Renting versus Buying a House in the Bay Area
It’s the question that’s older than time itself: chocolate or vanilla, left or right, ask directions or just go for it, rent or buy? Because you have made it clear that this is a topic of interest today, I wanted to talk about the renting versus buying question here in the Bay Area, specifically. I have this conversation regularly with folks considering jumping into the housing market for the first time because interest rates are so low. Instead of renting their apartment, house, or wherever they currently live, they’re now considering having their own home.
Before we jump into any data or any anecdotes, I want to say this first: I am a real estate agent.
I make a living when people buy or sell homes, so there’s an obvious bias to my position professionally when it comes to this question. It’d be great if everyone wanted to buy or could buy a house because that would be a good thing for me. I’d have a lot more clients. However, I also rent until December of 2020, when we officially moved into the new house we bought. We did that on purpose too. In addition, I was also buying investment properties before I owned my primary residence, so I do have few different perspectives on this renting versus buying question from recent memory.
Hopefully, I can share some of that value with you. Let’s start with the obvious differences between renting versus buying.
Things you need to consider
1. The difference in responsibility level when it comes to renting versus buying
First, we’re going to consider the difference between renting and buying in terms of responsibility level. In renting, the costs associated with it are pretty minimal. You just pay your rent check, and if something happens and you accidentally caused damage to the property, such as the walls or an appliance, you might have to cover or pay for that. But generally speaking, you’re calling your landlord or the property manager to come over and fix basically everything.
Whereas as a homeowner, you’re responsible for any little thing that goes wrong and any upgrade you want to make. So that’s the first one, the cost difference there.
2. How much you're going to pay
The second thing we’re going to consider with renting versus buying is how much we’re going to pay. In renting, all you’re paying is your rent payment. In addition, baked into that rent payment are all the things you would be paying in addition to a mortgage. Incorporated in this payment are the principal, taxes, insurance, interest on the loan, and all of that stuff. So the difference between renting and buying can be pretty interesting when you break them down.
To go deeper on this, let’s look at some data real quick.
The above graph shows some readily available rental data from San Francisco. Here’s what I found from it. The cost of renting has actually come down pretty substantially during the pandemic.
In San Francisco, a two-bedroom apartment costs about $3,500 a month, which is down roughly 22% year-over-year. A four-bedroom apartment is $5,195 a month, which is down over 30% year-over-year. Then, when you take a step back and look at what $3,500 or $5,000 can get you in a mortgage, considering the current interest rates, you’ll come up with something in the world of $800,000-$1,000,000 mortgage payment with your taxes and insurance and all of that kind of stuff wrapped into it.
So you can see, as I’ve also talked about before, a lot of renters are now entering the buyer pool because interest rates are so low. Moreover, the cost of a house, a condo, or a townhouse that they can afford for that same rental payment is becoming very apples to apples on a dollar-to-dollar basis.
3. Appreciation
The other thing that you should consider when choosing between renting versus buying is home appreciation. Everyone will talk to you about how owning a home is an asset, and it appreciates in value. You pay it, and then as time goes by, it becomes more valuable. There is a value that is added to its original price over time.
However, in the short timeline that we have with COVID, the decrease of interest rates has also seen a huge appreciation in the value of homes. Thus, the equity cushion has grown substantially for people who have owned their homes through just this short time during the COVID pandemic.
Now I’ve done several blogs on when the market will shift and when the value will go down, but to answer these questions quickly, I don’t know, and we’ll have to see. For the time being, homeowners are sitting on a very healthy equity cushion. However, if you’re renting, you do not have access to that equity cushion. It’s not something you can take advantage of or even claim on a balance sheet. So that’s definitely something to consider if you’re someone who knows they want to settle down and stay there for quite a long time.
4. The cost of living in an apartment versus a home, over time
The other thing that I think is critical to consider is the cost of living in an apartment versus a home over time. In buying, most people are getting 30-year fixed mortgages. That means that payment stays the same for 30 years, assuming you don’t refinance or do anything similar. It remains the same, and at the end of 30 years, you’re done.
On the other hand, the same could not be said in renting. I don’t know about you, but I have never lived in an apartment that didn’t have the rent go up every single year. Now, with the pandemic, many people didn’t have their rent increase, or they couldn’t have been increased legally, or what have you. Nonetheless, that concept still applies. Rent goes up every single year.
Your housing cost will continue to go up for the same exact thing—rent increasing every year. That’s just how it works, especially with rent control being the way that it is. Landlords are incentivized to continue to raise the rent within the bounds of what they’re allowed to do. If they don’t, they will lose the ability to catch up to market rent over time. So you can be sure that it will continue to increase. You can be sure that you’re not going to have that consistent payment for 30 years or even 15 years as it is in buying. Most likely, this increase is also going to be on a year-to-year basis.
Now, to be fair, on the flip side, it’s a lot easier to get into a rental than buying a house, especially in this market.
I’ve now done thousands of minutes of videos on this whole concept of what it takes to buy your first home, things you got to watch out for, and downpayment and closing costs are really the obvious ones that come to mind immediately when talking about buying.
For an average house here in the East Bay, you’ll need to have about $200,000-$300,000 in your bank account to be competitive. The downpayment, closing costs, and the mortgage reserves you need to hold when you close all need to be considered. That is why it is crucial to have that amount of cash at arm’s length to close that deal.
Whereas for renting, with just securing the first and last rent payment and the damage deposit, you can already get into a pretty nice rental. So, instead of having a couple of thousands, you’ll need to have hundreds of thousands of dollars to get into a house and get the mortgage you’re actually looking for. So the barrier to entry is much different when it comes to renting versus buying.
What it means for you
What is your long-term goal?
Now, what does all of that mean for you? Well, here’s my take. When people ask me if they should rent or buy a house, I usually recommend asking themselves several questions.
What is your long-term goal? Is this a place you want to be? Do you want to put roots here, be part of this community? Do you want that commute, that lifestyle? All of that kind of stuff.
If you really see yourself in a community wanting to settle down, have kids, or volunteer, or whatever is important to you, you might consider buying. It is because if you’re going to invest in that community in other ways, you might as well financially do so.
What is your income looking like?
Second, of course, is what is your income looking like. Are you going to be transferred? Is your job unstable? Or is it looking really solid, and you’re getting a promotion and all that kind of stuff?
If you are very firmly planted professionally, if you have a financial cushion to invest in a property, and your job prospects are looking good for you in the future, it might be a good idea to consider buying in that location. However, if you’re on the other side of that, and don’t have a lot of money available, and are just uncertain about your work prospects, or even if you want to continue working at the company you’re at, right now might not yet be the time for you to buy.
What does the property need to do for you?
Last is what does the property or the structure need to do for you. What kind of lifestyle do you have? Are you traveling constantly and can’t maintain a yard? Are you calling a handyperson or a plumber to fix things over time that would be a tricky thing for you to accomplish? Or do you spend a lot of time at home? Are you working from home a lot? What does the lifestyle you want to lead dictate that your space needs to provide for you? Are you having a kid, getting married, or getting a pet?
All of these things that really affect your life, such as space the property offers or whatnot, need to be considered. Whether it’s a purchase or a rental, these small details need to work for you and your life and provide you the utility to live and enjoy everything around you in the community one way or another.
To sum up, when it comes to renting versus buying, I really highly recommend doing a deep dive analysis on what the property needs to do for you.
You have to ask yourself again and again: What does the house need to do for us? What do we need out of our current housing situation?
You have to consider things you need or necessary for you, such as flexibility, work-from-home space, a yard, etc. Also, consider things not just at a surface level like knowing or having three beds, two baths. Instead, understand what the three beds and two baths need to do for you. Then, based on your financial situation and your down payment ability, can you find that detail, that thing you’re looking for in a property for a price that makes sense for you?
I hope my tips on Renting versus Buying a House in the Bay Area has helped you.
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