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Paragon Real Estate’s 2017 San Francisco Farmer’s Market Guide.

San Francisco Rent vs. Buy Comparison

Comparing the PURCHASE of a 2-bedroom, 2-bath, 1080 square foot condo at the
2016 median San Francisco sales price of $1,150,000, to the RENTAL of a comparable apartment at a San Francisco market rate of approx. $4,400 to $4,600/month rent

Median sales price per 2016 MLS sales; monthly rent based on averaging Zillow,
RealFacts & Rent Jungle asking rent data in late 2016/early 2017

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. And, of course, one could not consider buying under the scenario below if one did not have the cash for the initial down-payment and closing costs.

We have tried to be conservative in our 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%. (Since 2011, the SF median house price has appreciated about 90%.) However, appreciation 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. We believe we 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 below calculations were created using a calculator Paragon licenses from a third party. We 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, rate projections, and purchase scenarios: NYT Rent vs. Buy Calculator.

The Purchase Scenario and Financial Parameters

Estimated Loan Information

Your total monthly housing payment was estimated at $6,239.38. Your down payment was estimated at $230,000 purchasing a home priced at $1,150,000. This is for a 30 year mortgage at 4.2% in the amount of $920,000. Your total purchase closing costs are estimated at $16,800.00 (about 1.5% of the purchase price).

In the analysis, the current monthly market rent is set at $4,400. The expected inflation rate of 2% annually was used to estimate future rent ($4,488 in the second year) and property taxes (though in California, increases in property taxes are strictly limited due to Prop 13 regulations). The rate of return used for the investment of down-payment monies by renters was 3% per year after taxes – obviously, this will vary widely by type of investment and time period. (If one had their money in CDs, one could only dream of an after-tax return of 3% in recent years. On the other hand, stocks have had a terrific run.)

After adjusting for your initial tax saving based on interest and property tax deductibility, and for the principal pay-down portion of your monthly housing cost, your net housing cost payment is reduced from $6,286 to $3,867, well below the market rate rent for a similar apartment of $4,400 to $4,600.

Note that with condo ownership, the greatest portion of home insurance cost is covered in the monthly HOA association dues & maintenance. For a 2BR/2BA condo, these dues typically run $350 to $550; we added a little bit to the calculation to cover the personal property portion of the insurance not covered by the HOA policy.

According to the above calculation, using the specified rates of appreciation, inflation and investment returns, your home purchase breaks even in approximately 2.7 years.

This is based on your home’s estimated equity minus 6% closing costs when you sell your home. It also assumes your home will appreciate at 3% per year and you have an income tax rate of 25%. If you cannot remain in your home for at least 3 years you should strongly consider continuing to rent.

The breakeven point was calculated by examining how long it would take to create enough equity in your home to exceed the value of investing your cash on hand (at 3% after-tax return). We also accounted for differences in your monthly rent and house payments.

Building Equity

Typically, by far the most important financial advantage of buying is the increase in home equity (and your net worth) over time, as is calculated in the last column below. Firstly, there is the monthly reduction of your loan amount, which increases your home equity. Secondly, there is the effect of inflation/home appreciation on the value of your home over time. Since the purchase was made using a 20% cash down-payment, there is also the significant financial advantage of leverage: When home values go up 10%, the increase in your cash down-payment is approximately 50% (though there is an adjustment for closing costs).

It’s worth noting that with a fixed rate mortgage rate (and Prop 13 limitations on property tax rate increases), one’s housing costs stay relatively stable over time, while rents typically continue to increase much more quickly. As the years pass, this can add substantially to the benefit of buying.

As mentioned earlier, the New York Times also has an excellent rent vs. buy calculator: NYT Rent vs. Buy Calculator. We could not use screenshots due to copyright law, however when we ran a very similar scenario through its calculator, based on living in the condo purchased for 5 years, it came to the conclusion that if you could rent a similar home to one you were buying (for $1,150,000), at a rent of $3,700 per month or less, then you should probably rent. That is, it came to a very similar conclusion to the calculator we used above, that with a market rent in the $4,400 to $4,600 range, buying was an option worth serious consideration.

The NYT also published this excellent editorial on the financial implications of homeownership: NYT Homeownership & Wealth Creation

Typically, the purchase of a new home is one of the largest financial transactions and investments of one’s life. Whatever home you purchase should work for you now—fulfilling your basic housing requirements at an affordable monthly cost. We also suggest retaining enough monies after purchase for a sufficient reserve fund.

Historically, San Francisco real estate has generally proven to be an excellent investment over the longer term (and sometimes, over the shorter term, such as if you had purchased in 2011 and sold today). This is due to the advantages of leverage (the ability to finance much of the purchase); the significant tax benefits of home ownership; economic, demographic and geographic conditions in the city; and long-term appreciation trends. Among other things, real estate is usually considered one of the best hedges against inflation.

If one doesn’t “refinance out” increasing home equity, home ownership (as you pay down the principal balance on your mortgage month by month) typically acts as a “forced” savings account to build household wealth, as mentioned in the NYT editorial referenced above. In addition, the $250,000/$500,000 tax exemption on capital gains on the sale of your principal residence can supercharge the financial return when you do sell. (We cannot think of another investment with this advantage.)

Here are some questions to consider:

  • How long do you plan to own the home you wish to purchase? Buying and selling in the short term always entails more risk and makes it more difficult to recoup closing costs on purchase and sale.
  • Are current interest rates advantageous for buyers? Lower interest rates make an enormous difference in the ongoing costs of homeownership (and your return on investment). A long-term fixed rate at a low interest rate is hugely advantageous to buyers.
  • Apropos of this rent vs. buy analysis: How does the cost of home ownership, with existing tax benefits, compare to renting? How does it compare in the calculation of building your financial assets over time?
  • How important is it to you to own the home you live in, with all that implies—security, control, pride of ownership, the ability to make changes and improvements according to your own tastes and needs?

Any investment has both potential risks and rewards—which only you can weigh according to your financial circumstances, your tolerance for risk, your timeline, and your projection of future economic trends. If you have to sell during a down market, the financial ramifications can be negative. Please consult your accountant for a more detailed analysis of the above factors.

This report was created in good faith using data and analytical tools deemed reliable, but it may contain errors and is subject to revision. It is not meant to convince anyone to do anything, but to simply provide additional decision-making tools and information. Ultimately, the end result of any investment will depend on the exact purchase and sell dates.

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. Tax law can change at any time, which could impact the calculations provided above. We encourage you to seek personalized advice from qualified professionals – accountants, financial planners, and loan agents – regarding all personal finance, tax and loan issues.

© 2017 Paragon Real Estate Group

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1000 Ways to Enjoy San Francisco & the Bay Area This Summer

Guests are coming, the kids are out of school, or you just want to do something different than usual. Summer has arrived in one of the most beautiful and multi-dimensional places on earth, and here is a wide variety of ideas for making the most of it.

Dinner, brunch, burritos, burgers, bars, music, dance, theater, running, biking, hiking, and things to do with visitors, children and dogs.

Food & Drink

Top 100 Restaurants

Zagat’s Best

Outdoor Dining & Drinking

Best Meal Delivery

Best Breakfast

Best Brunch

Best Burritos

Best Sandwiches

Best Pizza

Best Hamburgers

Best Dim Sum

Best Bars

Beer Drinking

Coffee Drinking

More Coffee

Best Desserts!

Out & About

Things to Do

To Do with Kids

To Do in Oakland

To Do in Marin

In Napa & Sonoma
City Biking

Mountain Biking

City Walks

Best Views

Hiking Trails

Running Clubs

LGBT – To Do

Sunday Streets

City Parks

Dog Parks

Farmers’ Markets

Sports Teams

Sports Calendar

Arts & Culture

Arts & Entertainment

More Arts Events

Nightclubs

Music

Museums

Ballet

Opera

Symphony

Theater

Important note: You will undoubtedly find yourself disagreeing vehemently with one or more of the above “best lists” – best burrito, brunch and coffee are particularly contentious issues in the Bay Area. Our position is clear: We agree wholeheartedly with you and share your dismay. Still, despite these egregious errors in taste, we hope you and yours are able to enjoy a summer delightful in every way.