Don’t Believe the Scare Headlines – Buying a Home in Los Angeles Still Beats Renting – It Isn’t Even Close

Buying a Home Beats Renting - Even in West Los Angeles 2017

This isn’t a scientific study, but the math is the math. Since 2013, we’ve been watching the value of one West LA home that today is worth just under $1 Million. Each year we compared Zillo.com’s Zestimates for purchase and for rent. We then looked at current mortgage rates using a 20% down, 30-year fixed-rate mortgage. We assumed $500 per month of maintenance on the home. We assumed about 1% closing costs if the home were purchased in that year. We spread those closing costs over 3 years. We also assumed that someone who could afford this home was probably in the 25% income tax bracket, so we used 25% of interest and property taxes as a savings. 

We recognize that home prices have been rising rapidly in this period, so it is not representative of all real estate situations, and may be a terrible predictive tool for the next 4-year period. But even if values drop, the out of pocket costs will not be effected, as rents have not dropped in the previous two real estate recessions. 

The results that follow give the out of pocket expense for renting versus buying, and also show the wealth building for each. For wealth building, we assume the home would be sold with real estate commissions at 5%. The renter invested the down payment and made 6%, compounded on the investment. Results are approximate and rounded for ease of viewing.

2013 – Purchase Price $650,000 - Rent  $3150

Year one – Out of pocket cost to buy $3066 vs Rent $3150

2014 – Purchase Price $795,000 – Rent $3125

Year one – Out of pocket cost to buy $3550 vs Rent 3125

If purchased in 2013 – Out of pocket still $3066 

Wealth Increase -  $98,000 buy vs $7800 rent

2015 – Purchase Price $840,000 – Rent $4000

Year one – Out of pocket cost to buy $3900 vs Rent $4000
Year three if purchased in 2013 – Out of pocket for purchase still $3066 vs $4000 to rent
Year two if purchased in 2014 – Out of pocket for purchase still $3550 vs $4000 to rent

Wealth increase if purchased in 2013 - $148,000 buy vs $16,000 rent
Wealth increase if purchased in 2014 - $3000 buy vs $10,000 rent

2016 – Purchase Price $930,000 – Rent $4000

Year one – Out of pocket cost to buy $4300 vs Rent $4000
Year four if purchased in 2013 – Out of pocket for purchase still $3066 vs $4000 to rent
Year three if purchased in 2014 – Out of pocket for purchase still $3550 vs $4000 to rent
Year two if purchased in 2015 – Out of pocket still $3900 vs $4000

Wealth increase if purchased in 2013 - $233,000 buy vs $26,000 rent
Wealth increase if purchased in 2014 - $90,000 buy vs $20,000 rent
Wealth increase if purchased in 2105 – 44,000 buy vs $11,000 rent

2017 – Purchase price $970,000 – Rent $4000

(Caveat – The big jump in rent 2015 after a slight decrease in 2014 and the subsequent flat rents in 2016 and 2017 could be smoothed out and still be good for comparisons)

Year one – Out of pocket cost to buy $4300 vs Rent $4000
Year five if purchased in 2013 – Out of pocket for purchase still $2766 vs $4000 to rent
Year four if purchased in 2014 – Out of pocket for purchase still $3550 vs $4000 to rent
Year three if purchased in 2015 – Out of pocket still $3900 vs $4000
Year two if purchased in 2016 – Out of pocket still $4200 vs $4000

Wealth increase if purchased in 2013 - $270,000 buy vs $34,000 rent
Wealth increase if purchased in 2014 - $125,000 buy vs $30,000 rent
Wealth increase if purchased in 2105 – 80,000 buy vs $23,000 rent
Wealth increase if purchased in 2016 - <$10,000> vs $11,500 rent

After four years of running this experiment, and even with a supposedly overheated seller’s market in Los Angeles, it seems that buying just makes way more sense than renting. We can imagine scenarios where this would not be the case. The housing market is subject to downturns just like any market. It is possible to imagine this home dropping by $300,000 if there were a typical drop in market values.

Even then, these markets correct, and over time the likelihood is that the home will continue its upward valuation curve. On the other hand the market may continue strong and deliver another $100,000 or so in appreciation over the next three years.

A major issue in the current market is whether you can even find a home to buy in Los Angeles. Inventories of Los Angeles homes are the lowest ever recorded.

We can help you with that.  Belle Tsai has the experience, the focus, and the backing of real estate powerhouse, Sotheby’s International Realty to help you. Call Belle now to get the ball rolling at 310.738.7118

Belle Tsai - Sotheby's International Realty
15308 Sunset Blvd.
Pacific Palisades CA. 90272

310.738.7118