Monday, June 17, 2013

Is It Cheaper to Rent or Buy in Los Angeles?

Picture credit http://bit.ly/VDDJpN

With Los Angeles Mortgage Rates Still at 4%, and Home Prices Still Depressed, Buying Is Better


So I took a typical Westside home worth $650,000.  According to Zillow.com the rental value of that home is $3150 a month.  The estimated mortgage is $2441 based on 20% down and 3.75% 30 year fixed mortgage.  Property taxes and insurance would add another $730.  Maintenance might be $300.  So total out of pocket around $3500.

The tax advantage in the 25% tax bracket would come in at around $800 month, so the net advantage to buying is around $450 a month.

Do the exercise yourself.  You can see estimated purchase value and rent on Zillow.com.  You can see property tax on Trulia.com.  Trulia will give you an estimated value also, but their values seem more like assessment values than the market values on Zillow.com.  Real Estate friends say that both should be taken with a grain of salt.

On the other hand, Trulia has for some time been compiling the information into statistical surveys that might shed light by city, even if it doesn't give you help on each unique situation.  They claim that the current spread in Los Angeles gives you a 35% advantage in buying over renting.  The unique property that we checked on earlier was around 13% better.

To be honest, Trulia uses a lot more information.  Length of stay in house, comparable move in and move out expenses, etc.  So the example we used was not as sophisticated.  Moreover, a minor change in your personal situation could change the dynamic a lot.  Someone who buys a $650,000 house is very likely to use the IRS long form and deduct the interest and property taxes.  But most who purchase a $200,000 home will not be getting the tax advantage.  This changes the equation.

On the other hand, it would appear that the market has taken that into consideration.  Thus you'll find that lower priced condos and homes have a bigger savings on purchase compared to rent before taking the IRS advantage into consideration.  Here are some of the comparable cities in the US right now, coming from Zillow.com


Where Buying a Home is a Tougher Call
# U.S. Metro
Cost of Buying vs. Renting (%), 2013
Cost of Buying vs. Renting (%), 2012
1 San Francisco, CA
-19%
-35%
2 Honolulu, HI
-23%
-26%
3 San Jose, CA
-24%
-38%
4 New York, NY-NJ
-26%
-26%
5 Albany, NY
-30%
-34%
6 Orange County, CA
-32%
-41%
7 San Diego, CA
-33%
-42%
8 Los Angeles, CA
-35%
-37%
9 Long Island, NY
-36%
-34%
10 Ventura County, CA
-36%
-43%

Note: Negative numbers indicate that buying costs less than renting. For example, buying a home in San Francisco is 19% cheaper than renting in 2013. Trulia’s rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down, itemizing tax deductions at the 25% bracket, and 7 years in the home.


At the other extreme, homeownership is most affordable in Detroit, where buying is 70% cheaper than renting. This means it costs less than one-third as much to buy a unit than to rent a similar unit in a similar neighborhood. In fact, buying is less than half the cost of renting (more than a 50% difference) in 46 of the 100 largest metros.

Where Buying a Home is a No-Brainer
# U.S. Metro
Cost of Buying vs. Renting (%), 2013
Cost of Buying vs. Renting (%), 2012
1 Detroit, MI
-70%
-69%
2 Dayton, OH
-63%
-70%
3 Gary, IN
-63%
-60%
4 Cleveland, OH
-63%
-57%
5 Warren-Troy-
Farmington Hills, MI
-63%
-64%
6 Toledo, OH
-62%
-59%
7 Memphis, TN-MS-AR
-62%
-61%
8 Kansas City, MO-KS
-60%
-55%
9 Birmingham, AL
-59%
-60%
10 Indianapolis, IN
-58%
-56%

If you would like to look at this issue in much more depth, catch the Trulia write up Buying a Home 44% Cheaper than Renting Despite Rising Home Prices. 

You can even follow their links to get into some of the micro data on how they arrive at the statistics.  Where does that leave you in all this?

With many, many more unanswered questions.
  • Many times the type of residence that you desire is not available for rent anyway
  • If you will or might move in 3 years, renting is almost always better
  • What will happen to home prices?
  • Do you like the idea of managing your property?
A major issue in the current market is whether you can even get a mortgage in Los Angeles.  We can help you with that.  A short complimentary conversation will allow us to give you plenty of direction on your eligibility and what you can afford.  Call Bill Rayman at


New Contact Information for Bill Rayman

Bill Rayman Home Mortgage

12121 Wilshire Blvd
Suite 350
LA CA 90025

424-354-5325

bill.rayman@guaranteedrate.com

1 comment:

  1. With our extensive experience and Buy to let property tax expertise we assist our clients through the various tax liabilities they come across as they buy, sell or rent out the buy-to-let property (BTL). These may be Stamp Duty Land Tax, Income Tax, Capital Gains Tax (CGT) and Inheritance Tax.

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