To Buy Or Not to Buy

Rent or buy in the Bay Area

To buy, or not to buy, that is the question:
Whether ‘tis Smarter for the pocket to buy
The House and hope for outrageous Fortune,
Or to Rent and ne’er repair a Thing

Buying vs. renting: the eternally debated question on financial independence and personal finance forums. Conventional wisdom says that buying property is the way to go. However, the path to FIRE flies in the face of all things conventional and some FIRE bloggers have come out strongly against the idea of buying. As we grow older we learn to accept that there are few absolutes in life, and the correct answer to this question is a disappointing ‘it depends’. It depends on where you plan to buy, and when, and for how long and a host of other factors.

We bought our house back in 2012, back in the dark ages when our savings sat in a Bank of America savings account, way before we had ever heard of FIRE. Now I find myself wondering, was buying the right financial decision for us? We live in an extremely high cost of living area (the San Francisco Bay Area) and property prices here appear to be increasing every day. “Everyone” says that buying a house here is the best investment ever. Is everyone right? What are the facts of our particular case?

Bravely, I decided to find out, even though I don’t have a time machine in my garage, waiting to take me back to 2012 so that I can undo any stupid mistakes or maybe even become my own grandmother. Time travel is odd that way.

Assumptions

In order to construct a parallel universe in which the BITA’s are carefree renters I had to make a few simplifying assumptions. Here they are:

  • If we were renting, we would be renting a condo, or a townhome, not a single family home.
  • Said rental would be much closer to our place(s) of work, so even though it would be smaller than our home, we would pay in rent what we are paying for our mortgage plus property taxes now.
  • Everything that we do spend on our house now, we would have instead invested in VTSAX. Every last dime. We are assuming that we would have frittered away nothing. 

The Cost of Buying in the Bay Area

We put down $167,918 to buy our home. This includes the down payment, closing costs, cost of fumigation, inspection costs etc. Our monthly payment (mortgage + homeowners insurance + property taxes) is close to $4000. I’m going to round it up to $4000 for the rest of this article.

I estimate that we pay an extra $290 every month for the privilege of home ownership (alarm system, pool maintenance, extra electricity because of the size of the house and the pool etc.). Every year we spend $150 on pest control. These, then, are the fixed annual costs we enjoy for the privilege of being home owners in sunny California.

Rent or buy in the Bay Area: fixed costs of ownership

Now we come to the truly fun part of home ownership. The oh-shit-that-broke part. And in an elderly house like ours, things break all the time. Here is a breakdown of the variable cost of home ownership by year.

Rent or buy in the Bay Area: variable costs of ownership

I won’t bore you with an itemized list of these expenses. I will give you a flavour though. This includes things like the cost of buying a new dishwasher, AC repair, fence repair, and new carpet installation. I am sure that there are folks out there who maintain their own homes and hang on to their hard earned dollars. Not us. Put together we are about as handy as a single doorknob. No, wait. Less actually. Even a doorknob has its uses.

Renting instead of Buying: The Numbers

As I said above, I’m going to assume that our rental would cost us $4000 monthly. I will also assume that we put down $4000 as a safety deposit. So, in this parallel universe, in 2012, instead of buying we would have invested a lump sum of $163,918 in VTSAX. $163,918 = $167918 (down payment etc.) – $4000 (rental deposit).

Then we would have made monthly contributions to VTSAX. For simplicity we are going to take our Rent or buy in the Bay Areavariable annual ownership expenses and divide them by 12 (except for 2012, where we divide by 3, because we start investing in October) to get monthly costs. To this we will add our fixed monthly expenses as detailed above. The sum will give us a monthly amount to throw into our theoretical VTSAX investment. 

This is how much we would have contributed to VTSAX per month from Oct 2012 to Dec 2016, once we combine our variable and fixed spending on home ownership.

Rent or Buy Bay Area monthly investment amount

The average works out to be $786 per month. I then fed this data into the Portfolio Visualizer Backtesting Tool.

The result: our portfolio, if we had rented, would have been worth $329,024 at the end of December 2016.

Rent or buy in the Bay Area: investing instead of buying

Rent Or Buy in the Bay Area

Given that we exist in this universe as home owners and not in the parallel one as renters without a care in this world, how did our house purchase fare from 2012 to 2016?

Based on comps that local realtors feel compelled to leave under our front door mats, similar homes in our area are selling for around $1,100,000. Redfin confirms this and estimates our home is worth $1,134,644. Zillow thinks, oh wait a minute, nobody cares what Zillow thinks. Let us be conservative and assume that our home would sell for $1,050,000. Let us further assume that brokerage costs, escrow fees, title transfers, maybe painting the house eat up another $75,000. We would be left with $975,000. Subtract the pound of flesh we owe the bank and we would be left with $407,000.

Rent or buy in the Bay Area

But wait, we’re not done yet. Buying has in its corner one more trick – mortgage interest tax deductions. Every year we have been able to deduct approximately $21,000 from our taxable income for the purposes of federal taxes. Even without a mortgage we would be itemizing (because we can deduct our state taxes as well), so I’m not going to take standard deduction into account.  At a marginal federal tax rate of 35%, we save $7350 every year. Our state allows us to deduct mortgage interest for state taxes as well and our state marginal tax rate is about 9%. So at the state level we save an additional $21000 – $8000 (standard deduction) * .09 = $1170. So let us throw this $8540 into VTSAX every year and ta-da we end up with about $39,000.

So in the final analysis we have

Renting: $329,024

Buying: $446,000

We are currently ahead by $116,976.

Home Ownership for the Win?

So should I be celebrating the fact that all those years ago when we made a blind choice we lucked out and chose the option that has come out ahead? Maybe. I’m still not sure that I can call it a definitive win and move on.

Why not? What if we had rented a cheaper place? Instead of $4000/month, if we had decided to live in a smaller place, or maybe one further away from work, maybe our rent could have been as low as $3000/month. If we threw that extra $1000/month into VTSAX, renting would have resulted in a portfolio of $392,509. That brings us to within $53,491 of home ownership, a much less comfortable margin of victory (roof replacement, I’m looking at you). The point I am trying to make is that this is a hypothetical parallel universe and there are so many variables I could tweak that would affect the outcome. e.g. maybe because we stayed closer to work, we spent less on cars and gas, and invested that money too.

On the other hand, back in 2012 I invested nothing, and had never even heard of Vanguard or index funds, so if we hadn’t bought at the time we would probably be a lot further behind financially than we are now. So for us, personally, the biggest factor in the eternal rent vs. buy argument boils down to something other than the financials of the matter. It comes down to who we were at the time. We were not financially savvy nor were we investors. Was buying in our market better than doing nothing with our money? Absolutely.

And now that I’ve established that I don’t have to stew in a pot of regret over past decisions, I’m off to tinker with that time machine in my garage. You know, the garage that I own, as part of my house.

What about you? Are you confident in your rent vs. buy decision?

19 thoughts on “To Buy Or Not to Buy”

  1. Daaaang. It’s funny how the cost of housing varies so wildly from one area of the US to the next. We paid $145,000 total for our home with a small $4,000 down payment. In our area renting vs. home ownership is more of a wash. It just depends on what your goals are. For us, we wanted a home we could customize and enjoy. We also wanted the freedom and privacy that comes with ownership. But sometimes renting does come out ahead, depending on the area you live in and your finances. It’s always important to do the math first to see what you’re getting into!

    1. Colour me green. I would sell my kidney for those prices. Joking. Or not. Maybe one lobe. Wait, those are livers aren’t they, the ones with lobes? This whole comment has got away from me. Let us start fresh. It absolutely is important to do the math first, and that is exactly what I would do the next time around. Unless that time machine thingy comes together.

  2. We did this analysis when moving away from LA to TX, and we found that it was essentially a wash. Now, that was with buying at the peak of the 2008 market (subsequent crash ensued with homve value) adding in about $15k of improvements, and getting brought back to 90% of our original value by our megacorp, since they were moving us. Thank you megacorp! Like you, Mrs. SSC added in insurance, taxes, and some minor repairs we had to do, but most were improvements as the house was only 3 yrs old when we moved in.

    However, like you, we probably wouldn’t have invested the extra, and even with being $35k in the hole at the end of it, renting still would have been a wash. Although without all the yard maintenance, minor landscaping tweaks every year, and more, we probably would have spent more in the local economy enjoying the free time on the weekends that we didn’t have to worry about those things. So maybe renting would’ve cost more, lol.

    I cringed at the big bumps on your house maintenance checklist as we replaced an AC in 2015, and since they were both the same age, we’ll probably have to replace the downstairs one soon as well. Also, our neighbor on one side wants to replace the fence which would be another $1k for our part. Fortunately, that got pushed off from last year to who knows when. Plus, we have a new dishwasher showing up tomorrow, because this house wasn’t as new when we got it, and well, things are hitting that point of needing to be replaced. Especially when they’re the cheapest thing you could get to put into a new house. Oh well, is it weird that I’m excited that soon I won’t be able to hear the dishwasher when it’s running? Sometimes, it’s the little things in life. 🙂

    1. Ha! At least you did the analysis before, and not 4 years after the fact. Yay megacorp though! That is pretty awesome that they did that for you.

      A quiet dishwasher is worth it. Our old one was noisy, and I never quite noticed how noisy until it break and our new one whispered ever so gently at us. Houses! Eventually we’re going to need a new roof. The carpets will need replacing too. Ugh. I’m glad I finally did the math though, at least now all those replacements won’t hurt quite as much.

  3. Time travel – ain’t it grand!! Especially when you find out you followed the right path. Had your outcome been different what a pity you may have felt!! I absolutely the the SF bay area. One of my favorite places to visit. When I am there I often wonder if living there would be worth the cost of Quality of Life. For me, to work there I would have to work a ton more hours than I do…so that is a strike against. However, it being a dog friendly area with way better weather than Chicago I think it may be worth the price. Add in the awesome people, food, landscapes and architecture…well, SF has my heart but not yet my body. I also wonder how I would feel had I been born in a different city or country than Chicago and in the states. Like, if I was born in St Louis or Omaha (where many flight attendants commute from) would it be worth the commute to Chicago for a lower cost living. On the other hand, if I was born in SF that is all I would know so perhaps it wouldn’t feel as financially inaccessible if I was looking from the inside out instead of the outside in. Oh so many things to consider! Let me know if you get that time machine working…

    1. I would have felt very sorry for myself and sulked for days on end and been unbearably whiny. So Mr. BITA has much to be grateful for.

      I love this area too – everything about it is perfect except for the ridiculous cost of living. Bring your body over, at least for a visit. I’d like to catch up with you IRL.

      1. Haha – I could just picture it. This is why I don’t go into too much depth on my past mistakes (though yours was not a mistake!). After writing about my short sales I conjured up all those useless feelings again. It’s been a month or two now…I think they are sufficiently stuffed back where they need to be! I won’t be returning to that rabbit hole again. 😉

        And, yes, I agree! I must get my body over there soon! This winter weather is killing me.

  4. We live in a higher rent lower purchase price area. The house hasn’t appreciated much, but the reality is my purchase price monthly payments aren’t far off rent. Thus so long as my repairs don’t exceed rent Inflation plus home appreciation I’m good to go. The longer you hold the house the more likely you are to reach that point given the sunk transactional costs.

    1. It is still startling to me how much the real estate market varies by area. Fingers crossed that your house doesn’t throw a tantrum and demand repairs in the near future. Thanks for stopping by!

  5. Howdy neighbor! I’ve been tempted to run the same calculations, especially with the neighbor crap going on, to try and justify the math of moving. I haven’t had the nerve to, yet 🙂

    One thing I didn’t spot, maybe because I’m reading on my phone, is the increase in rent that would have happened every year. In most places during that specific time period, rent increased from 5-25% at least once but more likely two to three times depending on where you were thanks to some of the IPOs. It’s why some of my friends moved out of state entirely and partly why I would simply not rent around here. Between my need for a dog and financial stability, buying tends to be more right for us. 😞

    1. Howdy *waves*! I hear you – there was a part of me that was terrified of finding out that in our ignorance we had totally fucked the pooch. You have a truly rubbish neighbour though – extra motivation to run the numbers.

      I didn’t adjust the rent because I started it out at the higher end. Back then friends who were renting were paying around $3000, and I’m guessing it would have been somewhere in the $3000 – $4000 range through the time period I’m looking at. That is part of the reason why I also threw in math with $3000 at the end.

  6. Nice home appreciation! I think the rent vs own topic is not as black and white as some people paint it. A hot market like yours can give you some great gains, whereas our market has just bottomed out. Some people like to do their own renovations and some people need to hire out everything changing costs significantly. Personally I prefer having a back yard and doing my own renovations, so it makes more sense to own than to rent for us in most cases. But one day we might just sell everything and do more extended travel. If we did that, then we would rent for a few years 🙂

    Great analysis, turned out even better for you than I would have expected!

    1. It turned out better for me than I expected too. Most things in life aren’t black and white – so quite unsurprisingly this issue isn’t either. I’m sorry to hear your market is not being cooperative. I hope it looks up soon.

  7. For us, we’re renters at the moment. Financially I guess it depends how well you manage your money and what you do with it (eg investing or not). In Australia there is no property deduction for owning your home, so it’s a bit more clear for us.

    When we do buy, it will be for non-financial reasons.

    Tristan

    1. There is clearly no one answer. It depends on the local housing market, the people in question and a host of other factors. And that is part of the reason I wanted to run the numbers for _me_ and find out what was right for our specific situation. I didn’t know that about Australia, so thanks for that tidbit.

  8. We are in the DC metro area, so home and rent prices are high – but not as crazy as the bay area. We are on our third home and we made a decent profit on the first two, but I think we will essentially break even on our current house.

    When we retire (probably before) we will certainly downsize and rent for a while. Our plan is to travel the country and do short term rentals to help determine where we want to settle down. At some point we would love to build a ‘final’ house to our specifications.

    1. That sounds like a fun time – scouring the country for your ideal location, slowly traveling and soaking it all in. I’ve loved every custom built home I have ever been in but I can’t ever imagine taking on a project like that myself.

  9. Great analysis. I haven’t run the numbers but since my house has only gone up 25% in 13 years, I’m guessing that I would have done much better if I had thrown the money into the stock market and let it ride. Although I wonder if I should actually only factor in the money paid in those 7.5 years. You may have inspired a new post 🙂

    1. I hope you write it, because I would love to read it. 13 years in one house! The longest I have ever lived in one house in my whole life is four years!

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