Owning in the Bay Area really makes little sense (San Francisco: for sale, real estate)

[HappyinCali]

Now, I am fully aware I am not going to convince anyone. I can't even convince my wife, so I am pretty sure that when (if) we can afford it, we will buy a house. But if you detach the emotional aspect of it and look at just the numbers, owning in the Bay Area makes no sense.

Let's say you buy $1,000,000 house with $200,000 down.

So you have a $800,000 mortgage, and $1,000,000 house. Let's use a round property tax of 1.2% and a mortgage rate of 5%.

You are paying $12,000 in property taxes per year into perpetuity.

For the early years (until you start making a dent into your principal) you are also paying $40,000 in interest. Let's say you put $500,000 down and only have $500,000 mortgage. You are still paying $25,000 per year in interest in the yearly years.

So let's add those two. In my 20% down payment, you are paying a staggering $52,000 to the bank and the government. NOT to you.

So unless your monthly rent is >$4333 owning makes no sense. IF your monthly rent is $3,000, you are literally paying 4 months of your annual rent to the government every year.

You are also responsible for your maintenance etc.

Add in the fact that Bay Area politicians believe that Parcel taxes can fix the schools, pave the roads, cure cancer and bring peace to the Middle East and you really have no reason to buy a house in the Bay Area.

What are your thoughts?

[timberline742]

What would the rent be for that $1,000,000 place? And what could you get for renting a $3000 apartment? When I rented in SF we (3 guys) paid $1000 each for a three bedroom and it wasn't much at all... but I have no idea what the unit would have cost on the market either.

[HappyinCali]

Originally Posted by timberline742

What would the rent be for that $1,000,000 place? And what could you get for renting a $3000 apartment? When I rented in SF we (3 guys) paid $1000 each for a three bedroom and it wasn't much at all... but I have no idea what the unit would have cost on the market either.

Even in today's market you can get a pretty decent place for $3,000. We have an amazing apartment that we got at the bottom of the market for $2,700. It is in a rent controlled building, so the rent increase is predictable.

Here is a link that says average rent in SF is $2,800 for a 1 BR and $3,700 for a 2 BR. Both of those confirm my thesis, although I actually thought the 2 BR will be more like $3,200.

http://sfist.com/2013/07/19/another_sf_rent_map.php

[countofmc]

Did you factor in tax deductions? A mortgage is also fixed, as opposed to rent which can keep going up, so it's basically an inflation hedge.

[tstieber]

Keep in mind that the cost of buying isn't $1 million everywhere in the Bay Area, so the calculations may make sense in some neighborhoods and cities, but not everywhere. For example, we live literally a ten minute drive from the financial district, in a fairly new condo building in Emeryville designed by a famous SF architecture firm, with high ceilings, high end finishes, amazing amenities, gated parking, walking distance to shopping, restaurants, movies, and waterfront, plus we have a view of the new Bay Bridge, Treasure Island, and the Transamerica Pyramid. And this 1 BR + den condo is probably worth just under $400,000, whereas in the City, ten minutes away, where the building would look right at home in South Beach, it would easily sell for double (about $750K-$780K). At those prices, based on our current interest rate, and considering income tax deductions on mortgage interest and taxes, we are paying about the same as renting in the building from a landlord. BUT: $800 of our monthly payment actually goes towards paying down the mortgage, so that's like putting $10K into savings each year that we wouldn't be getting if we were renting. And we also get the appreciation over time. So if, let's say, home prices appreciate only 4 percent a year over the next 5 years, then our condo would be worth more than $80,000 more than it is now, plus we'd owe $50,000 less on the mortgage, for a net benefit of $130,000 compared to renting for the same five years.

For someone who was commuting to the City every day (which I don't), you could add the cost of bridge tolls I suppose (about $1000 a year), but that's not much in the scheme of things. And it might be offset by the lower cost of living outside of the city (gas prices are about 30 cents lower per gallon, for example).

So I agree with the OP that owning in the City compared to renting is not worth it right now, because buyer demand is through the roof. However, for those people willing to look ten minutes out, there are some great options.

[Ruth4Truth]

Why assume a $1,000,000 home? Few can afford that, and there's plenty of housing stock available for less.

The way to hedge against property taxes is to rent out a basement or a room with a separate entrance. Create a MIL apt. The way to hedge against the big interest burden is to pay extra toward interest every month, and pay it off in 15 years instead of 30. Think just a little outside the box, and these problems can be mitigated.

[Ultrarunner]

Plenty of homes for less than a million...

You are right on taxes... depending on where, tax rates can be anywhere from 1.15 to over 1.6%

On a 600k home, property taxes could be $750 a month.

Some folks do make money on appreciation.

A doctor where I work bought a nice home in Castro Valley for 550k two years ago and sold it earlier this year for 800k because he was taking a job offer in Texas.

Many told him to rent... his wife really wanted to own.

Buying/owning a home in the Bay Area worked very well for them and said it was only because of his wife... he wanted to rent a home for $2600 in the area.

[beb0p]

Originally Posted by HappyinCali

So unless your monthly rent is >$4333 owning makes no sense. IF your monthly rent is $3,000, you are literally paying 4 months of your annual rent to the government every year.

What are your thoughts?

You are comparing apples to oranges. The $1M property is definitely going to set you back more than $4,333 in rent. So using your own argument, it makes sense to buy instead of rent.

This condo was sold last year for $668,000.
301 Mission St. #20H | San Francisco Real Estate | Condos Lofts & Homes for Sale and for Rent | ClimbSF

It had been rented for $4,200
301 Mission St #20H | San Francisco Real Estate | Condos Lofts & Homes for Sale and for Rent | ClimbSF



Also, this condo was sold a few months ago for $650k:
http://www.trulia.com/property/31113...cisco-CA-94107

A similar unit in the same building is rented for $3,000:
http://www.climbsf.com/for-rent/1310-minnesota-st-101/


So using those comps, how it is possible that you can rent a $1M place for only $3,000?

Now, in your case, since you're already in a rent controlled unit, it may not make sense for you to buy. But note that you are a very special case. In general, the math for most cases still favor buying instead of renting, mostly because rent is so ridiculously high that it matches the equally ridiculous RE prices.

.

[bluebeard]

This is a neat tool:
http://www.nytimes.com/interactive/b...alculator.html

[ssmaster]

what about tax deductions?
if you are making enough to buy a $1 million dollar home you really need as many deductions as possible.

i bought 15 years ago in a somewhat desirable area and my house has increased in value signifigantly. Since i did not use my home as an atm and only refinanced to lower my interest i have a LOT of equity and have a small mortgage payment.

people are renting a lot worse places than mine for a lot more money than i pay in mortgage.