With Los Angeles Mortgage Rates Still at 4%, and Home Prices Still
Increasing, Buying Is Still Better
So I took a typical Westside home worth $650,000 in 2013 and we’ve been following this house for two years. According to Zillow.com the rental value of that home was $3150 a month in 2013. The estimated mortgage was $2441 based on 20% down and 3.75% 30 year fixed mortgage. Property taxes and insurance would add another $730. Maintenance might be $300. So total out of pocket around $3500 in 2013.
The tax advantage in the 25% tax bracket would come in at around $800 month, so the net advantage to buying was around $450 a month that year.
Last year the house was worth $650,000. Today it is worth $795,000. Last year the interest was 3.5%. Today interest would be 4.5%. Total monthly mortgage would be estimated at $3129 now vs $2441 a year ago. All of these estimates are from Zillow.com, and we can’t totally rely on their numbers. In fact, the rent number seems suspect, as it has dropped from $3150 to $3125.
Government statistics for cost of living specifically associated with rental of a primary residence showed a 2.7% increase in the LA area. Even so, that would only boost the rent by $90. My gut tells me that rents are up and that the 2.7% number might be more in line with reality. Last year, the owner would have had a $450 advantage over the renter for that same unit. This year that advantage is wiped out, and the renter is going to spend about $100 less than the owner.
Now the house is worth $840,000. And increase of $190,000 over the last two years. The rent is up from $3150 to $4000 per month. Markets don’t always act like this, but the tenant would likely be subject to these incrases and would now be paying $4000 for rent vs the $2700 they would still be paying for mortgage, property tax, insurance, and repairs if they had purchased. They would also have a $190,000 capital gain on their $130,000 down payment. The purchase in 2013 would have been a huge success.
Of course this capital gain would be offset by costs of purchase and costs of sale if the increase was to be realized rather thn just on paper. If we used 10% or $83,000 for that number, we are still $50,000 ahead by the end of year two. In other years this could have gone the other way.
The current mortgage based on a 20% down payment and 4% interest rate would be $3208 with another $900 for property taxes and insurance. Add in $300 for repairs and the total is approximately $4500. Tax savings would be $1000 using the same criteria as above. So the net cash cost per month is $3500 vs rent of $4000.
Of course, every house in every neighborhood will have different results, but Zillow has done an analysis by neighborhood that predicts how long it will take to break even with a purchase vs a rental. Their system is not very sophisticated and does not take into consideration appreciation.
With many, many more unanswered questions.
Many times the type of residence that you desire is not available for rent anyway
- If you will or might move in 3 years, renting is almost always better
- What will happen to home prices?
- Do you like the idea of managing your property?
Bill Rayman is looking forward to being you most critical financial resource as you work towards purchasing any real property. There is no cost for his advice. Call Bill today and see how much you qualify for: (424) 354-5325