Rent or Buy in expensive cities?

Asked by Erica, Greenwich, CT Tue Jul 24, 2007

In cities such as San Francisco and New York, where rents are currently astronomical, is it better rent or to try to scrounge up enough for mortgage payments?

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1rusty, Home Buyer, San Francisco, CA
Thu Feb 19, 2009
I really hope you didn't follow the advice of the "Real Estate Professionals" and "Real Estate Pros" below. Buying in a city such as San Francisco (where I currently live) or in NYC (where I've lived before), particularly in the nicer areas, is a highly risky endeavor. It was high risk high reward for a long time - in recent times it's become an unmitigated catastrophe. I have many high income friends in Manhattan and San Francisco who are thinking of walking away from underwater mortgages.

Right now I can rent a 1 bedroom in the best part of San Francisco (Pacific Heights), with world class views of the Golden Gate Bridge, for $2500 per month with parking. I contrast that to buying - just a couple of months ago people were asking $800k for comparable properties. Even with perfect credit and a high, stable income I would have to put down almost $200k in equity to get the best loan rates, money that would have been lost as home values have crashed even in the high end of these cities. On top of that I would be paying $500-$1000 in HOA fees per month in buildings comparable to mine - in fact the most comparable unit to mine had exactly a $1000 monthly HOA. Next we add city taxes - at this price point, my one bed will cost almost $700 per month in city taxes. So I've put down $200k in equity, pay $1700 month in HOA and city taxes, and now have to pay for the mortgage - at the best rates on a 30 year fixed I'll be paying several multiples of the $2500 monthly rent all-in. Of course there is a federal income tax shield from buying but I get hit with AMT that mitigates the benefit and does little to compensate for the profound risk to equity principal.

Bottom line - buying is for suckers, particularly in this market. Those who have been prudent and saved may find bargains eventually, but based on what's happening to the global and local economies, both NYC and San Francisco stand to suffer more more. I'm renting happily - in fact I just moved into a nicer unit for the same price, with piece of mind and flexibility that comes from renting.
3 votes
Rochelle Wil…, Agent, Lafayette, CA
Tue Jul 24, 2007
Erica this is usually a personal choice based upon financial goals, timeline, job status and other intangibles that are different for everyone. Generally the value of real estate here in SF over long periods of time trends upward making it a good long term investment. As you probably know there are also tax benefits of owning your own home. As a San Francisco real estate agent I am supposed to be bullish on the local economy and real estate market and in general I am. There are certainly some soft spots and currently there are disturbing developments in the lower end of the market. But overall, in international cities such as San Francisco and NY that are magnets for high wage earners and investors from all over the world and where the local economies are diverse and continue to evolve home ownership is generally a better financial alternative to renting. Of course if you are "scrounging" to make payments and "house poor" you have to take a hard look at whether it's the right move for you. You don't want to resent your wonderful home and investment because it's stealing your soul and your ability to enjoy life.
2 votes
Deborah Madey, Agent, Brick, NJ
Tue Jul 24, 2007
If you anticipate being a resident in the location long term, I recommend buying. If short term, then think about renting.
2 votes
Yvonne Jaram…, Agent, Honolulu, HI
Sun Aug 19, 2007
You can't just answer this question by talking about time frames. You really need to get a bit more complex,, doing a rent v. buy analysis, and consider the following - cost of renting - cost of mortage payments for a comparable place - anticipated annual appreciation on the property you might be purchasing - anticipated annual cost of taxes, insurance, maintenance and/or association fees - the tax advantages of getting the interest deduction for a portion of your mortgage payment - the rate of return you might get by investing any difference between your mortage payment and what you would pay in rent (assuming the rent is less) - whether and how much money you have money to put down and other factors. Also, even if you are only in SF and owning for the short term (less than 24 mo), it is possible under the tax laws to still get a pro-rata portion or all of your capital gains (assuming you have them) tax free. Check with your accountant and/or attorney on the details of this. And again, even if you are in SF only in the short term, it might even make sense to buy and then keep a property for rental purposes. Bottom line - this is not a yes or no question, but there are some online tools available to help. Check out…
1 vote
Joy Liu, Agent, San Francisco, CA
Thu Aug 9, 2007
Hi Erica - Erin had the best answer for this question. A couple more resources to seak in helping you determine the dollar and cents of it would be a mortage broker and a financial planner. The mortgage broker can help you determine what you can afford. While the financial planner can help you determine if a home purchase makes financial sense to your personal financial goals. Also a financial planner can also help you put a plan together towards a home purchase goal if it's not something your ready for in the immediate future.
1 vote
Lance King, Agent, San Francisco, CA
Mon Jun 27, 2011

Not all Real Estate Pros are self-serving dealmakers as 1 rusty seems to be saying. We have "lost" a lot of money as a firm over the years by frequently recommending buyers DON'T purchase for a number of reasons. Sometimes it's because they have a short window before selling, or as back in the crazy days because properties were selling at prices that made no sense, especially when buyers were putting in non-contingent over ask offers. One axiom will always remain true: the law of gravity applies to Real Estate as well. Most of our buyer clients are still good on value because of our approach to the business.

Foregoing said, it's probably not a good idea to buy ANYtime if you're "Scrounging up" money for mortgage payments. The business is different now, and there is nothing that indicates to me that there is any huge rise in the market coming (disclaimer that I, like everyone else don't have a crystal ball), so the decision to buy or not needs to be well-though out.

When you take in to account raw land, houses, and multi-unit buildings, I have personally bought and sold over 100 properties and NEVER lost money, even in the last couple of years, because I apply business principles to purchases even if I'm going to live there. We use the same approach with our clients, and this has served them very well. We have a large contingent of folks are eternally grateful because we advised them not to buy a particular property or at all.

In San Francisco there are still some opportunities but they are fewer because of market dynamics. If you're thinking of buying you need to look at long-term and short-term needs, and find some trustworthy professionals who really know their stuff to guide you. There are lots of ways to figure out who these people are, and I'm happy to go into that offline.

Best Regards,

Lance King/Owner-Managing Broker
DRE# 01384425
0 votes
Cliff Perotti, Agent, Chicago, IL
Sun Jun 26, 2011
Great question! And one commonly asked by people these days. While there are certain advantages (as stated by other esteemed professionals in response to your question), there is a rising of a "Renter Nation" in the U.S. metro areas because of two issues: 1) Price disparity, and; 2) benefits of not being tied down by ownership. We had David Vivero, CEO of on our radio show back in April and the talked about this very issue. You may find it informative. Check out the link.
0 votes
Johnny Marr, , Arlington County, VA
Fri Jun 24, 2011
1rusty was right back in 2009. Now it is 2011 and I may be moving to SF later this year. I would not buy even at this time, with a 5-10 year horizon. Why? Incomes have topped out and there will be even more pressure that will keep prices at the current level or declining for the next 10 years. Don't forget that, closing costs on the purchase and sale (including the realtor/broker fee) is about 10%. So, on a 800k place, that's 80k...which is 3+ years in rent out of the 10 years.

I get 7% after tax on my fixed deposits in Asia...and I'm certainly not going to dump 300-400K into a down payment, when I can get $28,000 after other words, I can keep $500,000 in fixed deposits (and keep my liquidity) and pay for my rent instead of buying the same place for $900,000 (plus the 10% purchase and sale costs) plus paying HOA fees and prop taxes.

There are studies out there that say that properties are still overpriced by 30-40% in a number of places throughout the world (e.g. Mumbai, NYC, etc).
0 votes
James Testa, Agent, San Francisco, CA
Sun Feb 22, 2009
Hi Erica,

Rent vs Buying is an age old question - In places where real estate values are very high, such as in New York and San Francisco, the questions becomes much more complicated. As a rule, you will always be able to rent the given unit for less money that you will pay in mortgage payments (depending on your down payment.)

In other words, people tend to purchase real estate in high valued areas with an eye toward the appreciation rather than the cash flow.

You will find many answers to your question within the real estate community however, my feeling is that purchasing your principal residence is a highly personal decision. Is this something you've always wanted to do? If so, do it! Its a great time to buy!! However, if this is just about the numbers - you may want to take a second look. It doesn't matter if it is the best buyers market in 20 years if you aren't interested in being a home owner.

I always provide my clients with a "first time look" at being a buyer and I always available to share. Please feel free to contact me if I may provide any further information.

James Testa
Paragon Real Estate Group
0 votes
Mr. M Soliman, , Los Angeles, CA
Wed Jul 30, 2008
1) $ 100,000 at 8% interest with allowances for amortization, depreciation and interest deductions [YES ]
2) $ 666 a month rent and happy new year kiss it good bye [NO ]
1) $100,000 (see above) with a 12 month loss in vaue totaling $ 12,000 [ BREAK EVEN ]
2) $ 50,000 REO next door bought by the renter above in month 12 [ WINNER! ]
0 votes
Sylvia Barry,…, Agent, Marin, CA
Thu Aug 9, 2007
In general, for short term stay, rent, for long ter, buy. But other than that, what do you do?

I think for the cities you chose, San Francisco (or for that matter, surrounding areas - I have to pitch for the wonderful Marin) and New York; all have been and will continue to appreciate because of the vibrant job market, the location, the precious supply vs. demand, the gateway from foreign country to the U.S., the immigrants, ..., etc There are just a lot of potential here! .

Even though most of the housing market are slowier than before, S.F. onlyl has 2.4 month of inventory and Marin has only 3.9 months of inventhory, both areas are doing quite well. I also have a 40 years trend chart which shows that during the past 40 years, Marin housing price pretty much went down once, at around 1980, by around 5% only . The housing price went up all other years.

I guess what I am trying to say, is that personally, I would try to 'scrounge up' enough for mortgage payments than to rent. I have so many people telling me that how lucky they were to have gotten into the market before, otherwise they would not be able to afford their houses now. I think the same thing will be said by others a few years later.

There is appreciation, tax advantage, enjoyment of living in your own house (paint, remodel, landscape to your delight); and a basis to trade up later. If you don't start now, it'd truely be difficult to buy later in these cities

Check out this Historical Real Estate Quotes to Ponder. It will give you some perspective.…

Good Luck! Either way, enjoy your stay - I have so much fun in both cities Amazing places; especially when you are young! .... Now that I think of this, maybe you should just rent and enjoy all things those cities can offer .. :-) ....

0 votes
Pam Winterba…, Agent, Danville, VA
Thu Aug 9, 2007
Renting vs Buying is always the questions. Hands down I would say buying for the long term provides appreciation and tax relief as well as homeownership. Good luck with you decision.
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0 votes
The Hagley G…, Agent, Pleasanton, CA
Mon Jul 30, 2007
As a Realtor and an investor, I believe that owning real estate is the quickest way to build wealth. Add to that the tax advantages, and you have a great case for buying rather than renting.
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0 votes
Bruce Lynn, Agent, Coppell, TX
Wed Jul 25, 2007
It depends on a lot of things. One is your timeframe for living in one place. If you move every year and you don't get a relocation package from your company, then renting might be the way to go. In some places in CA while rents might seem high, they're actually much lower than the mortgage payment, so owners are hoping for appreciation not rent to cover the deficit. It also depends on where exactly you want to live. If prices are falling, it might be better to rent. If prices are increasing, it might be better to buy.
0 votes
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