are other questions that address what your actual needs as an individual are. Maybe home ownership doesn’t make sense for you right now. If you plan to relocate in the next two to three years, renting is probably best. Also, some people don’t want to be responsible for any maintenance or upkeep. As a renter, all of that falls on someone else’s shoulders. Also, for renters, there are no homeowners dues, no property taxes and no major repairs. Maybe you’ve been in the same place for 10 years and pay $900 for a two-bedroom top-floor unit in West Hollywood. God bless rent control. It can be hard to give that up.
However, if you are looking to stay put for a while, you may be best served by purchasing something and begining to lay the foundation to build wealth. Over the long-term, real estate is an excellent investment and will build equity. And that equity is what will help you afford to move up to that second home when the time comes. There are many financial benefits that come with home ownership too. For over half of the period you’ll be paying your mortgage, most of that payment will be interest, which is tax-deductible. You can also deduct your property taxes (always consult with a tax preparer or CPA on these things). When you rent, that money is gone forever, just helping to pay someone else’s mortgage.
Home ownership brings with it a certain sense of accomplishment and pride of ownership. The property is yours to do whatever you want with (almost), and you can make improvements and upgrades over time to increase its value. There are significant tax breaks on the profit you make when you sell your home as well. The flip side of this is that some might choose to invest their savings into equities or the stock market or mutual funds rather than tying them up in the down payment on a home. To that, I say “to each his own.” I definitely don’t claim to be an investment professional. You have to do what’s right for you, but what I can say is that there has not been a better time to buy in Los Angeles in many years.
Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries at email@example.com or facebook.com/jeffersonhendrickrealtor.