Living in “America’s Finest City” is a dream for many. And, while we’ve certainly played a part in making this possible, the most popular question we get is, “How do I decide between renting or buying ?” While there are many factors to take into account, the decision generally rests on three broad factors:
- Long term goals and considerations
- Personal issues for the current and foreseeable future
- Financial factors and preferences
As you read, it may help to look at each point from your own perspective.
Buying Gives You Stability and a Sense of Achievement
- Owning your home offers emotional and psychological benefits. The feeling of fulfillment and sense of achievement is palpable when you know that you’re living the American dream.
- Homeowners feel a greater sense of belonging in the community and are more likely to be involved in local affairs. This has the added effect of making the community a better place to live and thus, result in higher property values.
- Owning a property puts you in control of your living arrangements. You, not the landlord, make all the decisions about improvements, decorations, maintenance, and repairs.
Buying Gives You Financial Leverage
- It’s, initially, more expensive to buy a home: the down payment and closing costs are higher than a renter’s initial costs. However, the potential benefits are many.
- According to the San Diego Association of Realtors (SDAR) July Market Overview, the average home price increased by 6.8%, while the median home price increased by 5.7% from 2019 to 2020.
- The average home in July sold for $761,098 compared to $712,936 last year. That $48,162 increase belongs to you, the homeowner, and not to the landlord.
- Had you put the equivalent of a 20% down payment and closing costs into public stocks and they increased by 6.8%, the return wouldn’t have been close to $48,162.
- Capital gains on a primary residence are exempt from capital gains taxes for a couple unless the profit exceeds $500,000. On the other hand, all profits on stock value increases are taxed.
The Costs of Ownership
- Owning a home comes with responsibilities. The costs for repairs and maintenance projects are all yours. You’ll pay for paving your driveway, painting the exterior of your home, and finishing your basement. And, if the stove breaks down, you’ll pay to replace it, as well.
- The down payment and closing costs are much higher than a tenant’s initial costs.
- Property values may decrease, which would result in a lower return if you were forced to sell at an inopportune time.
Positive Considerations for Buying a Home
Economists often tout the social and economic benefits of homeownership or stable housing. According to a Bank of America survey, homeowners are happier than renters. In fact, 83% insist that they will never go back to renting. And, compared to renters, current homeowners enjoy greater satisfaction with their finances (78%) and social life (77%).
- The National Association of Realtors financed a research paper on the social benefits of homeownership. The research showed that these benefits extend to greater civic participation, improved domestic happiness, and lower community crime rates. The research concluded that a community of homeowners delivers positive results for their neighborhoods.
- HUD (Department of Housing and Urban Development) also published a University of California study on the school performance of children who live in a stable home environment. Because homeowners tend to move less often, their children feel more grounded and perform better at school.
Renting: The Positives and the Negatives
Renting Gives You Flexibility
- You may be considering a permanent stay in San Diego and want a few months (or longer) to learn about its neighborhoods, schools, and recreation opportunities.
- A job promotion may have brought you here and the next promotion may take you away again.
- You may be at a stage in your life where you’ll want a larger or smaller home in a couple of years.
- If the neighborhood changes and you want to leave, you can walk away at the end of the lease period. You can even leave sooner, provided that you pay any fees for breaking the lease.
You Have Less to Worry About When You Rent
- In practice, this does depend on your lease terms and conditions. But, generally, the landlord is responsible for all the “big problems.” If the roof needs to be replaced or if the central heating/air conditioning fails, you call the property manager to handle the matter.
- Some minor repairs may be your responsibility, but the landlord will be responsible for most major maintenance/ repair projects.
Some Renting Costs Are Lower
- Tenants begin a lease by making their first and last month’s rent payment plus a security deposit. The deposit will be returned at the end of the lease if all responsibilities have been met. You may also be required to cover the cost of background checks, attorney fees to draw up the lease, and broker fees. Compare that to the down payment and closing costs when buying the same property.
- Renter’s insurance premiums are lower than homeowner insurance premiums.
Some Negatives: Renting Isn’t All Rainbows and Unicorns
- Ultimately, you have less control when you rent. Your landlord writes the lease terms, not you.
- The landlord may sell the property, and your new landlord may have a different approach to renting. So, at the end of the lease, you may be faced with unexpected decisions to make.
- Rents in San Diego keep rising. According to Rent Jungle (July 2020), the average San Diego rent is $2167 per month and has increased 3.1% in the last six months (5.8% for one-bedroom apartments.) Increases tend to reflect both a profit incentive plus rising insurance costs, homeowner fees, and property taxes. The landlord includes these costs in monthly rents.
Financial Factors That May Affect Your Decision About Renting or Buying
- You may be starting your own business and renting may give you more liquid cash to invest in your new venture. In this case, renewing a lease may make more sense than using your liquid assets to buy a home.
- The 2017 Tax and Jobs Act doubled personal allowances and limited deductions such as the amount of property taxes that can be used to reduce income taxes. To some people, these changes removed some of the traditional reasons for owning a home.
Renting or Buying: Making the Right Decision for You
Renting versus buying is a subject covering many topics. We hope this brief discussion helps you consider the different factors from your own perspective.
Need more help to decide whether you should rent or buy in San Diego? If so, contact us. We promise you’ll have answers to your questions!