West Los Angeles Real Estate: February 2017


Thursday, February 9, 2017

West LA – Santa Monica Homes Average Three Years to Break Even on Rent VS Buy

You are so tired of paying the landlord and keep thinking you ought to be buying instead of renting. There are lists of benefits and detriments to each choice, but financially you keep watching your friends and family members amassing huge assets in their primary residences.

Zillow produces an analysis that tells you how long you need to live in a home before the costs break even when compared to renting. For most of West Los Angeles, that is a mere three years. As you head more toward mid cities, it can take less than two years to break even.

While no method for scoring costs of ownership compared to renting is perfect, Zillow says they have tried to take all the costs including mortgage expenses, moving, repairs, utilities, and such. It also includes the likely rent increases and home value appreciations for each neighborhood.

How does the three year breakeven math work?

For instance, LA County is predicted to have rents increasing by an average of 3.46% per year, while housing values are predicted to average 4.26 increase each year. Therefore only taking into consideration the out of pocket cost, a homeowner will be paying 10% less per month by year 6 and 20% less by year 9 than if they were renting the same house.

In the meantime, based on historical information, that same homeowner would see the underlying asset value increasing by 4.26% each year, or roughly doubling within a bit over 16 years. (Your results may vary widely based on when you bought your home.)

Example of three years on rent versus buy

Using the average price of a West LA home as an example to flesh out these numbers, you would see the following:

Home price early 2017  $800,000 
Down Payment 20%      $160,000
Mortgage, Tax, Ins          $3,783 per month  ($630 is principle)
Closing costs (appx)       $13,500 ($375/month over 36 months)
Total cost per month      $4158.00

Rental for that home would currently be around $4000. Cost per month over first three years will be about equal, not including repairs. Repairs will drive homeownership higher than rent during that time.

The renter could also put his $160,000 in an investment. It might pay $30,000 or so over that time.

At the end of three years the cost will drop form $4158 to $3783. In the meantime, the rents are projected to increase to about $4400.00. This provides $600 a month in repairs, which should be a fair expectation.

However, during this time, the homeowner has reduced his mortgage by $22,680, and the expected value of the home has increased by over $100,000. Sure, if the homeowner sold, there would be a cost of around $50,000 to sell. So the gain would only be $70,000, compared to the renter who has gained about $30,000. The gains are not the same, as the owner will have tax benefits and will clearly have no taxable income if he stays or sells and buys another home. The investor may have had to pay some taxes on his gains.

What happens after six years?

Move ahead another 3 years. The rent is now $48,400. An argument can be made that the homeowner is now pocketing at least $400 a month in cash flow. There has been another 23,000+ in equity gain from principle payments, and another $120,000 in value increase. A sale will now cost $60,000, so the gain is $115,000, plus the cash flow benefit of $15,000.

The tenant may have made $40,000 or so. His rent is now almost $5000 a month, the owner is still paying a mortgage of under $4000 (property taxes would increase somewhat.)

As the years go on, the benefits get even bigger for ownership.

We won’t use this space to discuss the myriad other plusses and minuses associated with rent versus buy such as flexibility, community, stability, etc., We only hoped to provide the details of the Zillow estimate that after three years, a owner will have achieved parity with a renter financially from a cash flow standpoint, and have a huge gain when taking into consideration principle payments and tax savings.

Belle Tsai is an experienced professional home seller for the entire DTLA to Santa Monica region. She can help you find the home of your dreams. Call her today to discuss your needs at 310.738.7118