Buying vs Renting in LA in 2018
The obligatory question that the majority of renters are faced every year is whether or not they should rent or buy a home. Excessive 30 year home mortgages have been a thing of the past. Generations now are not interested in taking on such a large debt so early in their lives. Add to that the fact that home rentals have been a popular option for millennials and baby boomer generations as they are not forced to be planted in a single location all the time.
So, what should you do? Should you continue renting in one of the hottest real estate markets? Or take the plunge? Let’s take a look.
Long Term Rent vs Purchasing Prices
What many renters and buyers need to consider is owning a home for the long term. Zillow Research provides a great tool for this, it is called the “breakeven horizon” which is the number of years buying is more financially advantageous than renting. For the city of Los Angeles, the breakeven horizon is 3.7.
This means that in 3.7 years, a renter would spend approximately $128,760 on rent. If you are looking to purchase a home in Los Angeles for $650,000 with a down payment of 20 percent at $130,000, it would take 3.7 years for that initial down payment on the purchase to equal the money spent on rent.
The Reality of Closing Costs
Closing costs in the LA real estate market have been exceedingly high. You will need to have your credit checked, lenders will charge a loan origination fee for processing loan paperwork and there may be attorney’s fees. In addition to all of that you will also incur inspection costs, appraisal fees, survey fees, title insurance and title search fees. But that’s not all, there are also: pest inspection fees, recording fees (paid to the county to record your deed) and underwriting fees paid to the lender to evaluate your loan application – all of which fall under the heading of closing costs. These usually total approximately 2.5 to 5 percent of the purchase price of the property.
Property Taxes
Just like everything else your newly purchased home will be taxed. This cannot be avoided.
The unfortunate reality of this is that these many hidden costs of buying a home add up – to a lot of money. If you and your spouse are not financially comfortable in taking on this debt, then renting a home is a great solution. Renting a home requires far less paperwork and headache – as long as your landlord is professional and timely.
At the same time, if you are comfortable taking on that debt and you are sure of where you will want to be in almost 4 years time then buying a home can be a financially sound decision.