Buy vs. Rent a Home in Silicon Valley
Pros and Cons of Buying vs. Renting a Home in the Bay Area
Today, I would like to address the forever recurring question from
first-time home buyers about buying vs. renting a home.
There’s nothing quite like a home that you can truly call your own. A place
where you can have the gleaming hardwood floors you’ve always dreamt of, a
space to cultivate your own vine-lined patio, a way to provide a good
neighborhood for your kids to grow up in, and a freedom from the whims of your
landlord. These are just a few of the images that immediately come to mind for
many of us. There are also obvious advantages of owning your home including tax
deductions potential for appreciation (capital gain).
As tempting as it may sound though, before to begin the buying process, here are
a few questions you might want to ask yourself to help determine if you are
better off buying or renting.
A recent article in the New York
Times summarizes the costs of buying a home versus the costs of renting.
There are 3 types of costs to consider when buying a home:
1. The initial costs of buying a home are the costs you incur when you go to
the closing for the home you are purchasing. This includes the down payment and
2. The recurring costs are expenses you will have to pay monthly or yearly in
owning your home. These include mortgage payments, condo fees (or other
community living fees), maintenance and renovation costs, property taxes and
homeowner’s insurance. Property taxes, the interest part of the mortgage
payment and, in some cases, a portion of the common charges are tax deductible.
The resulting tax savings is accounted for in each item’s totals. The mortgage
payment amount increases each year for the term of the loan because the tax
credit shrinks each year as the interest portion of the payments becomes
3. The opportunity costs are tracked for the initial purchase costs and for the
recurring costs. The former will give you an idea of how much you could have
made if you had invested the down payment instead of buying your home.
The net proceeds is the amount of money you receive from the sale of your home
minus the closing costs, which includes the broker’s commission and other fees,
the remaining principal balance that you pay to your mortgage bank and any tax
you have to pay on profit that exceeds your capital gains exclusion.
Symmetrically, here are the fixed and recurring costs to consider when renting
1. The initial costs of renting a home include the rent security deposit and,
if applicable, the broker’s fee.
2. The recurring costs include the monthly rent and the cost of renter’s
3. The opportunity costs are calculated each year for both your initial costs
and your recurring costs.
The net proceeds include the return of the rental security deposit, which
typically occurs at the end of a lease.
In the end, regardless of the state of the market, the decision to buy or rent
is a function of your willingness and your ability to assess the cost/benefit
ratio corresponding to your personal situation. Your Realtor (and your loan
officer) are here to make everything else fit within the boundaries of your own
ratio as efficiently and as inexpensively as possible.