Rent vs. Buy? (In San Francisco)

In seemingly lock-step with the technology boom in San Francisco is the real estate boom. As we argue whether or not we are in "bubble" or not (for both tech and real estate), those moving to and living in the city make gut wrenching decisions -- should I buy or should I rent? (Or on the flip side, should I sell? There is a whole 'nuther calculus here that is different than the opposite of the rent vs. buy decision -- but that is for another blog post).

The simple conclusion? It's still slightly better to rent. Here's the breakdown, using a simple but real example. Of course, YMMV.

We consider a 3 bedroom, 2 bath, 1 parking space, 1200 sqft condominium or apartment in the Mission/Noe Valley. Looking at listings on Zillow,  these price at about $1.2 million. As a sanity check, this turns out to be about $1000/sqft. That sounds about right.

Some Assumptions

To simplify matters, we make some assumptions:

• You are able to finance the whole amount at 5%, no points, no fees, interest only
• You don't know if the property value is going up or down, so call it a wash
• You are in the 28% marginal tax bracket

The Cost to Own

• Monthly mortgage:  $1.2 million *.05/12 = $5000/month, net after taxes = $3600/month
• Taxes: $1.2 million * .011/12 = $1100/month, net after taxes = $792/month
• Insurance: $300/month
• Home owners dues: $500/month
• Maintenance: $100/month

Total: $5292/month

Renting 

Well, it seems like you can still rent a 3 bedroom 2 bath place for $5000/month. Assuming renter's insurance is $50/month, that $5050/month.

Some Caveats and Observations

• Financing the whole amount is probably unrealistic. We make this simplification to avoid the complexities of points, fees, time you stay in the home. And, we ignore the value of "infinite" leverage, opportunity costs, etc.
• We ignore the value of "flexibility" -- e.g. moving out of a rental is easier than selling.
• We ignore the value of "pride of ownership."
• We assume the appreciation/depreciation is 0. If we compare the price of real estate at the peak of the last boom (2000), this hypothetical property was about $900,000. At $1,200,000 today, that's less than an increase of 2% year. For a huge (perceived) real estate boom, this seems small.
• Rents over the past 15 years have probably doubled. So, increase in rent seems to have outpaced appreciation of property values.
• The parking place might be a $200/month "swing" for renters. For some parking matters, others not.
• Rent control in San Francisco probably reduces the anxiety for renters worrying about large year to year increases in rent.

Conclusion

If your rent is less than around $6000, then it seems reasonable to rent. You might sleep easier at night. Regardless of how high rents are or how fast property values are appreciating.

The biggest surprise is that property values really haven't gone up much (for condos) since the last boom.