|Zillow pegs the "break even" at 2.3 years nationally.|
Let's look at one of my favorite examples, the North Redondo Beach 3 on a lot townhouse.
Assuming a hypothetical sales price of $725,000, well that's not so hypothetical considering that I recently sold 2417 Grant Unit B for exactly that price, here's an example of 20% down since it is the most straight forward.
At 20% down, the mortgage amount is $580,000. At a 4% interest rate that is a principle and interest payment of $2770 per month. Add to that $125 a month for HOA dues and approximately $750 for property taxes and we're at $3645 before any tax deductions. The same unit might rent for $3200-$3500 per month so without purporting to be an accountant I think I can go out on a limb and state that this is at least a break even proposition with an upside.
The upside is that once the rent is paid, that money is gone forever. If you own, you may recoup a large part of it and possibly some profit if you own long enough.
For the sake of this analysis we'll look at prices appreciating 3% a year which is fairly conservative considering what we've been seeing in North Redondo Beach of late.
After 3 years that $725,000 home may well be worth $800K (well $792K mathematically). During the same time period at $3000 per month rent you would have paid $108,000 in rent. So, even before the tax break your net difference is $41K. If you divide the same $41K by 36 months of occupancy, your effective monthly cost is more like $1138 per month. And that assumes your rent was not increased or higher.
But considering that you have to live somewhere, this may be somewhat of a false equivalency.
Let's look at the cost of acquisition which is somewhat easier to quantify.
Using the same example of the $725K purchase price, let's say that your closing costs were $10,000 (which is high for the sake of the example). That would mean that in addition to the $145,000 down payment, your true settlement charges were $155,000. (Escrow fees, lender title insurance, appraisal, inspection, loan origination, etc). At 3% appreciation, the closing costs are recouped after six months (on paper at least).
Let me wrap this up with two thoughts.
First, Zillow's economists peg the time frame for "break even" in LA County right now at 2.4 years although I'm not quite sure how they are calculating that. So, at least according to Zillow, if you intend to be in the same home for longer than 2.4 years best to buy. FYI, the "normal" time frame is 4-5 years for "break even".
Lastly, while there's times in our life when we all are renters, and there are many valid reasons to rent rather than own, for the most part renting is a much better deal for the landlord than the person paying rent. Which is why good income properties are so hard to come by. But that's a while other blog post for another time.