Rent vs. Buy…

Posted on June 15, 2010 | by Denny Oh

Trulia just published an article that lists the top 10 cities in America to buy, versus rent and vice versa.  Topping the chart of US cities to buy vs. rent was Minneapolis, Minnesota.  The analysis “calculated the price-to-rent ratio using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on Trulia.com.”  New York was listed as the top city to rent vs. buy…no surprise there I guess.

What was interesting to me though, was that San Diego was number eight on the top 10 cities where renting was supposedly better than buying.  Actually, this isn’t totally true.  Since the analysis was only based on a price-to-rent ratio, there was no subjective input on this, nor were market trends or predictions taken into account.  Pete Flint, the co-founder and CEO of Trulia added that “Were not suggesting that its unwise to buy in these areas, though – just that its significantly more expensive than renting.”

Now lets look at specifics and not generalities…

I just pulled up three properties that are in various buildings of downtown San Diego – all of which, I’d consider/want to live in.  I then pulled up similar units that have rented in those buildings over the last 12 months and found that $2400/month is a pretty conservative average for all three of these units.  In other words, if you purchased/owned one of the units below, or one similar to it, I’d bet that you could rent it for $2400, or very close to it, depending on the available inventory at the time(the rental market is very  susceptible to supply…more so than sales).  In the three examples below, I based the monthly payments on a 4.5% 30 yr fixed mortgage, with a 20% down payment and 1.25% property tax. The tax savings is based on a 33% write off on the mortgage interest.

Property #1 – M2i $375,000

This 1187 sqft condo in East Village’s M2i building is a 1BR/2BA loft style condo that is bank owned(aka REO, foreclosure).  Located at 527 10th Street, M2i is a great loft style building that was built by Citymark in 2005.  This is one of my favorite non-highrise buildings and I love the location.

This M2i condo would be a great 1 bedroom, but could be built out as a 2 bedroom.  With low HOAs of $406/month, this is one of the more affordable buildings.  Unit 411 is priced at $375K, which would make your monthly payments around $2316 – this does not take into account your tax write offs as a home owner, which would be around $371/mo…making your actual monthly payment about $1945.

FYI – this condo was purchased in 2006 for $550K – it’s currently priced 32% lower than it was worth 4 years ago!

Property #2 – Trellis $369,000

Located in the famous Gaslamp District of downtown San Diego, Trellis is a great spot for someone who wants to be in the middle of it all.  530 K Street #813 is currently for sale at $369K. This 2BR/2BA has 943 sqft and is a great corner unit.  The bedrooms are on opposite ends of the condo, providing maximum privacy.  Trellis is one block away from Petco Park and is litterally on top of Donovan’s steak house!

This condo is investor owned and at the listed price, would have a monthly payment of about $2462(the HOA are higher, at $569/mo).  With that said, I think you could get this for less than $369K, which would obviously lower your payments.  With the tax write off, you’d be closer to a monthly payment of about $2097.

FYI – this condo was purchased in 2005 for $449K – 18% lower than it was.

Property #3 – Parkloft $425,000

Parkloft is where I want to live.  This building is in the East Village and is very unique.  Parkloft is the only true loft building in downtown San Diego that I know of.  It has exposed plumbing/ductwork, 11′-14′ high ceilings and exposed concrete walls.  Additionally, there are no bedrooms walls that have been built out(that I’ve seen).  It’s hard to explain, but I just really love this building.

877 Island Ave #109 is a short sale with a list price of $425K. This loft is 1671 sqft and has two full bathrooms.  This condo also has a HUGE closet, that’s probably 10’x10′, if not larger – no joke.  I love this unit because it’s so spacious and open.  Also, this can be accessed from the street and has a walk-up entrance.  The only drawback I’ve seen, is that it’s a little on the dark side(not much natural light).

At the asking price, your monthly payment would be about $2911(the HOAs are much higher here, but you also get more space), or about $2491/mo after your tax benefits.

FYI – this condo was purchased for $770K in 2004 – this is a 45% price reduction over 6 years!

So what does that mean….?

Clearly it’s not apples to apples (nor is it Apples to Apples), but aside from the down payment, renting isn’t really much cheaper.  Sure, there are other costs, such as repairs, upgrades, etc., but as a home owner, you also get to reap the benefits of appreciation – yes I know home prices haven’t done much good to home owners lately, but a LOT of people made  a lot of money not too long ago.  You also don’t have to worry about your landlord raising the rent, asking you to move out because he wants to sell, or anything else like that.

I’m not saying buying is the right move for everyone, but it might make more sense than you think.  What else are you going to do with you $50-100K you have saved up?  Let it earn 1-1.5% in a CD?  Invest it in the  stock market?

If you’re ready to look at your options and you have questions about real estate, please contact me.  Denny Oh 858-243-2092 [email protected]

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2 Comments

  1. Joel says:

    “Fortunes are not made in boom times…that is merely the collection period. Fortunes are made in depressions or lean times when the wise man overhauls his mind, his methods, his resources, and gets in training for the race to come.”

    George Wood Bacon

  2. Denny Oh says:

    Thanks Joel – I couldn’t agree with you more. Check out this article I wrote back in October of 2008.
    http://www.sandiegoh.com/2008/10/24/be-fearful-when-others-are-greedy-and-greedy-when-others-are-fearful/