Renting vs Buying in Bay Area

#1

It spur my interest from other topic.

Scenario 1: You are buying in Cupertino school district (Cupertino / West Sunnyvale) for 2.5M house (3bed 2bath) and downpayment 550K. Table suggests your need to pay $11K per month.

Scenario 2: You are renting in Cupertino school district, but buy 2 rental property in Bay Area (Fremont, Daly City) with downpayment 550K. As table below, your out of pocket could be $1500, so you still got $9500 to spend on rent. Cupertino rent for 3 / 2 is about $4000 - $5500.

Rent $4800 in Cupertino: https://www.zillow.com/homes/for_rent/house,mobile_type/19641121_zpid/3-_beds/37.418027,-121.950474,37.191365,-122.18771_rect/11_zm/

I can rent this house in Palo Alto for $7500, and I still came out ahead: https://www.zillow.com/homedetails/4239-Manuela-Ave-Palo-Alto-CA-94306/19526698_zpid/

@manch @hanera @Jil

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Predictions for Sunnyvale, Cupertino
#2

One more added benefit of Renter, you move your house when you switch job without selling or buying. No long commute. Maybe you need to be Landlord and Renter in Bay Area to make it.

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#3

To add more weight to the argument, in high cost areas like the bay area, the needle moves more towards renting (due to cap on deductions). Would you rather take 12k/18k/24k standard deduction (single/hoh/married) or itemize and be capped at $10,000 + loan interest on up to $750k of mortgage (if you are a new home purchaser).

so may make sense to rent your primary, and buy to rent to maximize tax laws

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#4

Most people don’t buy until they have kids. They want stability of schools. Moving every few years when changing jobs isn’t practical for people with kids in school. Buying a primary home isn’t about maximizing your ROI.

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#5

The tax argument is very good. For landlords you can deduct 100% of every expense, including interests, and you have the depreciation working in your favor. With owning your deduction is severely limited.

Another argument for renting is that for young child you never know where they will lead you. People just blindly assume Cupertino schools will be best for every child. It may not be. What if your child is crazy about performance arts and it turns the best program is in SF? What if your child is a math genius and the best specialty math program is in SJ? Or the other way around that your child may need some special help.

#6

It’s hard to rent a good house. Also poeple are more stingy in selecting a rental so qaulity of life is not as good.

Financially it would work out either ways. If you buy 5 rentals in Austin and rent here, you might be in worse shape after 30 years

#7

@myo too complex,

You need to have

  1. year over year appreciation rate for each home
  2. Rent potential for primary home
  3. Holding years (15 or 30 years)
  4. Personal tax (IRS + CA) assumption as rent is considered as income.

With all these, hard to calculate, but doable.

My gut feeling, if appreciation % remains same, scenario 1 will still be winner as rent cash flow is considered as income and taxed, while renting palo alto home he/she needs to pay tax, then give rent.

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#8

Tax is about a wash. No tax benefit for landlord. As Jil pointed out, you pay rent with after tax money. Your rental income is taxable income, deduction is used to offset rental income, not your paycheck

#9

I am paying the same net monthly payment(mortgage+prop tax+maintenance-(interest+tax deductions)) for my primary residence in Fremont(all 3 good schools) AS the rent I paid for a 2 bed 1000 sq ft apartment in Sunnyvale with BAD schools.
Negative: Longer commute - but it’s not too bad.
Btw, people who live in the (Gussie Baker elementary+ Moreland Middle school district in SJ) have @10 minutes shorter commute each way(during peak traffic) compared to me, so the commute difference is not that big.

Of course, I am not counting the ROI on the downpayment+principal part of payment & have kept them out for simpler calculations, but that has been balanced by the rise of equity(due to price rise) of the primary so far.

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#10

As @notabene mentioned in another thread, house price tends to plateau between 2 to 3M. Cupertino is already there, and that puts pressure in Sunnyvale. Now Sunnyvale is there too, and the pressure moves to Santa Clara.

What’d the 2.5M house in Cupertino sell for in 10 years? I think at best it will be around 3.5. Cupertino schools are good, but parents have most influence on students performance. With more affluent parents moving into other towns, the performance gap will close.

What will the 1M Fremont house sell for in 10 years? It will likely reach the 2-3M level. Let’s just say it will be 2M. Two Fremont houses will get you 4M.

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#11

I did that… think you miss my posts… you’re on vacations I guess. Very detailed computation not just macro %.
Without hard numbers and detailed computation, is just conceptual discussion. I think the article you posted yesterday summed up the conceptual argument well…

stocks > RE
investment savvy renters > homeowners
However, we know most of us are not investment savvy i.e.
homeowners > non-investment savvy renters

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#12

What assumptions you use for projecting compensation over time?
Remember as share price goes up, the worth of RSUs goes up + savings from pay and hence they can afford a larger downpayment, notwithstanding that their base pay may have built-in inflation increase. Your number seems to imply only 1 double over 10 years :slight_smile: In that case, how can you win the bet :slight_smile:

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#13

Advocating scenario 2?

#14

Is there any psychological impact on your kids if they grow up in a rented home or owned home?

There could be non monetary factors at work.

#15

My monthly payment is less than Single bed room BA rent, have money to pay off mortgage, but holding it as it is fixed 3.6%. Otherwise, it is only property tax payment that can also be tax deducted.

In bay area, it is no brained just buy any home to break the rent and live as primary (even w/o tax deduction on mortgage 750k). Unfortunately, some people do not understand this when they were affordable.

Here is one sample. My friend renting last 22 years. He started with first rent for $835 apt 2bed/2bath in Mountain View.

During the worst period 2009-2011, I took him to Cupertino condo open house 2Bed/2.5bh listed at $438k, no buyers were there at that time. He did not even think to buy, nor listened many of friends’ suggestion to go for it. At that time, he had enough down payment money for 20%. That house was on market 3-4 months without any buyers.

Now he is renting 2bed/1Bath room appt for $2900, regrets not buying, but could not buy any condo as his down payment money is worthless. Now, he has been trying to get a home at mountain house, but confused about long commute. He is risk averse person, not invested in stocks.

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#16

Yepp, people who bought during this time benefited the most.

examples of people I know personally(there are many more I have skipped mentioning):
Person 1: 2009 - $770K Now - $1.8M
Person 2: 2009 - $650K Now - $1.8M (Probate sale, got money for copper piping from seller :slight_smile: )
Person 3: 2009 - $780K Now - $1.65M

In addition, part of net payment is also going towards principal unlike rent(especially important if the net payment equals prior rent cost)

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#17

Thought it is implicit that myo is looking from a financial perspective only.

#18

Some parts of Newark or Fremont or parts of San Jose might work out for him(bad schools though), however better commute than Mountain House.

#19

Just something I pulled out from behind as we are talking about the future.

There are two things that work in Fremont’s favor (or any other less expensive town like Newark). One is the 2-3M plateau theory I and @notabene talked about. The other is just that less expensive homes tend to appreciate faster.

#20

Yes, I told him exactly about Newark (1st pref) and Fremont (schools no issue). He has to improve his down payment position as current sellers won’t prefer less than 20% down payment even though banks lend money.

The ironic part is my another friend bought a SFH in Cupertino in 2011 for 1.2M (exactly same time, this friend missed buying condo), he sold now 2.2M, bought a mountain house home for 800k full cash newer home.

This made him realize what he missed…FOMO.

On any case, this friend will not (unlikely) buy condo as the current market is different. Nowadays, list price is low and such reluctant buyers won’t understand low LP and market value (very high over LP). They will get kicked off.