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Better to Rent a Home than Buy in San Francisco

(with exceptions based on tax bracket, deductions, years you'll live there)


Better to Rent a Home than Buy in San Francisco

An apartment for rent in a San Francisco neighborhood.

B. Koh

Should I rent or should I buy? In nearly every urban hub in the US, buy. But in San Francisco, rent.

San Francisco is famous and infamous for bucking national trends of all sorts, including when it comes to real estate. Out of 100 major metropolitan areas of the country--with traditionally expensive places like New York, Los Angeles and Boston among them--only in Honolulu and San Francisco is it cheaper to rent than to buy a home, according to Trulia.

A spring 2012 report by the online real estate company points out that in Honolulu and San Francisco, long-term economic growth looks solid, and there is little physical room to build. People here (and in Honolulu) expect an increase real estate prices over time and a decent return on their investment, so they're willing to fork out more for a home. In slower-growing areas with high vacancy rates and ample land--such as Detroit and Cleveland--home prices are unlikely to rise much, and buying is a better deal than renting.

Trulia's survey, released in late March 2012, examines the rent and sales prices posted on Trulia.com from December 2011 until the end of February 2012. Figuring in costs of maintenance, insurance and taxes, it calculated the price-to-rent ratios for homes with similar features in similar neighborhoods.

The U.S. metropolitan area with the lowest price-to-rent ratio (of 3.7)--i.e., where renting a home is most expensive relative to buying--was Detroit.

Honolulu's ratio of 17 was the highest in the country. The San Francisco area came next, with a price-to-rent ratio of 15.5 (compared to 19.5 a year ago, in spring 2011). Our current vacancy rate is 5.5, according to Trulia's study. Following us were New York, NY-NJ, with a 14.5 ratio; San Jose, at 14.3 (compared to 14.8 a year ago); Orange County, CA, 13.5; and Los Angeles, 13.

Here's how Trulia interprets the price-to-rent ratios:

  • Price-to-rent ratios of 10 or less: Depending on moving and closing costs, buying could be cheaper than renting if you want to live in the home for less than 5 years.
  • Price-to-rent ratios of 15 or less: Buying is cheaper than renting, especially if you plan to live there for five years or more.
  • Price-to-rent ratios of 20 and above: It's a better deal to rent than to buy (except if you plan to live in the home for at least 15 years).
  • Price-to-rent ratios of 15-20: The value of renting and buying is similar, so the decision depends on your own tax bracket and tax deductions and how long you plan to live there. (If you can take the mortgage-interest tax deduction and plan to stay put for at least 5 years, it might be worth it to buy in San Francisco).

Within the San Francisco Bay Area, San Francisco proper has the highest price-to-rent ratio, 17.2. The Peninsula and Silicon Valley are slightly less expensive, with ratios of 14.5 for Santa Clara and 14 for San Mateo County. Alameda and Contra Costa counties, which have had more foreclosures and vacancies, have ratios of about 12 and 10.8, respectively.

Your rent vs. buy decision should also consider the size of home that you want. Trulia's study found that the price-to-rent ratio was lower for smaller homes--so buying (rather than renting) is a relatively better deal if you're in the market for a studio or one-bedroom as opposed to a mega-mansion. The ratio was 13.1 for studios and one-bedrooms in the San Francisco metro area, 14.8 for two-bedrooms, and 18.2 for three or more bedrooms.

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