Should You Rent or Buy in SF? It Depends
I am often asked, "Should I buy or rent in SF?" Though the answer is always variable based on your situation, my answer is nearly always that, if you can do it, buying is a smart choice from an investment and savings perspective. As a quick comparison, let's look at the purchase with 20% down payment of a 2-bedroom, 2-bathroom, 1080-square-foot condo at the 2016 median San Francisco sales price of $1,150,000*, versus the rental of a comparable apartment at a San Francisco market rate of approximately $4,400 to $4,600/month rent. (See graphics below for financial calculations.)
Looking just at the monthly payments, you might be tempted to think renting is the better deal, at $4,488 per month versus $6,239. However, there's more than meets the eye. Of that monthly mortgage payment, $1,334 would go to the principal, which is effectively paying money back into your pocket. You would save additional $1,085 per month against your income taxes as a shelter. That means your effective net payment on the mortgage would be just $3,867, $621 less than renting the equivalent property.
Over the course of the first year, you would spend $53,856 into rent, with no benefit. With this mortgage scenario, you would save $13,020 in income taxes. You would also pay down your principal $16,008, which combined with the growth of value of your property increases your equity. In fact, as you pay down your principal, the amount you pay into interest decreases, meaning you pay more into your own pockets. Over the course of years and decades, that can be very significant indeed.
Showing My Work
Rent vs. buy calculations depend on a wide variety of financial data and projections – prevailing and future interest, property tax, inflation, home-appreciation and investment-return rates – as well as data pertinent to you and your specific purchase, such as your marginal income tax rate and how long you plan to stay in the home you purchase. Altering any of these factors can change the calculation significantly.
I have tried to be conservative in my projections, for example, putting in an annual home appreciation rate of 3%, when for the last 30 years, San Francisco has seen an average, compounding appreciation rate of 5 to 6%. However, rates vary enormously in shorter time periods, and can go negative in downturns, such as occurred in 2008, and the ability to ride out down markets can make a big difference in financial returns. I believe I have used similarly conservative inflation and investment-return rates, and used the prevailing average, conforming mortgage interest rate in February 2017.
How long you plan to stay in the home you purchase is an important factor, because the longer you stay, the more of your monthly mortgage payment goes to principal pay-down, and the longer the period of amortization of closing costs.
The calculations were created using a calculator Paragon licenses from a third party. I strongly recommend that you consult your accountant or financial planner to discuss your financial situation, potential tax advantages and other specific pros and cons of purchase as they relate to your situation. What follows is only one scenario and should not be relied upon to make important decisions. The New York Times also has a very flexible rent vs. buy calculator, which allows you to put in your own data, projections, and purchase scenarios.
*Median sales price per 2016 MLS sales; monthly rent based on averaging Zillow, RealFacts & Rent Jungle asking rent data in late 2016/early 2017.