Owning in the Bay Area really makes little sense (Los Angeles: apartment, to rent)

[HappyinCali]

Originally Posted by 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.

Hi, that's fair. I maybe should have said San Francisco in the title, but I don't know how to edit. However, in San Francisco, $1 mn is really kind of what you want to pay to get something semi decent.

I live in the Richmond which is one of the cheaper areas and a 3 BD/3BA was selling for 1.7 mil...

80 Rossi Ave, San Francisco, CA 94118 - Zillow

[wave9x]

Something else to consider is appreciation. Say you put $200k into a $1m house. The house goes up in value 5% for the year - that would be a $50k ROI because of the leveraging. Say you put the $200k into investments instead. You'd need the investments to go up 25% for the year to get $50k ROI.

You also need to consider tax deductions.

The NY Times rent vs buy calculator will factor these in and more.

[ssmaster]

Originally Posted by HappyinCali

Hi, that's fair. I maybe should have said San Francisco in the title, but I don't know how to edit. However, in San Francisco, $1 mn is really kind of what you want to pay to get something semi decent.

I live in the Richmond which is one of the cheaper areas and a 3 BD/3BA was selling for 1.7 mil...

80 Rossi Ave, San Francisco, CA 94118 - Zillow

this demonstrates the longterm value of homeownership
the tax assesment on this house is $118,000.
if the person who owned this house was frugal they can walk away with $1.5 million and go retire in hawaii.

[SportyandMisty]

The true value of owning & living in a house comes in the form of tax-free income in the amount of the fair market rental rate of that house.

Here is a hypothetical to illustrate the above point:

Imagine two people -- let's call them Bob and Sue -- have identical financial situations (income, savings, etc etc etc). Let's say each of them owns a house -- and they happen to live next door to one another. The two houses are identical in every aspect. Bob & Sue each purchased their houses on the same day, with the same down payment, using the same mortgage company, paying the same fees & interest etc etc etc. Everything is identical.

The normal situation is that Bob lives in Bob's own house, and Sue lives in Sue's own house. Imagine their tax returns: each has income from several sources resulting in AGI, and various deductions including mortgage interest expense, which results in an income tax obligation. Because Bob and Sue are identical in their situations, their respective IRS 1040s (and CA 540s) are identical.

With me so far?

Now, let's imagine a very unusual situation. Instead of Bob living in his own house, he rents his house to Sue. Sue in turn rents her house to Bob. (This is a hypothetical, of course). Bob rents his house to Sue at the fair market rental rate. For sake of argument, let's say the fair market rental rate is $5000/month. Sue in turn rents her house to Bob at the fair market rental rate, which of course is also $5000/month (remember -- the houses are identical and next door to one another).

Imagine Bob's and Sue's respective IRS form 1040s: In addition to their normal income from their jobs, each has an extra $60,000/year in rental income. Each also has some extra depreciation expense. Each 1040 will list the total income tax obligation -- AND THAT OBLIGATION IS HIGHER in this hypothetical scenario!

When Bob and Sue live in their own respective homes, their total tax obligation is $X. When they lease their homes to each other, their total tax obligation is $Z, and Z is greater than X.

What is happening here? In the scenario where they each live in the home they own, they "pay themselves rent" in the amount of the fair market rental rate, and this income is tax free. Call it phantom income. But, when they lease the homes to each other, that phantom income & its tax obligation become real.

So, the TRUE benefit of owning a home is that tax free income.

[HappyinCali]

Awesome responses so far! Making me think deeper about my analysis.

One thing I want to point out. People keep talking about $1 million being a lot of money. It is a TON of money. But the whole issue is that in San Francisco, a house costs that much. Just Zillow properties for sale in the Richmond and Sunset. A 2BD/2BA will easily set you back $900k to a million. And for a family like ours, where we always have a lot of guests, we really need a 3BD

[Ruth4Truth]

Originally Posted by HappyinCali

Awesome responses so far! Making me think deeper about my analysis.

One thing I want to point out. People keep talking about $1 million being a lot of money. It is a TON of money. But the whole issue is that in San Francisco, a house costs that much. Just Zillow properties for sale in the Richmond and Sunset. A 2BD/2BA will easily set you back $900k to a million. And for a family like ours, where we always have a lot of guests, we really need a 3BD

This makes more sense, OP. Thx for clarifying your situation.

[Ultrarunner]

Do you have live in the city?

The East Bay is filled with people that work in the city and no longer live there.

There are entire neighborhoods in Orinda, Lafayette and Walnut Creek where just about everyone has some tie to the city...

They use to live there before kids, they work there, they cashed out and bought somewhere else in the Bay Area.

About half of my renters formerly resided in SF...

[Scott456]

Originally Posted by SportyandMisty

The true value of owning & living in a house comes in the form of tax-free income in the amount of the fair market rental rate of that house.

Here is a hypothetical to illustrate the above point:

Imagine two people -- let's call them Bob and Sue -- have identical financial situations (income, savings, etc etc etc). Let's say each of them owns a house -- and they happen to live next door to one another. The two houses are identical in every aspect. Bob & Sue each purchased their houses on the same day, with the same down payment, using the same mortgage company, paying the same fees & interest etc etc etc. Everything is identical.

The normal situation is that Bob lives in Bob's own house, and Sue lives in Sue's own house. Imagine their tax returns: each has income from several sources resulting in AGI, and various deductions including mortgage interest expense, which results in an income tax obligation. Because Bob and Sue are identical in their situations, their respective IRS 1040s (and CA 540s) are identical.

With me so far?

Now, let's imagine a very unusual situation. Instead of Bob living in his own house, he rents his house to Sue. Sue in turn rents her house to Bob. (This is a hypothetical, of course). Bob rents his house to Sue at the fair market rental rate. For sake of argument, let's say the fair market rental rate is $5000/month. Sue in turn rents her house to Bob at the fair market rental rate, which of course is also $5000/month (remember -- the houses are identical and next door to one another).

Imagine Bob's and Sue's respective IRS form 1040s: In addition to their normal income from their jobs, each has an extra $60,000/year in rental income. Each also has some extra depreciation expense. Each 1040 will list the total income tax obligation -- AND THAT OBLIGATION IS HIGHER in this hypothetical scenario!

When Bob and Sue live in their own respective homes, their total tax obligation is $X. When they lease their homes to each other, their total tax obligation is $Z, and Z is greater than X.

What is happening here? In the scenario where they each live in the home they own, they "pay themselves rent" in the amount of the fair market rental rate, and this income is tax free. Call it phantom income. But, when they lease the homes to each other, that phantom income & its tax obligation become real.

So, the TRUE benefit of owning a home is that tax free income.

You forgot to mention the mandatory depreciation of a rental property over the period of 27.5 years.
So after 27.5 years of getting rental income from the property, your tax obligation is the value of your original purchase price. If you purchase it for $1 million, your mandatory depreciation is just a little less than $40K per year. You have to pay this back to IRS when you sell the property. If you sell this rental property after 10 years, you owe IRS $40K x 10 = $400K.

[bmw335xi]

You forget that property values tend to go up over the long run. I could sell my 1 bedroom condo for $150k more than what I paid. If I had rented, I'd be down around $50k right now. I bought at a good time though. When the market is near the top it is better to rent and wait for the next correction. However, to say it is always better to rent is a joke.

[wooliemonster]

The tax benefits are huge. You can't compare the nominal costs of rent vs. mortgage payment without factoring this in.

Also, sure appreciation, but that can drown you just as easily. Our house in Houston is going on the market for about 60k more than we paid for it 6 years ago. Of course, we've put a big fraction of that into the house as improvements, maintenance, repairs... and for long stretches of time after we first bought it, the market value was barely what we paid. The appreciation has only occurred in the past 2 years.