Rent vs Buy in Bay Area: (my) number-driven approach

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deanmoriarty
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Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

Hello,

Highly disheartened by this crazy year when my portfolio is down, compensation is down, real estate is up and rents are increasing through the roof, I decided to re-evaluate my living situation, and specifically wonder if it might be worth finally buying my primary residence.

Assumptions:

- I am fine living in a nice rented one bedroom apartment close to work, since I’m not having kids. It’s just me and my partner and our view on kids hasn’t changed for 5+ years, and as we are approaching 40 (36 now) everyone finally is understanding that we are, in fact, “different”, and we won’t change our mind.

- I do not need a house, so I would mostly be looking at a 2bd condo or 2bd townhouse in a commute-friendly area (Sunnyvale/Mountain View/Santa Clara/...). 1bd condos are ridiculously overpriced for what they offer so I refuse to look at those. I understand this makes the calculation skewed since I’m not looking at the “rent-equivalent” for the property I would be purchasing (2bd own vs 1bd rent), but I do not care. At the end of the day my only metric is how much I spend for the lifestyle I need.

I’ve been struggling with a lot of online rent vs buy calculators because they seem grossly inaccurate, for example they don’t properly model tax benefits or they do not properly consider investing the difference in expenses between mortgage and rent.

So, I decided to burn a few hours and create my own.

Here are the results (click the link for full resolution): https://i.imgur.com/teTNNhP.png

Image

Even with significantly aggressive assumptions in terms of rental inflation, I seem to always come out ahead by renting and it’s going to take more than 20 years before I break even! It doesn’t seem a reasonable deal, even if I could comfortably afford a purchase (net worth $3M liquid with ~$1M income, 20% lower now due to FAANG RSU).

If I use calculators from NYT, Smart Assets, … the numbers are wildly different and the break-even is always in less than 10 years. I don’t have a way to tap into their obscure calculations, but I suspect they are not modeling properly the “investing the difference” calculation (which may be reasonable for an average Joe since he might blow the difference on discretionary expenses, but not for me, a 10+ year disciplined frugal Boglehead).

Let me know if the above seems reasonable!

EDIT: Added apples-to-apples numbers for 1bd condo below as well.
Last edited by deanmoriarty on Tue May 17, 2022 8:28 am, edited 3 times in total.
irr
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by irr »

In VHCOL areas, it's hard to justify buying, especially with mortgage rates where they are.

Also, 8% rent increases are 2-3x higher than historical averages. Pre-pandemic, most large institutions underwrote deals anticipating a 2-4% annual increase with some years being flat.
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

irr wrote: Tue May 17, 2022 7:35 am In VHCOL areas, it's hard to justify buying, especially with mortgage rates where they are.

Also, 8% rent increases are 2-3x higher than historical averages. Pre-pandemic, most large institutions underwrote deals anticipating a 2-4% annual increase with some years being flat.
For comparison, here is the calculation for a 800k apartment, which might get you a very decrepit one bedroom apartment in the areas I currently rent: https://i.imgur.com/MiyIJ4o.png

Image

Ten years to break even, and this is with 8% rent inflation. If I lower the rent inflation, the calculation never skews towards buying. This is substantially different than every other calculator found online, so I hope I'm not making any mistake.
atdharris
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by atdharris »

I am in the same boat and having the same issues you are. I live in a HCOL area, top 15 most expensive counties to buy real estate along the east coast where the median home price is ~$450k, and I'd be looking at spending $500k or more for something like 1100 sq ft and 2 bedrooms. A condo may be less, but those come with HOA fees on top of their ridiculous prices. I don't need a house either (no pets or kids), and when I total up the costs of homeownership it seems less of an "investment" that people tell me it is and more of a liability.
DH0
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by DH0 »

Your numbers are off. Not sure whether it will change the ultimate conclusion but here are some hard data points. We own a 2/1 condo in the area you mentioned, bought for a song 10 yrs ago during the housing crisis and currently used as a rental.
– insurance will only be ~$350/year. The HOA insures the structure, so you only need an HO6 policy, which insures the interior.
– maintenance seems really high. Again, the HOA takes care of the structure so $3k/year is probably sufficient unless you're planning significant upgrades
– property taxes should be ~1.15% of the purchase price, and increase by 2% per year.
– I think your assumed purchase price is high. Condos in this area have actually come down in value during the pandemic as people have moved further out to take advantage of WFH in search of more space. An older 2/1 would have run about $900k in 2019. Recently I've seen places going for $750–800k.
– I agree 8% annual rent increase is not at all realistic. I would assume more like 4%.
Last edited by DH0 on Tue May 17, 2022 8:56 am, edited 1 time in total.
THY4373
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by THY4373 »

deanmoriarty wrote: Tue May 17, 2022 7:17 am - I do not need a house, so I would mostly be looking at a 2bd condo or 2bd townhouse in a commute-friendly area (Sunnyvale/Mountain View/Santa Clara/...). 1bd condos are ridiculously overpriced for what they offer so I refuse to look at those. I understand this makes the calculation skewed since I’m not looking at the “rent-equivalent” for the property I would be purchasing (2bd own vs 1bd rent), but I do not care. At the end of the day my only metric is how much I spend for the lifestyle I need.
Too early in morning for me to comment on the numbers but personally as a current renter and prior homeowner I see no issue with comparing apples to oranges. Some of the pro-ownership contingent get worked up over this but the level of commitment between renting and buying in my opinion can lead to very different requirements for each. As a renter the level of my commitment to a place is more or less my lease duration and rent cost which is much lower than if I buy. Therefore I am happy to live in a less than stellar neighborhood (perfectly safe but not a place I'd want to commit long term to) and my son is at college (and previously went to private school) so as renter I don't care about being in a top school district, etc. But as a buyer all of these come into play (good school district helps retain value of my purchase home vs just a waste of additional rent). In general even in my MCOL area I can rent for the same as owning or less because I'll rent less than I'll buy. I have chosen rental for the last five years for flexibility and more recently the lack of desire to compete in the hot real estate market. That said my future plans have solidified so I am starting to look now that the market is showing the barest hints of a cool down (and I am not yet in danger of being priced out of what I want).
randomguy
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by randomguy »

irr wrote: Tue May 17, 2022 7:35 am In VHCOL areas, it's hard to justify buying, especially with mortgage rates where they are.

Also, 8% rent increases are 2-3x higher than historical averages. Pre-pandemic, most large institutions underwrote deals anticipating a 2-4% annual increase with some years being flat.
People have been saying that about bay area real estate for 30 years and so far buying has pretty much always been the right choice. When you are making over 7% appreciation on a leveraged up investment, you are printing money. The problem with these calculators is that the outcome is always going to be driven by that appreciation number and you have no way of figuring it out. Maybe this is the decade were it goes back to 3% and stays there. Maybe we have another 20 years of 7%.
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

randomguy wrote: Tue May 17, 2022 8:49 am
irr wrote: Tue May 17, 2022 7:35 am In VHCOL areas, it's hard to justify buying, especially with mortgage rates where they are.

Also, 8% rent increases are 2-3x higher than historical averages. Pre-pandemic, most large institutions underwrote deals anticipating a 2-4% annual increase with some years being flat.
People have been saying that about bay area real estate for 30 years and so far buying has pretty much always been the right choice. When you are making over 7% appreciation on a leveraged up investment, you are printing money. The problem with these calculators is that the outcome is always going to be driven by that appreciation number and you have no way of figuring it out. Maybe this is the decade were it goes back to 3% and stays there. Maybe we have another 20 years of 7%.
Have condos/townhouses appreciated at 7%+ a year? Based on several Redfin comps I've seen, condos have appreciated more like ~3%, and townhouses ~4%. I sampled various datapoints from different time horizons (mostly the properties that I would actually be interested in buying that fit my criteria, and I ran a sqrt(newest_sale_price - oldest_sale_price, number_of_years)), typically starting from the 80s, 90s and 2000s.
Last edited by deanmoriarty on Tue May 17, 2022 8:58 am, edited 1 time in total.
halfnine
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by halfnine »

Maybe I am missing it but have you adjusted for taxes both on dividends (equities) and capital gains (post sale of equities and home). Your ultimate numbers to be "fair" would have to be after tax as you would benefit from a 500K exclusion for the home.
randomguy
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by randomguy »

deanmoriarty wrote: Tue May 17, 2022 8:52 am Have condos/townhouses appreciated at 7%+ a year? Based on several Redfin comps I've seen, condos have appreciated more like ~3%, and townhouses ~4%. I sampled various datapoints from different time horizons (mostly the properties that I would actually be interested in buying that fit my criteria, and I ran a sqrt(newest_sale_price - oldest_sale_price, number_of_years)), typically starting from the 80s, 90s and 2000s.
A 2/3 townhouse very similiar to what a friend bought

https://www.zillow.com/homedetails/181- ... 8091_zpid/

240k in 1997. 1.2m today. That is 6.5% over the last 25 years including a housing bust. If you just look at the last 10 years the number is higher.
Last edited by randomguy on Tue May 17, 2022 9:08 am, edited 1 time in total.
Ron Ronnerson
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by Ron Ronnerson »

Your underlying assumptions can make a big difference, especially as time progresses on. I purchased a townhome in the Bay Area in 2010. Since that time, the rent on my old apartment has gone up from $1800/month to $3400/month. This is around a 5.5% increase per year. The home I purchased increased in value from $500k to $1.35m. The rate of appreciation is 8.5% year so far. The pattern may not hold but these are the actual numbers after a dozen years.

A couple more details: I purchased with 3% down ($15k) without having to pay PMI. Property taxes were $9k in 2010 and $10k in 2022. Property taxes have gone up 10% while home value has increased 270%.

By the way, if you buy, your mortgage rate won’t go up but it could go down. I purchased at a 5.25% rate in 2010, refinanced in 2012 to 3.25%, in 2020 to 2.875%, and in 2021 to 2.375% (took out cash from the home during the last refi as well). All have been 30 year fixed loans. I’m not sure how a calculator would factor in a potential interest rate drop at some point In the future but the possibility is there.

My main point is just that the underlying assumptions you use can greatly affect the results. So I would alter the inputs and try various scenarios to see what the possibilities might be. Downside is that it might leave you more confused.
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quantAndHold
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by quantAndHold »

In a period where there’s 8% inflation, with housing costs being one of the largest parts of that, you’re predicting that sale prices will increase by 3% annually. Got it.
THY4373
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by THY4373 »

quantAndHold wrote: Tue May 17, 2022 9:08 am In a period where there’s 8% inflation, with housing costs being one of the largest parts of that, you’re predicting that sale prices will increase by 3% annually. Got it.
Predictions about the future are hard and nobody knowns nothing. Inflation is up but so are interest rates and the latter is likely going to introduce headwinds on real estate values (perhaps less so in areas like the Bay Area where lots of folks would appear to be able to buy for cash). Whenever I have done this sort of analysis in the past for my neck of the woods I have found one's assumptions about the future often would swing the analysis one way or the other. You take your best guess and make a decision and move on.
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quantAndHold
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by quantAndHold »

THY4373 wrote: Tue May 17, 2022 9:58 am
quantAndHold wrote: Tue May 17, 2022 9:08 am In a period where there’s 8% inflation, with housing costs being one of the largest parts of that, you’re predicting that sale prices will increase by 3% annually. Got it.
Predictions about the future are hard and nobody knowns nothing. Inflation is up but so are interest rates and the latter is likely going to introduce headwinds on real estate values (perhaps less so in areas like the Bay Area where lots of folks would appear to be able to buy for cash). Whenever I have done this sort of analysis in the past for my neck of the woods I have found one's assumptions about the future often would swing the analysis one way or the other. You take your best guess and make a decision and move on.
Well, this is basically a situation where OP wants to continue renting forever, so is making up assumptions that proves he is correct. So he’s comparing a one bedroom rental with a two bedroom purchase, and historically low price appreciation numbers during a time of high inflation to make it all come out the way he wants. I’m just pointing that out.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by Californiastate »

Don't fight the Fed and don't bet against BA RE price appreciation.
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The Man with the Axe
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by The Man with the Axe »

Your annual budget numbers for for Maintenance and Insurance are too high.

Maintenance will be somewhat unpredictable, but budgeting $12,000 per year is excessive. The condition of the unit at the time of purchase will have a big impact on that number.

DH0 is right: Part of your insurance is included in the HOA payment and the other part should be less than $1,000/year. If you want a better number, call a few insurance agents and ask them for an estimate.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by mervinj7 »

deanmoriarty wrote: Tue May 17, 2022 7:17 am Even with significantly aggressive assumptions in terms of rental inflation, I seem to always come out ahead by renting and it’s going to take more than 20 years before I break even! It doesn’t seem a reasonable deal, even if I could comfortably afford a purchase (net worth $3M liquid with ~$1M income, 20% lower now due to FAANG RSU).
At the end of the day, you are interested in purchasing a $1.2M condo on a $1M salary with $3M in liquid assets in your mid-30s. Financially, it won't make much of a difference one way or another in your overall net worth over time. If you want to own a condo, just ignore calculators whose outcomes can vary widely based on the assumptions you use, and go for it. If your gut is telling you no, then don't. In a non-recourse state, even with slightly elevated interest rates, I would put down 20-25% and get a mortgage for the rest (see the threads on relationship mortgages to take advantage of your substantial assets). No need to liquidate holdings to get a larger down payment unless you want to take advantage of techniques to maximize your tax deduction on your mortgage interest.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by Big Dog »

Californiastate wrote: Tue May 17, 2022 10:21 am Don't fight the Fed and don't bet against BA RE price appreciation.
I've always had that pov, but when I had to sell my folks house last year, I needed a retro appraisal for Trust purposes. In my research, I found that East Bay prices declined yearly 20% in the '08/'09 market downturn. (several data sources)

"I purchased a townhome in the Bay Area in 2010." Great timing (in retrospect).

The question anyone contemplating a purchase in the BA (or other VHCOL area) now is whether local real estate is in for a similar correction as '08/'09. My D rents on the Peninsula, and when her lease came up in March, I suggested that she continue to rent. I certainly 'know nothing.' (But my gut tells me that the Fed is gonna be too slow to bring down inflation creating a longer downturn.)
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by boglesmind »

deanmoriarty wrote: Tue May 17, 2022 8:52 am I sampled various datapoints from different time horizons (mostly the properties that I would actually be interested in buying that fit my criteria, and I ran a sqrt(newest_sale_price - oldest_sale_price, number_of_years)), typically starting from the 80s, 90s and 2000s.
You meant CAGR calculated as (((End Value/Start Value)^(1/Periods)) -1 and not sqrt() as mentioned, right?
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

boglesmind wrote: Tue May 17, 2022 11:21 am
deanmoriarty wrote: Tue May 17, 2022 8:52 am I sampled various datapoints from different time horizons (mostly the properties that I would actually be interested in buying that fit my criteria, and I ran a sqrt(newest_sale_price - oldest_sale_price, number_of_years)), typically starting from the 80s, 90s and 2000s.
You meant CAGR calculated as (((End Value/Start Value)^(1/Periods)) -1 and not sqrt() as mentioned, right?
Yes, precisely that (was typing from my phone, not sure where that came from!).

Thanks to everyone chiming in, your perspective is very useful. Lowering rent to 6%, optimistically increasing appreciation to 5%, and lowering maintenance expenses indeed makes the break-even happen earlier, though I'm afraid to get these levels of appreciation I'd have to look at a townhouse, which could be way out of the $1.2M price range in a good location.

Link: https://i.imgur.com/Yjh4xVh.png

Image
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by SantaClaraSurfer »

Current renters in this area. We are happy.

Our choice to rent in the area close to where we work was based on the risks of ownership (job loss, RE risks) being too high for what we would have to expend on a 30% down payment and the available quality of affordable housing stock too low.

Basically, would we want to live where we can currently afford to buy (by our standards) versus where we rent now?

To come up with this:

1. We looked at rent in a quality location as a percentage of our gross income. This number currently checks out for us for what is nice apt. in a great location.

2. We then looked at a 30-year mortgage on an affordable house nearby that we would want to live in, and calculated the 30% down payment.

For us, the answer after comparing the two options was clear: we can afford to rent, and we prefer that option, for now.

When the needed down payment on somewhere we would really like to live is a smaller percentage of our net worth, we would consider purchasing housing near work, until then we are fine renting so long as we can keep the percentage of our gross income spent on housing low, and invest the difference. (We currently save a high percentage of our gross income, so this equation will evolve over time.)

Not perfect, but that's where we are at. It's a simpler approach to the math, but it works for us. Don't get hung up on high rent if your rent to gross income ratio checks out, and you are investing the savings.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by Ron Ronnerson »

Big Dog wrote: Tue May 17, 2022 10:57 am
"I purchased a townhome in the Bay Area in 2010." Great timing (in retrospect).
Hi Big Dog,

Since you quoted me from earlier up in the thread, I just want to address this. I agree it was great timing in retrospect. I was simply sharing my numbers to show that assuming 3% appreciation could be considerably different from the reality.

I do agree that 2010 was a good time to buy. However, pick a different year and calculate the annual appreciation since then. Won’t the numbers be way higher than the assumed 3%? In fact, since the start of 2020, my home value has gone up 60%. Maybe 2020 would have been a better time to buy than 2010 in terms of rate of appreciation. I think you’ll find that most years have been an amazing time (in retrospect).

All that being said, I also said above that “the pattern may not hold.”

The main point is that the assumptions used affect the results. The OP is assuming the future will be considerably different than the past. It may well be. But we don’t know to what degree or in what direction. After all, I used to think that 5% annual appreciation was a lot from 2010 to 2020. Over the last couple of years, it’s been more like 30% appreciation. That outcome was definitely not something I would have expected in 2020, as everything shut down due to a global pandemic. I suppose I’m like you: I know nothing either.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by MrDrinkingWater »

deanmoriarty wrote: Tue May 17, 2022 7:17 am Hello,

Highly disheartened by this crazy year when my portfolio is down, compensation is down, real estate is up and rents are increasing through the roof, I decided to re-evaluate my living situation, and specifically wonder if it might be worth finally buying my primary residence.

<SNIP>

I’ve been struggling with a lot of online rent vs buy calculators because they seem grossly inaccurate, for example they don’t properly model tax benefits or they do not properly consider investing the difference in expenses between mortgage and rent.

So, I decided to burn a few hours and create my own.

SantaClaraSurfer wrote: Tue May 17, 2022 11:56 am Current renters in this area. We are happy.

Our choice to rent in the area close to where we work was based on the risks of ownership (job loss, RE risks) being too high for what we would have to expend on a 30% down payment and the available quality of affordable housing stock too low.

OP: I like your effort at trying to come up with your personalized number-driven approach. If it has helped you clarify your thinking about what to do, that is a great outcome.

I think SantaClaraSurfer has a very good perspective on owning vs renting in a VHCOL area. The difference in decision-making about renting or owning should likely be mostly about what you are getting for the money spent. Maybe for 2-bedroom condos, especially in the neighborhoods you want to be in, the cost of renting and the cost of owning are going to be comparable. If your preferred shelter is going to be a 4-bedroom, 3-bath, 3000 square foot home in a highly desirable neighborhood, renting such a place might be far less costly than buying it.

Good luck! It sounds like you know the kind of property you'd like to live in, and you are going to increasingly have a better idea about what you'd like to pay as you do more research and fine-tune your own spreadsheet (that is capturing the utilitarian and financial aspects.)
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by Monsterflockster »

Rented in the Bay Area for 4 years. In that time (pre-covid) rent increased 36%. We bought a home and our mortgage was cheaper than what we paid in rent within one year due to mortgage rates dropping and refinancing (we got lucky and understand this is not the norm). I hated having a landlord as they were very intrusive. For me purchasing was a quality of life issue that was worth the additional money at the time. In the long run we are well ahead of where we were but even if we weren't I'd still be happy with the decision.

All this is to say everyone is different and I think there is more to the decision than what can pop out of a calculator. Not one way is right... you have to do what you feel is best.
Last edited by Monsterflockster on Tue May 17, 2022 2:01 pm, edited 3 times in total.
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

Monsterflockster wrote: Tue May 17, 2022 1:07 pm Rented in the Bay Area for 4 years. In that time (pre-covid) rent increased 36%.
Your experienced yearly rent increase (8%) is very similar to the one I experienced as well, for generally modest 1bd apartments. That's why in my calculation I put 10%. Most folks on here seem to believe it should be way lower long-term though.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by gwe67 »

Congrats, you are renting for less than 0.4% of the home's value. That's a great market for renters and a horrible market for landlords.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by dboeger1 »

I honestly thought I would never buy in the Bay Area, but a bunch of factors coalesced in 2020 that made buying the right choice for us. One of the things that should have been obvious but first-time buyers rarely talk about is that you can get monthly payments down to however much you want, assuming you have a big-enough down payment. Everyone always talks about the standard 0% VA / 3.5% FHA / 20% conventional down payments, but we just kept saving until we had over a 30% down payment for a house we were interested in, at which point the projected payments for a much bigger home were lower than the rent on our smaller apartment. I won't go so far as to say that it was a no-brainer because the cost is tying up a huge amount of capital, but if you think about it logically, Jeff Bezos has absolutely no reason to rent a condo, so somewhere between where you are and where he is on the wealth spectrum, buying becomes the obvious choice. Most people assume that if they wait to save more, they'll just end up buying more house, but actually, assuming your savings keep pace with housing affordability, you'll eventually make the same more affordable in terms of payments. By most metrics, we actually waited too long, but we wanted to make sure we were comfortable with our first purchase.

As an exercise, you might want to project what your savings would be 2-5 years from now, compare that to your purchase and rental projections, and if the numbers seem like a no-brainer for you, it means you're on the cusp of where this wouldn't even be an issue if you had just a little more money, and that's probably a good point to at least start the process of looking to buy.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by randomguy »

gwe67 wrote: Tue May 17, 2022 1:31 pm Congrats, you are renting for less than 0.4% of the home's value. That's a great market for renters and a horrible market for landlords.
It is a great market for landlords. They have made a fortune. It is a win-win arrange where the renters get to save a few bucks short term and the landlords make a ton of money long term.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by quantAndHold »

So I have a 93 year old, historic, 4 bedroom, 2300 sq ft single family home. It’s the quintessential money pit. Your projected maintenance and insurance costs ($6000 and $1200) are about what my actuals are.

Maintenance on a condo should be way less than $6000/year. When I had a condo, I paid maybe $10-20k for a cosmetic redo and new appliances when I first moved in, then my maintenance after that was maybe a few hundred a year, for things like snaking a drain or carpet cleaning. In an apartment style condo, there’s not much that can go wrong. Most of the expensive stuff, like roof or landscaping, is covered by the HOA fee.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by sksbog »

Florida Atlantic University, BH&J buy versus rent index.

https://business.fau.edu/executive-educ ... phs/#SF-CA

Hope this helps.
126inc
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by 126inc »

OP says they make 1MM/yr and 3MM liquid NW, I find the conversation and the fact that they are looking for a 2bdrm condo somewhat funny.
Topic Author
deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

126inc wrote: Tue May 17, 2022 8:12 pm OP says they make 1MM/yr and 3MM liquid NW, I find the conversation and the fact that they are looking for a 2bdrm condo somewhat funny.
Aren't we on a board where frugality is celebrated, as opposed to made fun of? :sharebeer
investlikebogle
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by investlikebogle »

deanmoriarty wrote: Tue May 17, 2022 7:17 am Hello,

Highly disheartened by this crazy year when my portfolio is down, compensation is down, real estate is up and rents are increasing through the roof, I decided to re-evaluate my living situation, and specifically wonder if it might be worth finally buying my primary residence.

Assumptions:

- I am fine living in a nice rented one bedroom apartment close to work, since I’m not having kids. It’s just me and my partner and our view on kids hasn’t changed for 5+ years, and as we are approaching 40 (36 now) everyone finally is understanding that we are, in fact, “different”, and we won’t change our mind.

- I do not need a house, so I would mostly be looking at a 2bd condo or 2bd townhouse in a commute-friendly area (Sunnyvale/Mountain View/Santa Clara/...). 1bd condos are ridiculously overpriced for what they offer so I refuse to look at those. I understand this makes the calculation skewed since I’m not looking at the “rent-equivalent” for the property I would be purchasing (2bd own vs 1bd rent), but I do not care. At the end of the day my only metric is how much I spend for the lifestyle I need.

I’ve been struggling with a lot of online rent vs buy calculators because they seem grossly inaccurate, for example they don’t properly model tax benefits or they do not properly consider investing the difference in expenses between mortgage and rent.

So, I decided to burn a few hours and create my own.

Here are the results (click the link for full resolution): https://i.imgur.com/teTNNhP.png

Image

Even with significantly aggressive assumptions in terms of rental inflation, I seem to always come out ahead by renting and it’s going to take more than 20 years before I break even! It doesn’t seem a reasonable deal, even if I could comfortably afford a purchase (net worth $3M liquid with ~$1M income, 20% lower now due to FAANG RSU).

If I use calculators from NYT, Smart Assets, … the numbers are wildly different and the break-even is always in less than 10 years. I don’t have a way to tap into their obscure calculations, but I suspect they are not modeling properly the “investing the difference” calculation (which may be reasonable for an average Joe since he might blow the difference on discretionary expenses, but not for me, a 10+ year disciplined frugal Boglehead).

Let me know if the above seems reasonable!

EDIT: Added apples-to-apples numbers for 1bd condo below as well.
I may have a very different take here.

First, it’s not worthwhile to assume a stock market return on down payment. If maximizing your portfolio is ultimate goal, you may as well live on street and put your rent money in the market and you will be ahead. But that’s just ridiculous, since you need a place to live.

So for me, the comparison is between rent vs buying but excluding the principle on mortgage. I view the principle as investment in real estate and a form of diversification. House values can go down but so do stocks.

For me, the right comparison is comparing your mortgage interest, plus taxes and expenses, including any tax benefits to your rent.

Of course, you would have to account for principle to make sure you have enough cash flow.
slalom
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by slalom »

As someone else said, I believe OP's maintenance estimate is extremely high - but I guess it depends on the place you're buying.

Also If it's a condo with an HoA, a lot of the big ticket maintenance items shouldn't be yours to begin with, but even if you bought a 3/2.5 SFH, $12,000/year maintenance is a lot.

I bought a new SFH in the Bay Area and am on year 10 of the purchase - we just repainted the outside ($9000) - the other expenses have been a couple times a year HVAC (about $180 per visit), landscaping ($90/mo), one HVAC part replace ($500), one water heater part replace ($400). Still on the original new appliances. ~$2500/year maintenance is what that's worked out to so far.
KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

OP,

IMHO, most rent versus buy calculators are pointless. And, it has nothing to do with the calculator. It has to do with the input data assumption.

It is very simple.

You can justify any buy decision with high enough appreciation rate. I was in Asia during the Asian Currency Crisis. Before the crash, the house's price double or triple every 2 to 3 years. It is obviously a good time to buy as long as you sell before the crash.

So, the question to you is this.

Can you justify the buy assuming 0% appreciation? That is the criteria that I use. I do not need any complicated calculator. The PITI with 20% down payment and 30 years fixed rate mortgage needs to be at least 20% to 30% lowered than the market rent.

In your case, as per California, non-recourse loan state, is the 0% down payment fixed rate Interest-only mortgage significantly cheaper than renting?

No complicated calculator needed. 0% appreciation buy based on imputed rent saving.

KlangFool
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

KlangFool wrote: Tue May 17, 2022 8:47 pm Can you justify the buy assuming 0% appreciation? That is the criteria that I use.
KlangFool
Thanks for your insight. Just out of curiosity, and I'm really not trying to justify a buying decision (if anything I'll probably continue renting, given the flexibility it provides me), how can you justify a world where the stock market will be up (nominal) in 20 years, but the real estate market will have 0% appreciation (nominal) during the same timeline? It seems a bit of a controversy to me.
KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

deanmoriarty wrote: Tue May 17, 2022 8:56 pm
KlangFool wrote: Tue May 17, 2022 8:47 pm Can you justify the buy assuming 0% appreciation? That is the criteria that I use.
KlangFool
Thanks for your insight. Just out of curiosity, and I'm really not trying to justify a buying decision (if anything I'll probably continue renting, given the flexibility it provides me), how can you justify a world where the stock market will be up (nominal) in 20 years, but the real estate market will have 0% appreciation (nominal) during the same timeline? It seems a bit of a controversy to me.
deanmoriarty,

"the real estate market will have 0% appreciation (nominal) during the same timeline? "

You missed my most important point. I bought my house by assuming 0% appreciation. If the house actually appreciate more than 0%, I make more money.

KlangFool
Last edited by KlangFool on Tue May 17, 2022 9:12 pm, edited 1 time in total.
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randomguy
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by randomguy »

KlangFool wrote: Tue May 17, 2022 8:47 pm
No complicated calculator needed. 0% appreciation buy based on imputed rent saving.

KlangFool
What good is a rule that gives the wrong answer? In the bay area in the past 40 years, I doubt it would have ever said to buy. Realty though is that you were better off buying pretty much all the time (in 2007 you did ok if you bought just not as well as if you waited to 2010).

It is a tough place to live where you can/have to make these bets. Don't buy that 1 million dollar house now and in 10 years, your housing costs will double. But if you do buy, you run the risk of buying at the top.
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

randomguy wrote: Tue May 17, 2022 9:07 pm
KlangFool wrote: Tue May 17, 2022 8:47 pm
No complicated calculator needed. 0% appreciation buy based on imputed rent saving.

KlangFool
What good is a rule that gives the wrong answer? In the bay area in the past 40 years, I doubt it would have ever said to buy.
randomguy,

I disagreed. Wrong answer in your opinion. But, it is the right answer for me.

"It is a tough place to live where you can/have to make these bets."

1) Then, don't live there. If someone is not paid well enough to live in one area, why live there?

2) If they choose to live there, then, it is their choice.

KlangFool
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

KlangFool wrote: Tue May 17, 2022 9:07 pm You missed my most important point. I bought my house by assuming 0% appreciation. If the house actually appreciate more than 0%, I make more money.

KlangFool
But does that apply also to the stock market? In other words, should a person invest their money in the stock market assuming 0% (nominal) appreciation over 20+ years?

If yes, such person shouldn't be able to retire when they reach 25-30X expenses, because 0% appreciation will mean their savings will be eaten by inflation alone?

If no, then why are the two markets so different from your point of view, even if they are subject to at least the same inflationary/demographic forces?
KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

deanmoriarty wrote: Tue May 17, 2022 9:18 pm
KlangFool wrote: Tue May 17, 2022 9:07 pm You missed my most important point. I bought my house by assuming 0% appreciation. If the house actually appreciate more than 0%, I make more money.

KlangFool
But does that apply also to the stock market? In other words, should a person invest their money in the stock market assuming 0% (nominal) appreciation over 20+ years?
deanmoriarty,

A) No. I need to live in a house. Housing expense is necessary. If I can reduce it permanently, I save money. Stock does not achieve that.

B) But, my saving rate is high enough (1X per year) and my personal inflation rate at 0%, I could achieve my FI goal of 25X at near 0% nominal rate over 20+ years.

KlangFool
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randomguy
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by randomguy »

KlangFool wrote: Tue May 17, 2022 9:14 pm
randomguy wrote: Tue May 17, 2022 9:07 pm
KlangFool wrote: Tue May 17, 2022 8:47 pm
No complicated calculator needed. 0% appreciation buy based on imputed rent saving.

KlangFool
What good is a rule that gives the wrong answer? In the bay area in the past 40 years, I doubt it would have ever said to buy.
randomguy,

I disagreed. Wrong answer in your opinion. But, it is the right answer for me.

"It is a tough place to live where you can/have to make these bets."

1) Then, don't live there. If someone is not paid well enough to live in one area, why live there?

2) If they choose to live there, then, it is their choice.

KlangFool
Not an opinion. Wrong mathematically. The person paying 500k in rent is far behind the person paying 700k for a mortgage and making 1 million dollars in appreciation. And that gap will keep growing for the rest of their lives...

1) They are paid well enough to live there. They still need to make the bet. You can easily afford that 1 million dollar house with a 400k salary. Doesn't mean you can avoid placing the bet
2) Sure. But who picks a place to live based on if a house is cash flow positive on day 1?
muffins14
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by muffins14 »

KlangFool wrote: Tue May 17, 2022 8:47 pm OP,

The PITI with 20% down payment and 30 years fixed rate mortgage needs to be at least 20% to 30% lowered than the market rent.
I’m not challenging your rule, but is there evidence that one can buy with PITI 20-30% cheaper than renting for any kind of property in any city in the US?

I’m really curious to see examples, because I’ve never seen such a case
Crom laughs at your Four Winds
KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

muffins14 wrote: Tue May 17, 2022 10:09 pm
KlangFool wrote: Tue May 17, 2022 8:47 pm OP,

The PITI with 20% down payment and 30 years fixed rate mortgage needs to be at least 20% to 30% lowered than the market rent.
I’m not challenging your rule, but is there evidence that one can buy with PITI 20-30% cheaper than renting for any kind of property in any city in the US?

I’m really curious to see examples, because I’ve never seen such a case
I bought my house with this rule. I am in Northern Virginia.

Rent = $2,300. PITI less than $1,800 per month.

KlangFool
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KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

randomguy wrote: Tue May 17, 2022 10:04 pm
KlangFool wrote: Tue May 17, 2022 9:14 pm
randomguy wrote: Tue May 17, 2022 9:07 pm
KlangFool wrote: Tue May 17, 2022 8:47 pm
No complicated calculator needed. 0% appreciation buy based on imputed rent saving.

KlangFool
What good is a rule that gives the wrong answer? In the bay area in the past 40 years, I doubt it would have ever said to buy.
randomguy,

I disagreed. Wrong answer in your opinion. But, it is the right answer for me.

"It is a tough place to live where you can/have to make these bets."

1) Then, don't live there. If someone is not paid well enough to live in one area, why live there?

2) If they choose to live there, then, it is their choice.

KlangFool
Not an opinion. Wrong mathematically. The person paying 500k in rent is far behind the person paying 700k for a mortgage and making 1 million dollars in appreciation. And that gap will keep growing for the rest of their lives...

1) They are paid well enough to live there. They still need to make the bet. You can easily afford that 1 million dollar house with a 400k salary. Doesn't mean you can avoid placing the bet
2) Sure. But who picks a place to live based on if a house is cash flow positive on day 1?
1) If they are paid well to live there, then, there is no problem. My problem is with folks that are not paid well to live there. Then, the question is why they live there?

2) If it is not worthwhile to buy, rent. Why a person must buy in order to live in one area?

KlangFool
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muffins14
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by muffins14 »

KlangFool wrote: Wed May 18, 2022 6:49 am
I bought my house with this rule. I am in Northern Virginia.

Rent = $2,300. PITI less than $1,800 per month.

KlangFool
What year was that purchase made?
Crom laughs at your Four Winds
KlangFool
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by KlangFool »

muffins14 wrote: Wed May 18, 2022 6:55 am
KlangFool wrote: Wed May 18, 2022 6:49 am
I bought my house with this rule. I am in Northern Virginia.

Rent = $2,300. PITI less than $1,800 per month.

KlangFool
What year was that purchase made?
The house in my area hit a peak around 2004/2005. It didn't recover to that nominal price level until 2019. I bought my house before 2019. It was close to the lowest level for this area.

KlangFool
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runninginvestor
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by runninginvestor »

investlikebogle wrote: Tue May 17, 2022 8:29 pm
deanmoriarty wrote: Tue May 17, 2022 7:17 am [....]
- I do not need a house, so I would mostly be looking at a 2bd condo or 2bd townhouse in a commute-friendly area (Sunnyvale/Mountain View/Santa Clara/...). 1bd condos are ridiculously overpriced for what they offer so I refuse to look at those. I understand this makes the calculation skewed since I’m not looking at the “rent-equivalent” for the property I would be purchasing (2bd own vs 1bd rent), but I do not care. At the end of the day my only metric is how much I spend for the lifestyle I need.
I may have a very different take here.

First, it’s not worthwhile to assume a stock market return on down payment. If maximizing your portfolio is ultimate goal, you may as well live on street and put your rent money in the market and you will be ahead. But that’s just ridiculous, since you need a place to live.

So for me, the comparison is between rent vs buying but excluding the principle on mortgage. I view the principle as investment in real estate and a form of diversification. House values can go down but so do stocks.

For me, the right comparison is comparing your mortgage interest, plus taxes and expenses, including any tax benefits to your rent.

Of course, you would have to account for principle to make sure you have enough cash flow.
That's how I do the quick back of the napkin math. I compare 1 year of rent with the ITI+M part of PITI+M(aintenance). I assume if I can afford the rent and PITI+M, then the principal will be invested in the home (buying) or stocks (renting). If the cost of rent is greater, then it may be worthwhile to buy a home. If the buy side is within 5-10% I'll look closer at any tax benefits that may be there, wants, needs, and other soft "fudge factors". Granted, we live in the Midwest and are looking at houses 1/3 of that price so the tax benefits are less but the desire for space can help balance the equation.

But OP sums the case up in that first sentence I start with "I do not need a house". If you are a happy renter and the rent v buy isn't financially conclusive to buying, there's no reason to.
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deanmoriarty
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by deanmoriarty »

runninginvestor wrote: Wed May 18, 2022 7:09 am
investlikebogle wrote: Tue May 17, 2022 8:29 pm
deanmoriarty wrote: Tue May 17, 2022 7:17 am [....]
- I do not need a house, so I would mostly be looking at a 2bd condo or 2bd townhouse in a commute-friendly area (Sunnyvale/Mountain View/Santa Clara/...). 1bd condos are ridiculously overpriced for what they offer so I refuse to look at those. I understand this makes the calculation skewed since I’m not looking at the “rent-equivalent” for the property I would be purchasing (2bd own vs 1bd rent), but I do not care. At the end of the day my only metric is how much I spend for the lifestyle I need.
I may have a very different take here.

First, it’s not worthwhile to assume a stock market return on down payment. If maximizing your portfolio is ultimate goal, you may as well live on street and put your rent money in the market and you will be ahead. But that’s just ridiculous, since you need a place to live.

So for me, the comparison is between rent vs buying but excluding the principle on mortgage. I view the principle as investment in real estate and a form of diversification. House values can go down but so do stocks.

For me, the right comparison is comparing your mortgage interest, plus taxes and expenses, including any tax benefits to your rent.

Of course, you would have to account for principle to make sure you have enough cash flow.
That's how I do the quick back of the napkin math. I compare 1 year of rent with the ITI+M part of PITI+M(aintenance). I assume if I can afford the rent and PITI+M, then the principal will be invested in the home (buying) or stocks (renting). If the cost of rent is greater, then it may be worthwhile to buy a home. If the buy side is within 5-10% I'll look closer at any tax benefits that may be there, wants, needs, and other soft "fudge factors". Granted, we live in the Midwest and are looking at houses 1/3 of that price so the tax benefits are less but the desire for space can help balance the equation.

But OP sums the case up in that first sentence I start with "I do not need a house". If you are a happy renter and the rent v buy isn't financially conclusive to buying, there's no reason to.
I find this a very interesting approach, thank you for bringing it up, I wouldn't have come up with it on my own.

Seeing everything that goes into the equity as a form of "investment diversification" is a reasonable stance, and comparing ITIM (+ effective tax reduction) with rent makes it for a metric that is independent from assuming the stock/real estate appreciation, and one just has to guess rent inflation.
runninginvestor
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Re: Rent vs Buy in Bay Area: (my) number-driven approach

Post by runninginvestor »

deanmoriarty wrote: Wed May 18, 2022 7:26 am I find this a very interesting approach, thank you for bringing it up, I wouldn't have come up with it on my own.

Seeing everything that goes into the equity as a form of "investment diversification" is a reasonable stance, and comparing ITIM (+ effective tax reduction) with rent makes it for a metric that is independent from assuming the stock/real estate appreciation, and one just has to guess rent inflation.
I think it works as a good heuristic for folks like me in the 22% tax bracket in places that don't see insane growth. It becomes a bit more muddy at higher tax brackets as I assume the number of ppl taking the standard deduction decreases as income goes up, and in effect cost of home goes up (mortgage interest deduction comes to play). You also have to consider being in one of the most tax advantageous class of investments - real estate. Since the first $250k/$500k gains are excluded. On a $1mill home, the $250k price gain in 5 years is a tax-free yield of ~4.5%/year (but then you'll factor in the expense of selling, maintenance, remolding).

Edit to add: I also have a more in depth Excel sheet, not too different than yours. I have it built to test diff scenarios and assumptions. Such as: utilities being higher than I thought; taxes increasing faster; different returns; different maintenance expenses. I have a number of variables like that that I use to get comfortable under an array of outcomes. Not really for a hard "yes/no" for if we should buy a house. I use it when I'm at the point where financially, buying is pretty clearly ahead of monthly renting in what I consider the sunk costs and I want to get a little more comfortable (monthly rent is sunk, ITI+M are essentially sunk costs in my view; note maintenance doesn't really include value added remodels as that's way too variable for me).
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