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General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer. Say a potential buyer ha

General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer. Say a potential buyer has a mountain of cash. They can scoop up a property with no issue. Financially, owning makes sense to them (no interest payments due to a mortgage), especially if they pick location correctly and see a property value increase. Next, say a potential buyer has a small pile of cash. A mortgage will almost certainly be needed to finance property, though this buyer should be able to cover the down payment. If location is right, it should work out well for this person, but it will take decades to see a positive return. Finally, say a potential buyer has little-to-no cash, living month-to-month on rent. They simply cannot afford to purchase a property and/or get approved for a mortgage. Let's consider each of these three categories of buyer in your scenario, where a local government makes it more difficult to seek rent. The wealthy buyer doesn't care, unless they own many rental properties, in which case they'll possibly have a harder time filling their units. The second buyer will benefit the most, potentially allowing more of this class to purchase properties (theoretically, more properties will be on the market). However, the third buyer is out-of-luck because they simply don't have the financial resources to outright purchase a property. Decrease the number of rental properties, and rents will increase, unless the number of new buyers balances existing renters. In summary, in your scenario, I would bet the wealthy will sell some properties and cash out, while the middle class will scoop up more properties and be able to pay for higher rents. The poorest, however, will likely need to settle for a lower overall standard of living.

nazgulnarsil 6y ago
breakeven is more like 10 years.
whimsicalism 6y ago
So, in the context of the bay, rather than paying my $3k/mo rent, I should buy a $1 million dollar home?
- microtherion 6y ago
  If you can afford a 20% or so downpayment (big if, I know), the two options might work out to fairly comparable (after-tax) monthly payments right now. In the longer run, buying will leave you potentially with equity and with a fixed rate mortgage will assure fixed payments. Even in a mildly inflationary economy, making fixed nominal payments on a salary rising more in line with inflation for an asset valued more in line line with inflation can be a fairly attractive deal. But none of the above is meant to be investment advice. Homeownership has its risks and certainly loses flexibility.
  - pedrosorio 6y ago
    Just checked Redfin, a condo in SF for $1M with a 30 year mortgage at a nice 3% interest rate and 20% downpayment would be: - $3300 in principal + interest - $1000 property tax - $500+ HOA - $200 homeowners insurance That is $5000+ monthly and requires $200k upfront (and significant upfront cost as the brokers are paid off). How is that comparable in after-tax payments to renting a $3000 apartment?
    - munk-a 6y ago
      The math might be a bit different for SF - there are a lot of local factors to keep in mind (like that 500 HOA + Homeowners seems steep to me for a property that isn't near EOL) - but the biggest different at the end of the day is that the 3300 you're paying into principal + interest is still your money (well minus the interest) when you rent all 3000 you're paying is essentially throwing money into the void.
      - o-__-o 6y ago
        5-10 years later you have equity, a portion of value of the home not tied up by a mortgage. You can refinance or sell and extract this money. You can then use this money to move into the $2M house you had your eye on.
      - refurb 6y ago
        The difference is appreciation. Otherwise owning is probably 150% the cost of renting in SF. And with rent control you don’t have the issue of rent going up.
- munk-a 6y ago
  You should only ever rent if you intend to live in a property an amount of time so small that the rent you're paying out doesn't cover the exchange cost. And that assumes that property prices aren't increasing which they almost always are and generally at a pretty firm pace. Basically - you're trying to avoid the scenario where you live in a place so short that the exchange cost you pay to flip it on the far side exceeds the amount of rent you'd pay to reside in it. Determining the exchange cost isn't always straight forward - the 6% given above may or may not be realistic for you, there are some brokers that will take a 1% cut and those folks are more common in hot markets, and there may also be taxes you need to take into consideration. Also, there is a risk of getting stuck with a lemon - if you purchase a house which seems fine but actually has extensive water damage and mold you could lose a portion of the value, this is a really significant consideration in quiet housing markets (like the midwest) and less important in areas like SF where most of the property's value is likely the land itself - in either case you're taking a big chunk of the value of the structure out of the equation when reselling the property but in the later case the value of the structure is rather minimal while in the former case the land is essentially free. Basically you almost always want to buy if you are able to. The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord.
  - frongpik 6y ago
    If it was just about the money, it would be better to invest the downpayment into a margin trading account with 1 to 5 leverage.
    - vkou 6y ago
      No, because if you're investing on a 1-5 margin, the market dropping by 20% in two weeks, and then going up by 80% over the next five will leave you flat out broke. Meanwhile, someone not investing on margin will be up 60%.
      - MontyCarloHall 6y ago
        Nitpick, but they’d only be up 44%. 0.8*1.8 = 1.44, not 1.6.
- hedora 6y ago
  I faced that choice years ago, and chose to rent. It was a $500k mistake (over ~5 years). The condo was near Google, and it was a bit after 2008; your results will probably vary.
hsitz 6y ago
> "General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer." This is a valid rule of thumb only because transaction costs are generally much higher when buying a home than when renting. Typically 6% of the cost is siphoned off by brokers (3% to each side) and the fees people pay to take out a mortgage loan are significant. Fees you pay to start a lease generally amount to only a small fraction of these.
- Johnny555 6y ago
  A good rule of thumb for selling costs is around 10% of the selling price. And when buying, factor it around 3% just for closing costs (or more if you're paying points), but then add-in more for funding reserves.
- aidenn0 6y ago
  It's also valid because the real-returns of investments typically exceed the gains on housing[1] and you tie up a minimum of 20% of the value of your home when you buy. 1: This gets complicated because (at least in the US) most people don't leverage their investments at a 5:1 ratio, but do leverage their home value by that much.
  - blaser-waffle 6y ago
    > real-returns of investments typically exceed the gains on housing[1] In markets where people want to live. Owning a couple acres around the far-flung suburbs of Seattle or DC will net you some good money. No one is buying housing in Gary, Indiana. Floods have annihilated many towns around the Mississippi River, and there is plenty of real estate in Detroit and New Orleans that sure as hell ain't gonna exceed the S&P 500 anytime soon.
    - aidenn0 6y ago
      I think you read my comment backwards? I was trying to say that you get more reliable returns if you invest your down payment in a diversified fund than if you use it to purchase a house. As far as "markets where people want to live" goes: yes, in any market, you can outperform the average if you can predict the future better than other investors. Some of the places around the Mississippi River probably used to be considered good investments; now they aren't. If this whole full-time remote thing catches on, it's possible that the bay-area will drop in prices. It's also possible that only part-time remote catches on, and interviews resume in person so people want to stay in the Bay Area. Heck, it's unlikely, but possible, that Cupertino or Saratoga decides to rezone large swaths of the town for more density and the increase in supply drops prices.
munk-a 6y ago
Just to note - that last class of buyer has no financial motivation to remain a renter. They are stuck in a situation they can't get out of easily where a larger portion of their paycheck goes to housing and decreases the rate at which they accrue value. This is why home buying assistance exists and is a very very good program for the government to subsidize, renting should, ideally, be a tool for those just starting life and those with the means to indulge in luxury - most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration, but the majority of renters today are people who are stuck in the rent cycle or don't know any better.
- techsupporter 6y ago
  > most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration I'd be very curious to know what kind of exceptions you mean. I've owned where I live a few times, each time it ended poorly. Now, I rent. The problem is, I can't buy what I want to live in even if I wanted to buy. Here's what I want to buy: - Inside the city limits of Seattle; location is not fungible, I can't substitute a property in Spokane or Atlanta for one in Seattle. - Within a 10-minute walk to a train station or rapid bus route. - An outdoor space of my own, not a shared garden but a balcony or private garden of some sort. That's it. That's the Tweet. You'd think that would be trivially easy, but the exactly two places I've seen where property can be owned (one is a townhouse development in Rainier Valley with an astoundingly expensive HOA, yet still sold out and the other is a condominium development near the stadiums but the handful of units with a balcony sold out immediately) are unavailable. There's nowhere else. No condos, no townhouses, no rowhouses, not even any detached houses. It's all rented apartments. No one is building ownable properties, because of a combination of striving for rental returns, zoning, and Washington's condo liability law.
  - munk-a 6y ago
    Well yea - that's a poor market for ownership and Seattle has one due to the recent (in terms of housing price response) appearance of two insanely large tech giants in the area - that causes a lot of market distortion that you're sadly on the receiving end of today. It is financially advantageous to own a property, it is usually financially advantageous to own a property if you purely want to rent it out - renting is a profitable business that's why there are a lot of really large companies holding insane amounts of property in the US. If the city/region has some guaranteed demand for rental numbers (like uni stundents and young people working their first job) then the math changes to make it even more advantageous to rent - what you're essentially seeing is that owning property is the correct decision, it's so correct that the market for property is being soaked up by landlords that can make a tidy profit on the margin and are more reliable load recipients than individuals. I'm sorry you're in the housing situation you're in because it sucks but, if you did see two identical places you liked and one was available for sale and the other for rent then it'd be the correct financial decision (really correct in fact) to buy the property. Various regions within the US have toyed with ideas around taxing property ownership for investment more heavily but there is a lot of lobbying money pushing back on that. A lot of places (including BC where I'm at) actually have a primary residence tax credit for owners - if you own your property and use it as your primary residence you get a bit off your taxes to help swing the balance back toward individual owners.

nazgulnarsil 6y ago

breakeven is more like 10 years.

whimsicalism 6y ago

So, in the context of the bay, rather than paying my $3k/mo rent, I should buy a $1 million dollar home?

microtherion 6y ago
If you can afford a 20% or so downpayment (big if, I know), the two options might work out to fairly comparable (after-tax) monthly payments right now. In the longer run, buying will leave you potentially with equity and with a fixed rate mortgage will assure fixed payments. Even in a mildly inflationary economy, making fixed nominal payments on a salary rising more in line with inflation for an asset valued more in line line with inflation can be a fairly attractive deal. But none of the above is meant to be investment advice. Homeownership has its risks and certainly loses flexibility.
- pedrosorio 6y ago
  Just checked Redfin, a condo in SF for $1M with a 30 year mortgage at a nice 3% interest rate and 20% downpayment would be: - $3300 in principal + interest - $1000 property tax - $500+ HOA - $200 homeowners insurance That is $5000+ monthly and requires $200k upfront (and significant upfront cost as the brokers are paid off). How is that comparable in after-tax payments to renting a $3000 apartment?
  - munk-a 6y ago
    The math might be a bit different for SF - there are a lot of local factors to keep in mind (like that 500 HOA + Homeowners seems steep to me for a property that isn't near EOL) - but the biggest different at the end of the day is that the 3300 you're paying into principal + interest is still your money (well minus the interest) when you rent all 3000 you're paying is essentially throwing money into the void.
    - o-__-o 6y ago
      5-10 years later you have equity, a portion of value of the home not tied up by a mortgage. You can refinance or sell and extract this money. You can then use this money to move into the $2M house you had your eye on.
    - refurb 6y ago
      The difference is appreciation. Otherwise owning is probably 150% the cost of renting in SF. And with rent control you don’t have the issue of rent going up.
munk-a 6y ago
You should only ever rent if you intend to live in a property an amount of time so small that the rent you're paying out doesn't cover the exchange cost. And that assumes that property prices aren't increasing which they almost always are and generally at a pretty firm pace. Basically - you're trying to avoid the scenario where you live in a place so short that the exchange cost you pay to flip it on the far side exceeds the amount of rent you'd pay to reside in it. Determining the exchange cost isn't always straight forward - the 6% given above may or may not be realistic for you, there are some brokers that will take a 1% cut and those folks are more common in hot markets, and there may also be taxes you need to take into consideration. Also, there is a risk of getting stuck with a lemon - if you purchase a house which seems fine but actually has extensive water damage and mold you could lose a portion of the value, this is a really significant consideration in quiet housing markets (like the midwest) and less important in areas like SF where most of the property's value is likely the land itself - in either case you're taking a big chunk of the value of the structure out of the equation when reselling the property but in the later case the value of the structure is rather minimal while in the former case the land is essentially free. Basically you almost always want to buy if you are able to. The money you're spending on housing when you own a property is accruing as equity instead of being siphoned off by a landlord.
- frongpik 6y ago
  If it was just about the money, it would be better to invest the downpayment into a margin trading account with 1 to 5 leverage.
  - vkou 6y ago
    No, because if you're investing on a 1-5 margin, the market dropping by 20% in two weeks, and then going up by 80% over the next five will leave you flat out broke. Meanwhile, someone not investing on margin will be up 60%.
    - MontyCarloHall 6y ago
      Nitpick, but they’d only be up 44%. 0.8*1.8 = 1.44, not 1.6.
hedora 6y ago
I faced that choice years ago, and chose to rent. It was a $500k mistake (over ~5 years). The condo was near Google, and it was a bit after 2008; your results will probably vary.

hsitz 6y ago

> "General rule of thumb: rent if strongly believe you'll be in a place for less than three years, and consider buying if staying longer." This is a valid rule of thumb only because transaction costs are generally much higher when buying a home than when renting. Typically 6% of the cost is siphoned off by brokers (3% to each side) and the fees people pay to take out a mortgage loan are significant. Fees you pay to start a lease generally amount to only a small fraction of these.

Johnny555 6y ago
A good rule of thumb for selling costs is around 10% of the selling price. And when buying, factor it around 3% just for closing costs (or more if you're paying points), but then add-in more for funding reserves.
aidenn0 6y ago
It's also valid because the real-returns of investments typically exceed the gains on housing[1] and you tie up a minimum of 20% of the value of your home when you buy. 1: This gets complicated because (at least in the US) most people don't leverage their investments at a 5:1 ratio, but do leverage their home value by that much.
- blaser-waffle 6y ago
  > real-returns of investments typically exceed the gains on housing[1] In markets where people want to live. Owning a couple acres around the far-flung suburbs of Seattle or DC will net you some good money. No one is buying housing in Gary, Indiana. Floods have annihilated many towns around the Mississippi River, and there is plenty of real estate in Detroit and New Orleans that sure as hell ain't gonna exceed the S&P 500 anytime soon.
  - aidenn0 6y ago
    I think you read my comment backwards? I was trying to say that you get more reliable returns if you invest your down payment in a diversified fund than if you use it to purchase a house. As far as "markets where people want to live" goes: yes, in any market, you can outperform the average if you can predict the future better than other investors. Some of the places around the Mississippi River probably used to be considered good investments; now they aren't. If this whole full-time remote thing catches on, it's possible that the bay-area will drop in prices. It's also possible that only part-time remote catches on, and interviews resume in person so people want to stay in the Bay Area. Heck, it's unlikely, but possible, that Cupertino or Saratoga decides to rezone large swaths of the town for more density and the increase in supply drops prices.

munk-a 6y ago

Just to note - that last class of buyer has no financial motivation to remain a renter. They are stuck in a situation they can't get out of easily where a larger portion of their paycheck goes to housing and decreases the rate at which they accrue value. This is why home buying assistance exists and is a very very good program for the government to subsidize, renting should, ideally, be a tool for those just starting life and those with the means to indulge in luxury - most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration, but the majority of renters today are people who are stuck in the rent cycle or don't know any better.

techsupporter 6y ago
> most people should own their homes since most people are living in the same place for extended periods of time. The exceptions to that are rare and need consideration I'd be very curious to know what kind of exceptions you mean. I've owned where I live a few times, each time it ended poorly. Now, I rent. The problem is, I can't buy what I want to live in even if I wanted to buy. Here's what I want to buy: - Inside the city limits of Seattle; location is not fungible, I can't substitute a property in Spokane or Atlanta for one in Seattle. - Within a 10-minute walk to a train station or rapid bus route. - An outdoor space of my own, not a shared garden but a balcony or private garden of some sort. That's it. That's the Tweet. You'd think that would be trivially easy, but the exactly two places I've seen where property can be owned (one is a townhouse development in Rainier Valley with an astoundingly expensive HOA, yet still sold out and the other is a condominium development near the stadiums but the handful of units with a balcony sold out immediately) are unavailable. There's nowhere else. No condos, no townhouses, no rowhouses, not even any detached houses. It's all rented apartments. No one is building ownable properties, because of a combination of striving for rental returns, zoning, and Washington's condo liability law.
- munk-a 6y ago
  Well yea - that's a poor market for ownership and Seattle has one due to the recent (in terms of housing price response) appearance of two insanely large tech giants in the area - that causes a lot of market distortion that you're sadly on the receiving end of today. It is financially advantageous to own a property, it is usually financially advantageous to own a property if you purely want to rent it out - renting is a profitable business that's why there are a lot of really large companies holding insane amounts of property in the US. If the city/region has some guaranteed demand for rental numbers (like uni stundents and young people working their first job) then the math changes to make it even more advantageous to rent - what you're essentially seeing is that owning property is the correct decision, it's so correct that the market for property is being soaked up by landlords that can make a tidy profit on the margin and are more reliable load recipients than individuals. I'm sorry you're in the housing situation you're in because it sucks but, if you did see two identical places you liked and one was available for sale and the other for rent then it'd be the correct financial decision (really correct in fact) to buy the property. Various regions within the US have toyed with ideas around taxing property ownership for investment more heavily but there is a lot of lobbying money pushing back on that. A lot of places (including BC where I'm at) actually have a primary residence tax credit for owners - if you own your property and use it as your primary residence you get a bit off your taxes to help swing the balance back toward individual owners.