Renting vs Buying a Home in San Francisco

23 Jan Renting vs Buying a Home in San Francisco

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“Renting can make sense as a lifestyle choice or because of income constraints.
As a means to building wealth, however, there is no practical substitute for homeownership.”

New York Times, “Homeownership & Affluence,” 11/30/14 op-ed article

 

Please Note: Rent vs. buy calculations can be performed a wide variety of ways, and results will depend on your own financial circumstances and economic projections, which you should review with your accountant. The below calculations represent simply one scenario.

This rent vs. buy analysis compares the monthly housing cost of buying a San Francisco home at the Q4 2014 median sales price of $1,050,000 – adjusting for tax deductions and principal pay-down of the mortgage – with the cost of renting a San Francisco 2-bedroom apartment at the Q4 2014 median asking rent of approximately $4500/month (per Rentbits.com). It also attempts to compare, while adjusting for inflation and other factors, projected asset appreciation between investing the downpayment monies (instead of buying a home) and using them in one’s home purchase.

Assumptions: 20% down-payment ($210,000); 30-year fixed-rate loan at an APR of 4%; and closing costs; property taxes; ongoing insurance and maintenance costs; annual inflation (2%), outside investment returns (3% after taxes) and home appreciation rates (5%) – all at what seem to us to be reasonable projections. We’ve used a combined income tax rate of 25% for the mortgage interest and property tax deduction. But especially when projecting variable economic factors over long periods of time, many of these figures will simply be best guesstimates. You may perform calculations based upon your own specific financial situation and future projections, and also see the definitions for all the terms used in this analysis here:

Rent vs. Buy Calculator

The New York Times also has a rent vs. buy calculator:

NYT Rent vs. Buy Calculator

The following may be easier to read if you adjust your screen-view to zoom 125% or 150%. In Windows systems, this can be done by pressing the Control and + keys simultaneously.

If you wished to perform this analysis comparing a 1-bedroom apartment rental with a 1-bedroom condo purchase, the median San Francisco asking rent would be approximately $3300 to $3400 per month, and the median purchase price in Q4 2014 was about $740,000. Interestingly, the ratio of median asking rent to median purchase price is almost exactly the same as in the scenario used above. If you currently have an SF apartment under rent control, you can still use the calculator, plugging in your current rent – annual increases in rents allowed under SF rent control are typically about 60% of the CPI inflation rate.

Other articles you might find interesting:

When Is the Time to Buy?

Home Buying as an Investment

10 Factors behind the San Francisco Market

Other articles for home buyers can be found using the “Information for Buyers” link in the upper left of this page.

These calculations were performed in good faith, but they may contain errors and are subject to revision. Many complex personal and financial issues pertain to the purchase of a home instead of renting. You may disagree with the financial assumptions and economic projections in this analysis. It is highly recommended that you speak to your accountant and a qualified loan agent regarding your specific financial situation and goals. Interest rates, rents, home prices and tax law are subject to change.
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