Homeownership may be the American dream, but is it always the right move? There's a reason that 100 million Americans rent their homes.
Actually, there are several reasons. Whether buying really is better than renting depends on your situation. Your income, your job situation, your plan for the next few years, and the real estate market in the area all factor in to whether you should rent or buy.
Let's take a look at renting vs buying in San Jose, California to help you decide what's the right move for you.
First, let's take a look at the market. the median home price in San Jose is $1,054,500. The median rent price in the city is $3,400.
One of the biggest advantages of renting is that you need far less money up front. You don't have to worry about scraping together a down payment or paying for closing costs. All you need, typically, is first and last month’s rent and enough money for the deposit.
However, when you buy, you are building equity with your monthly payment. In other words, at some point you'll be getting money back. How long does it take for you to “recoup” your initial investment? At what point does renting actually become more expensive than buying?
It depends on the market. Let's take a look at data from Zillow’s handy rent vs buy calculator. Let's say you purchase a $1,000,000 home, putting down 20%. After five years you would have spent over $600,000 on the home. If you had rented for the same five years at $3,400 per month you will only spend a little over $240,000, a savings of about $360,000.
However, the money that you spend while you rent is gone, whereas in buying a new home you’re building equity. At the end of five years, you would have about $570,000 in equity.
In this scenario, the sweet spot is four years and seven months. It is at this point that you've built enough equity to make up for the extra money that you spent buying a home rather than renting.
Based purely on the numbers, if you plan to live in your home for five years or longer it makes more sense to buy. But what if you don't have the necessary capital to put down 20%? Then you have to add mortgage insurance and other fees to your costs, making it even longer until you break even.
Another thing to consider is that even if you don't plan to live in the home for five years, you might be able to rent it out. Do you have the available capital to rent (or buy) another home once you're ready to move?
One more thing to consider is if you’re ready for the responsibility of a home. When the AC goes out, you can’t just call up the property manager. You have to find someone to fix it and you have to pay for it, further cutting into whatever profit you could make.
Another big expense that you’ll have to be ready for is taxes — and in San Jose, there are plenty of them.
First up, there are property taxes. These are paid twice a year but are often lumped in with your monthly payment. The rate can vary a bit but the average rate isn’t too bad at 0.794%. However, remember that we’re talking about a $1 million home so you’ll have to pay almost $8,000 a year.
When it comes time to sell the property, you’re looking at two more sets of taxes. First, the transfer tax. Transfer taxes are applicable when a property changes hands and can be levied by the state, county, and city where a property is located. In San Jose, both county and city taxes are applicable.
The county tax is $1.10 per $1,000 of the sale price. The city tax is $3.30 for a grand total of $4.40. On a $1 million dollar home, that’s a whopping $44,000.
You can negotiate who pays the tax, of course, but traditionally the seller pays the county tax and the buyer and the seller split the city tax.
The final tax to consider is capital gains taxes. This tax applies to whatever profit you make from the sale. If you qualify, you can exclude $250,000 profit ($500,000 for married couples filing jointly). However, you will have to pay taxes on any amount above that.
It’s hard to give an exact rate of what you’d have to pay, since it depends on your personal tax situation. It can get expensive pretty quickly though, as the federal government can charge at a rate up to 23.8% and the state of California will take their share at rates up to 13.3%.
In addition, these numbers are an estimate depending on what the market does. What if your home value goes down? Or doesn’t grow as much as you expect? This affects how much profit you would earn when it comes time to sell.
Home values in San Jose have only gone up 1.6% over the last year. Zillow predicts they will go up only another 1.2% in the coming one. A minor positive is that homes are selling somewhat quickly, at least for right now. Homes on Zillow are spending an average of 50 days on the market.
Rent vs Buy
So should you rent or should you buy? We hope that this information has given you more to consider as you decide. However, there is no clear cut answer and it really depends on your particular situation.
Researching on your own is great, but talking to an expert is better. A local, San Jose real estate agent can give you a solid opinion based on the current market, what they predict it will do, and your particular situation.
If you do decide to buy, a real estate agent is an invaluable resource for finding the perfect home and making sure that you get the best price. The best part is that when you find your agent through Clever, you’re eligible for a $1,000 rebate on homes that sell for more than $150,000.
Ready to get started? Reach out to us today!