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

10 Key Secrets - 2017 Los Angeles Guide to Home Buying

The housing market is still super tight in Los Angeles

The following 10 Key Secrets apply regardless of market conditions, but they are especially true in a seller’s market such as we are experiencing in Southern California 2017. Home sellers are generally receiving multiple offers from qualified homebuyers within days of putting their home on the market. How can you increase your chances of competing in such a market?

1. Prove You Can Pay. Many buyers are showing up to open houses prepared to pay all cash. These are usually sophisticated buyers who may offer less than market, because they know that their all cash offer has leverage. There will be no need for contingencies or surprise extensions due to mortgage issues. If you are not paying all cash, be sure you have a letter from your mortgage company declaring that you are preapproved for $X amount.
2. Have a well though-out plan. In this market it pays to be flexible about everything. When you go view a home, you’ll need to be ready to put in an offer if it will work for you. Know your acceptable ranges on neighborhood, price, number of bedrooms and bathrooms, home or condo/townhome, square feet, school district, etc
3. Hire an amazing real estate agent, like Belle Tsai. There is no benefit in hiring a second tier agent. You want someone with experience in the area you are moving to, and with great skills in negotiation. You also want someone who knows how to manage all the moving pieces of the process and paperwork.
4. Give your agent an exclusive, at least for 60 days or so. A great agent isn’t going to give you’re their best if you have other agents on the job. The best agents have plenty of clients who will give an exclusive, so you don’t want to be treated like second class. If they haven’t done a great job within 30 days, change agents. If you like them, but after 60 or 90 days the agent appears to be out of ideas, that may be the time to add a second agent. Be sure to tell your agent when you do this, and set up criteria for how you will decide which properties belong to which agent.
5. Do your own research on potential properties. You agent will likely only “see” 80% of the places available at any given time. This is not due to any failing on the agent’s part, but rather due to the amount of activity on the Internet. You might even find a property by driving around that is for sale by owner, or not yet on the multiple listings.
6. Eliminate any contingencies you can live without. Contingencies can be the deciding issue in a close contest for a great home.
7. It is legitimate to want to come back a second time to any property you are considering. You may need to show it to a co-owner, contractor, or someone offering you direction in making the purchase. However, keep in mind that you may only have hours or a day or two to make the offer. Being nimble is important in a tight market. If you are in an area that is not so buyer friendly as LA or you are reading this later when things have cooled off, you may have much more flexibility on time than during April to July of 2017.
8. If cash flow is an issue (and it almost always is), be sure to have your agent provide you with estimates of the cash you’ll need to close and move in. The down payment, closing costs, moving expenses, necessary repairs, window covers, utility and cable company deposits, can all start to add up.
9. If the home or condo is part of an HOA (Home Owners Association), ask your agent what he/she might know about this HOA. Some of the rules can be really restrictive. Some HOA’s are not well run or have financial problems. You may even want to call the president of the HOA or talk to the management company for the HOA.
10. There are many dozens of cities in LA County. Each of these cities has its own issues related to crime, regulations, transportation, local taxes, and so on. These issues are readily available to research online. You could find a lovely home, in a perfect neighborhood, in a city that is known to be in decline. Your agent is likely to be able to give you some direction, but do your own homework.

If you are ready to start your search or have questions that need answering before you do, or if you need to switch to a different agent, call Belle Tsai to set up an appointment. Call now at 310-738-7118.

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