It’s the age old question: Should I rent or buy? Ask landlords and they will say you should rent, so you can continue to put money in their pockets. Ask real estate agents and they will say you should buy, so they can earn a commission by selling you the home. With home prices and rents in San Diego continuing to increase, more and more people are asking themselves this question. The unbiased answer to that question is: it depends on your situation.
For example, if you are planning a career change that will require your to move to another location or have a job that requires you to transfer to a different location every few years, buying may not be in your best interest since you will have costs associated with maintaining a home and then selling it when you move. If you decide you want to hold onto the property even after a move, you will need to consider the costs of managing it as a rental.
If you plan on staying long-term in an area, you will want to compare current and future rent payments (rents in San Diego have typically increased 5 – 8% per year) with a fixed mortgage payment, including property taxes and maintenance costs among other factors, to determine if it’s best to rent or buy. Luckily, you do not have to do the math on your own. There are quite a few rent vs. buy calculators available online. The best calculators we’ve found take the area you live in, or want to live in, into account for more localized assumptions. Here are a few calculators we like:
Zillow Rent vs. Buy Calculator – Includes a localization feature and takes into account other factors such as maintenance costs, rates of investment, tax status, home value forecast, among others, which are all adjustable. This calculator also lets you know how long you would have to own the home to break even with the costs associated with buying it.
Bankrate Buy or Rent Your Next Home – If you don’t like dealing with a bunch of numbers, you can use Bankrate’s buy vs. rent tool which walks you through some simple questions and factors to determine if you should buy or rent.
Smart Asset Rent vs. Buy Calculator – Takes into consideration your location, annual income, and other assumptions and gives you a very detailed break-down of your scenario with extensive explanation for the methodology used to determine whether it’s better to rent or buy.
In general, what you will find with these calculators is that the longer you plan to stay in a place, the more it makes sense to buy instead of rent. This is because you will build equity over time in a home you buy vs. paying higher and higher rent each year. No rent vs. buy calculator will take into account potential downturns in the real estate market which could cause your home to lose value/equity because these are not easy to predict and the assumption is buying makes sense if you plan on staying long-term, which would smooth out the effects of any potential downturns. As to whether it’s the right time to buy, that’s a question we’ll address in another post.