Much of the Real Estate activity over the last few years has been driven by first time home buyers. Today, many renters with stable job situations and adequate savings and reserves have come to the conclusion that at current prices and interest rates, it makes a whole lot of economic sense to buy a home rather than rent. This blog post will discuss one common metric: the rent versus buy formula and how Los Angeles are Real Estate compares to the US in general.
Here's a simple calculation you can quickly do to decide whether it is better to rent or buy real estate. Dived the purchase price of any property by the annual rent. That's it. Pretty simple and straight forward.
As an example, currently you can buy a fairly new townhouse in North Redondo Beach for about $575,000. The same units are renting for about $3,000 per month (and sometimes higher). If you divide $575,000 by $36,000 (your annualized rent), you come up with a ratio of 15.97.
In general, a ratio between 16 and 20 means that it's more expensive to rent than to buy, but buying may be better than renting depending on personal circumstances, such as one's tax bracket, (Consult your CPA or tax preparer.) Any ratio above 20 indicates that owning is much more costly than renting. And if you are below 16, that's a piece of real estate you want to own.
(We actually take a more conservative approach to this calculation than many of the national real estate sites. Specifically, we do not include the individuals tax considerations into our calculation because those may change over time.)
Now let's do a reality check to see how well this holds up.
Going back to the above example of the townhouse that can be bought for $575,000 or rented for $3,000 per month, here's what we look at.
If a buyer puts down 20% and finances 80% of the townhouse purchase price, there is an outstanding loan in the amount of $460,000. At an interest rate of 5% (which is high as of this writing), that is a fully amortized payment of $2,469.38 for a 30 year fixed rate mortgage. To that you can add the typical HOA fee of $150 and property taxes of let's say $600 per month. We are now at a monthly payment of $3,219.38 to own rather than rent. And, this is before calculating the benefit of any tax breaks, possible future real estate appreciation, etc. (We are also not considering that as of today, you could do a lot better that 5% on a 30 year fixed loan so in fact your payment to own may be the same or less than renting.)
In this post we are not going to discuss whether it makes more sense to do a 7 year adjustable ARM, or 10% down or other variables. We are only looking at the basic premise of renting vs buying real estate from a very conservative perspective.
So, it appears that the simple rant vs buy ration calculation is fairly well borne out by facts. Furture blog posts will look more specifically at other examples of houses, townhouses, and condos.
Here's some other facts you might find interesting or useful.
Top 10 US Cities to Rent vs. Buy:
This is nice because it shows that, in general, Redondo Beach Real Estate is a better investment than Los Angeles real estate over all.
|Renting||Flexiblity (can relocate easily)||No equity|
|Can invest money elsewhere (stock market)||Annual rent increase could outpace inflation|
|No upkeep fees (drippy faucets, broken dishwashers, etc.)|
|Buying||Tax-break: deduct mortgage interest and property taxes||Property tax and upkeep|
|Potential tax-free capital gain||Mortgage costs|
|Emotional satisfaction||Less flexibility should you want to move; in very bad housing markets, you could lose principal|