Rent vs. Buy at similar monthly price ranges

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Rent vs. Buy at similar monthly price ranges

Tanner Shore
New to Real Estate · Corona, CA · Member since 2020 · 19 posts · 10 votes

Hi everyone,

I am having an internal debate. I am 23, and I plan on getting my own place soon. I live in southern California, so renting an apartment isn't the cheapest. I have found a few apartments for anywhere from $1700-$2000 per month. At these prices, I am thinking if it might just be better to buy a home for $350-$400k and have a monthly payment around $2200. This way, I will see the benefit of appreciation and start building equity and not waste money on renting an apartment that I'll only live in for a few years. 

All at the same time, I want to buy rentals OOS so I am not sure what route to take. I would love to house hack, but I would only want to with a duplex (because my Fiancee wouldn't want to share a unit with strangers) but duplexes aren't that available where I am. Any advice would be appreciated! 

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Frank Jiang
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
6y

Owning your own home is preferable for the following reasons.

1) If the monthly amount is similar, that means the monthly cost of ownership is likely lower.  A portion of your payment goes towards the principal and you receive taxation benefits on the interest.

2) After living in the house for two years capital gains of up to 250K (500K joint with spouse) are exempt from taxation upon sale.  This is one of the best ways to increase your net worth as a young person.

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    6y

    Owning your own home is preferable for the following reasons.

    1) If the monthly amount is similar, that means the monthly cost of ownership is likely lower.  A portion of your payment goes towards the principal and you receive taxation benefits on the interest.

    2) After living in the house for two years capital gains of up to 250K (500K joint with spouse) are exempt from taxation upon sale.  This is one of the best ways to increase your net worth as a young person.

    2Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y

    My decision was buy, although I do live in a much lower cost of living area. You're right, you do get appreciation and start paying down the mortgage after a few years. Plus there is the benefit of the pride of ownership. I didn't understand how much I disliked renting until I was no longer a renter.

    Buying in-state may drain your capital reserves for now, but if you keep working at it that won't last forever. Maybe you can do a live-in flip and add value to the house you buy, then either cash out or move.

    0Reply
  • Tanner Shore
    OP
    New to Real Estate · Corona, CA · Member since 2020 · 19 posts · 10 votes
    6y

    @Taylor L. thats what I am thinking. I don't want to buy a forever home, probably something I can live in for 2-5 years and then rent it out and move elsewhere.

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  • Tanner Shore
    OP
    New to Real Estate · Corona, CA · Member since 2020 · 19 posts · 10 votes
    6y

    @Frank Jiang thanks for the pointers! Do you invest down in San Diego? It seems like all of SoCal is tough to find reasonably priced deals unless you are house hacking.

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  • Trevor HaneyPro Member
    San Diego, CA · Member since 2017 · 49 posts · 33 votes
    6y

    @Tanner Shore you should loom up the regulations for ADUs in your area. You might be able to build a little studio on your property and rent that out. It probably won't eliminate your mortgage but it could reduce a chunk of it

    1Reply
  • Matthew Forrest
    Rental Property Investor · Torrance, CA · Member since 2016 · 263 posts · 132 votes
    6y

    @Tanner Shore In my opinion having equal payments (rent vs. mortgage) isn't automatic support for buying a house. There are a lot of hidden costs that the mortgage payment alone doesn't include (taxes, repairs, opportunity cost). You could also generate some income that can make buying look better (house hacking, renting storage space). There's a guy on instagram (@personalfinanceclub) that lives in San Diego and has some pretty good posts on owning vs renting. He mostly posts about index funds, but you can scroll through for the housing ones. 

    You should do a side by side quantitative analysis of your buying and renting options.

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  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    @Tanner Shore Piling on what @Frank Jiang said, buy a duplex if you can afford it (at least). Live in one side, rent out all of the units and the empty bedrooms. You get an FHA loan for 3.5% down with the lowest rate for 30 years! Wow! This becomes a cash-flowing monster. You can move out next year, keep the property, and do it again if you can save up. Do this as many times as you can stand it and you will be so far ahead of me and other investors by the time you are 30 you will never look back! Small sacrifice for huge rewards!

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Tanner Shore I highly recommend purchasing your own place first prior to going OOS. I like the idea of paying off your own place than your landlords. Also, There’s got to be some duplex’s around within your surrounding area because that would be the best way to go to house hack...no roommates to deal with.

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  • Marc Sterling
    Member since 2018 · 3 posts · 3 votes
    6y

    @Tanner Shore

    That’s so easy! First, buy. Second, make your own duplex there is always a way even if it’s a temporary conversion that you remove later .. but ideally find something with a mother-in-law unit in the basement for example. Then rinse and repeat after 1 full year of tenant income bc the banks will then convert the property to income on your balance sheet from the liability column after 1 FULL year of tenant income *on the books* .. Good luck!!!

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    6y
    Originally posted by @Tanner Shore:

    @Frank Jiang thanks for the pointers! Do you invest down in San Diego? It seems like all of SoCal is tough to find reasonably priced deals unless you are house hacking.

    Hello!  I live in San Diego and I have bought a few fixer-uppers to live in as my primary residence to create forced appreciation. I have bought out of state properties and had some success there, but I don't really think of that as a viable long term strategy and I've heard stories of other people getting absolutely hosed.

    It's definitely tough to find something like a duplex to house hack in SoCal.  It's a lot easier to buy a 4-5 bedroom and have roommates. All I can say is be patient, the deals are out there.  Just pick that one run-down house no one else seems to want and put a lot of time and effort into it.  It's called sweat equity for a reason.

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  • James Carlson
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Tanner Shore

    Buy! There are very few scenarios in which renting makes more sense. And I'd try to find a home with a basement apartment or separate entrance so you can rent that as a long-term or on Airbnb. That way you offset your mortgage and shore up your savings for that next investment.

    Even if your mortgage is slightly more than rent would be, it makes sense to me to buy. Where we're at in Denver and Colorado Springs, we see rents slightly lower than mortgage payments (although with the low interest rates, they're almost even now.) Still, our clients' mortgage payment goes toward equity that they now own and can sell later. Many of them are house hacking, so you're actually having someone else pay down your mortgage. They're getting appreciation, which in Denver has averaged 6% each year for 40 years. And they're getting tax benefits.

    To me it's a no brainer. 

    Good luck!

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y

    Those that act like a mortgage a little more than rent is not hugely cash negative I bet have not had owned RE long term.  Your scenario of a mortgage that is $200 more than rent will result in the ownership route initially costing significantly more than renting.  It would be a rare established RE investor that would purchase an RE with mortgage greater than rent.  If an RE investor did purchase such a property, they would either have a value add identified or they would be relying on appreciation for their return.  Research expected expenses.  Learn the 50% rule.

    This is not to say that in the long term owning is not the better choice of the two choice you provided (I suspect owning will be the better choice if you plan on owning at least 5 years), but to prepare you for the reality of ownership expenses.

    I would buy versus rent if you plan to own it at least 5 years.  If you were not planning on owning it at least 5 years, I would look at other investment opportunities.  Network and you should be able to find opportunities that historically have returned above 10% that are fairly low risk.  Even the S&P 500 has historically returned over 9%.  

    Your goal should be to maximize return on your investment.  The ownership scenario you are evaluating should not only be compared with the renting route, but other investment opportunities.  The numbers you provided, I would not consider purchasing as an RE investment without a value add.  There are better opportunities.

    Good luck

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