Only The Facts, No Fluff: Renting vs Buying A Home
In today’s Silicon Valley real estate market it is almost impossible to tell if you should pay the high price and buy a home, or pay the high price and rent a home.
The purpose of this blog post is to give you the empirical data so you can make an intelligent decision.
- Currently, there is a home in Redwood City for rent for $4,200. It is a 3 bedroom, 2 bath home with an attached 2-car garage. It has a nice size back yard with a big patio. The front yard is lawn with a row of roses down one side. There are no major upgrades like stone counters and tiled floors. It does have random plank oak floor throughout most of the house. It’s on a 4-way intersection.
- There are 9 homes in Multiple Listing Service (MLS), which are for sale today. Five of them are active listings (still for sale), and four of them have pending sales. The price range for these 9 homes is between $899,000 and $ 3,995,000.
- In the immediate neighborhood of the rental, there have been 2 closed escrows on 3-bedroom homes. Both homes sold in 2014 and do not show the current list price trend. The first home sold December 14, 2014 for $ 1,250,000 and was located at 1645 James Avenue. The second home sold December 5, 2014 for $1,285,000 and was at 2 Eagle Hill Terrace.
- There was a rise in home prices in Redwood City of 6.4% as of February 28, 2015, according to MLSListing.com.
Question: Should you buy or rent this home strictly using a cost basis?
Let’s use a selling price of $1,300,000 as that is more in-line with what is really happening in the trenches for home buyers today
Renter’s Monthly Costs: Rent: $ 4,200
Home Buyer’s Monthly Costs: Payment $6,120.04 (see break-down below.)
$ 1,300,000.00 Sales Price
$ -260,000.00 20% down payment (possible annual interest lost on these funds: $13K)
$ 1,040,000.00 First Deed of Trust (Loan Amount)
$ 4,670,04 Principal and Interest:
3.5%, 30-year fixed for buyers with excellent FICO scores
$ 1,300.00 Property Taxes
$ 150.00 Homeowner’s Fire Insurance
$ 6,120.04 per month house payment (PITI)
The monthly house payment $ 6,120.04 minus the monthly rent of $ 4,200.00, equals a difference of: $ 1,920.04/month.
It is cheaper to rent this home than buy it!
Okay I can hear you saying, “But what about the tax savings and appreciation the homeowner will make from this home?” And that’s a valid question. So let’s include them and see what the numbers are.
I have figured out from my ownership of income properties that the amount of money I “save” from my tax deduction for interest and taxes is about twenty-five cents on the dollar.
Here are my calculations on interest and tax write off in dollars and cents. I divided the annual costs by 12, which gives the monthly costs. Multiply that number by 25¢, which results in the amount of money I typically get in my pocket from my tax write-offs.
Property Taxes: $15,600/year or $1300/month write off – tax savings: $325/month
Interest Deduction $36,000/year or $3000/month write off – tax savings: $750/month
$1,075.000 Total monthly tax savings
$ 1,920.04/monthly savings when you rent minus $1,075 Monthly Tax savings equals $ 845.04/month savings when you rent this home.
It is cheaper to Rent then Buy this home. _____________________________________________________________
In conclusion, renting this home saves you $845.04 per month. That money could be used to get training. That would put the renter in a better position to negotiate a new salary or job with a higher salary. Earning a higher income can help the buyer achieve home ownership.
It’s important to note that the home owner or landlord does make money from the appreciation of the property. In Silicon Valley and Redwood City we are quite fortunate that our appreciation seem to be on a steady trend upwards. As in all investments…they go up and they come down. That is the risk home-buyers make when they invest in a home.
So, if you can afford to purchase property, appreciation is a potential benefit to consider.
Copyright 2015 by Cliff Keith of Today | Sotheby’s Realty and Cliff Keith and Team. This information is solely advisory, and should not be substituted for medical, legal, financial or tax advice. Any and all decisions and actions must be done through the advice and counsel of a qualified physician, attorney, financial advisor and/or CPA. We cannot be held responsible for actions you may take without proper medical, financial, legal or tax advice.