Rent or buy? This is one of the toughest questions for any prospective California home buyer to address and the answer is going to depend on several different factors. From the local market forecast to your income to your financial goals over the years, you need to weigh multiple considerations before deciding.
Renting has many inherent advantages. As a tenant, you aren’t responsible for paying taxes or for upkeep and maintenance of the property.
Leaky roof? Call the landlord. Annoying neighbors? You can give a couple of weeks notice and move to the other side of town. But at the same, what about all that money you pay in rent every month? That’s gone. When you rent, you’re essentially giving up future profit for present-day convenience.
Compare that to owning a home. When you own a home, the buck stops with you. If the basement floods, you’ve got to pay someone to come in and handle it. If the local city council votes to double your property taxes, you have little recourse except to pay. And if some loud neighbors move in next door, you better brush up on your conflict resolution.
But that might all be worth it, because a home is one of the safest and most lucrative investments you can buy. Whereas the carefree tenant will never see all their rent money again, you’re steadily building up home equity, month after month, year after year. And when you sell your home, all that paper wealth will become, well, actual wealth.
Of course, it’s never quite that simple. Your local market can dramatically change this equation in one direction or the other. High home prices and low rent makes renting a no-brainer, while low home prices and high rent can push you strongly towards buying.
With that in mind, let’s look at the numbers from California and see if renting or buying makes more sense.
Should You Buy in California?
According to Zillow data, the median home value in California is $548,000, close to twice as much as the national median of $226,000. Home values in the state have gone up 2.2% in the past year. Those home values are forecast to rise only 0.1% in the next year.
Basically, California is a high-priced property market that’s seen tepid gains in the past year, and is looking at a probable downturn. In a vacuum, this isn’t the ideal market to buy into. Of course, whether you should rent or buy depends on the rental market, too.
Should You Rent in California?
The average rent in California is just under $2,600, which is not quite twice the national average rent of $1,486. With rent being marginally lower and the local market facing a down period, renting would seem to be the preferable option.
But it’s not quite that simple either. The question of rent versus buy isn’t just about how much money you make, home values, and average rents. It’s also a matter of how long you’re planning to stay in one location.
Explaining the “Breakeven Horizon”
The term “breakeven horizon” refers to the point in the future when owning a home becomes more financially lucrative than renting. After all, owning a home is more expensive than renting, so in a typical market, those first several years of renting are going to be cheaper than paying a mortgage, insurance, maintenance, and California property taxes on a home.
But while you’re paying down your mortgage, you’re also accumulating equity as your home value increases. This means that at some point, the amount of your equity will exceed the cumulative savings of a typical renter over that same time. In down markets, this could take years or even decades, but in healthy ones, that time is typically very short.
In California, the breakeven horizon is a relatively brief two years and ten months. Let’s break down the numbers to explain why.
If you pay a conventional down payment of 20% on an average California home of $548,000, you’ll pay out $247,783 in the first three years, including your down payment, mortgage payments, taxes, and typical maintenance costs. However, in that period you’ll also be accumulating home equity. Once you figure that in, you’ll find that you really only spent around $109,000.
Now let’s say you rented over that same time. In the first year, your costs will be much lower than the buyer, since all you’re paying is the average rent of $2,600 per month. But you’re not accumulating equity, so your payouts aren’t being mitigated. So a little past the three year mark, you’re going to have paid out $114,000 in rent, while the buyer only paid out $109,000 (after taking equity into account).
Should You Rent or Buy in California?
So the answer to this question is going to come down to your plans. How long are you planning to settle down? If you’re only going to live in a place for only a year or two, renting makes more sense. However, if you’re going to stay there for three years or more, then buying would be a good idea and it becomes a better idea the longer you stay.
If you’re ready to settle down and are interested in buying a home in California, there’s no better partner for your home buying journey than an experienced local real estate agent. Clever Partner Agents are top performers in their markets and come from elite brands and brokerages.
Whether you’re looking for a San Francisco Queen Anne or an ultramodern home in the Hollywood Hills, they can help you find what you want. Best of all, they’ll give you a $1,000 home rebate on eligible homes.