Welcome to San Diego Blog | November 29, 2011

Rent vs. Own

Downtown San Diego

The proposition of Renting vs. Owning real property in Downtown San Diego is a conversation that comes up on a consistent basis.

Does it make more sense to Rent or Own a Downtown San Diego Condo in 2011?

With the demand for rental properties in Downtown at an all-time high, and the discounted prices of Downtown Condos for sale, the consideration of purchasing a Downtown San Diego Condo can make real sense.

Of course, there are a few variables that factor into this equation, but if you are contemplating the idea of moving Downtown, and you have a monthly budget between $1500-$3,000 per month, you may fall into the category of consideration.

Properties for Rent- Downtown San Diego

As of 11/28/2011, there are exactly 40 properties listed for rent within the CCDC Downtown Boundaries.

The following is a breakdown of  Non-Furnished Rental Properties in Downtown San Diego:

  •  Studios | Qty: 4 | Size Range: 628-593 Sq Ft | Monthly Rent: $1,195- $1,675
  •  1 Bedrooms | Qty: 10 | Size Range: 483-593 Sq Ft | Monthly Rent: $1,525- $2,395
  • 2 Bedrooms | Qty: 22 | Size Range: 1126-1545 Sq Ft | Monthly Rent: $1,900- $15,000
  • 3 Bedrooms | Qty: 1 | Size Range: 2,700 Sq Ft | Monthly Rent: $2,700
  • Lofts | Qty: 3 | Size Range: 1,390-2,033 Sq Ft | Monthly Rent: $2,800-$5,200

Downtown Economic Rent Summary                            

  • The least expensive rental available in all of Downtown is $1,195 per month.
  • The average 1 bedroom rental is approximately 777 sq ft, yielding about $1,888 per month.
  • The average 2 bedroom rental is approximately 1,294 sq ft, yeilding approximately $3,080 per month.
  • 7 of the 2 bedroom rental properties are less than $2,500 per month.

Owning vs. Renting-  Downtown San Diego

In searching for comparable properties for sale to the rental properties above, I created a search for1 Bedroom Condos for Sale in Downtown San Diego  between 700-800 sq ft.  The search generated 9 properties, 2 of which I omitted because the monthly HOA dues greatly offset the comparison.

1 Bedrooms Condos for Sale- Downtown San Diego

I selected 3 of the 7 properties to show a broad range in breaking down the numbers:

Condo with financing:     Union Sq 1402   |  Palermo 404   |  Breeza #105
Purchase Price:                    $185,000    |      $235,000    |    $325,000
Down Payment 25%:            $46,250     |      $58,750       |    $81,250
Mortgage Amount:             $138,750       |     $176,250      |   $243,750
Mtg Payment 4.25%:            $683      |      $1,734      |     $1,198
Property Taxes:                         $174     |        $221     |     $306
Monthly HOA dues:                   $370     |      $265     |     $561
HO-6 insurance:                            $19     |     $24     |    $34
Total Monthly Obligation:     $1,246    |   $1,378  |  $2,100  
Estimated Rent:                           $1,600   |   $1,800     |    $2,000
Own vs. Rent Variance:     +$354  |   +$422   |  -$100

Note:  The numbers shown in the breakdown are fairly conservative, and of course, down payment amount and mortgage interest rate can greatly affect the outcome of the variance reflected above.  Buyer must also note that there are significant tax benefits to home ownership that are not reflected in the calculations above.

  These three selected properties tell the tale of 1 bedroom properties for sale in buildings that are quality construction, with low to moderate HOA Dues, in desirable locations.  

The benefits of Buying a Downtown Condo can STRONGLY Out-Weigh the benefits of Renting!

As you can see, 2 of the 3 selected properties are actually cheaper to buy than to rent!  Often times, the rent vs. own variance can be within a few hundred dollars per month; in such a cases, it really makes sense to purchase a 1 bedroom based on these  scenarios.    

2 Bedroom Condos for Sale- Downtown San Diego

Here I created a search for 2 Bedroom Condos Under $400,000 that generated 17 total listings.

Of the listings that were available, I then selected a range of 3  quality properties with low to moderate monthly HOA dues, and compared them with the 2 bedroom rentals above.   Here are the results:

Condo with financing:    Pacific Terrace  |   Union Sq   |     M2i
Purchase Price:                      $315,000    |   $354,900   |    $382,400
Down Payment 25%:             $78,750       |   $88,725      |    $95,600
Mortgage Amount:               $236,250      |  $266,175     |    $286,800
Mtg Payment 4.25%:            $1,163    |  $1,309       |    $1,412
Property Taxes:                         $297          |    $334           |      $360
Monthly HOA dues:                 $400          |    $405           |       $438
HO-6 insurance:                       $33            |      $37            |       $40
Total Monthly Obligation   $1,892      |  $2,086       |     $2,250
Estimated Rent                        $2,200       |   $2,200        |      $2,400

Own vs. Rent Variance:  +308   |  +$114    |   +$150

In Summary:  2 Bedroom floorplans under $400,000 make a strong Rent vs.Buy debate, particualrly when HOA dues are less than $400 per month!

  Again, without calculating any tax benefits of homeownership, the selected properties fall well below what downtown 2 bedroom rentals are commanding.  Throw in the consideration of subleasing one of the bedrooms @ $1,000 per month and the idea gets very interesting…

Apparently, this is no secret as 75% of the sales this year have been in the aforementioned segment of the market (Below $450,000).  There is is such high demand for quality properties under $450,000 ,that the inventory has now shrunk to approximately 1.4 months supply.  There are still “good deals” out there; however, they are becoming more difficult to find.

Life in “America’s Finest City” is great.  Owning a piece of it can be surprisingly affordable. 

My suggestion:  Don’t wait!!!

Interested in finding out more details?  Give us a call:  (858) 531-8785

Image Courtesey of Aaron Goulding Photography www.jagmediaproductions.com

 


Written by: admin

Categories: Buyers, Cortez Hill Real Estate, Downtown San Diego, East Village, East Village Real Estate, Gaslamp, Gaslamp Real Estate, Little Italy, Little Italy Real Estate, lofts, Marina District, Real Estate Investment

  1. Your rent vs. buy analysis is missing several factors. You have omitted maintenance that an owner pays, but not a renter. Expect around 1% of the cost of the condo per year. Also you ignore depreciation, as current condo values in downtown San Diego are dropping. That is not a cost for a renter. And finally you ignore transaction costs. In order for a renter to move, he only has to pack and go. An owner had to list and sell in a sick market and expect to pay 10% of the sales prices on commissions and closing costs. All told, renting is far cheaper.

  2. Wilson- Thank you for taking the time to read my article. We appreciate your feedback and would further like to explore this topic with you. It looks as if additional information about tax benefits of home ownership, as well as condo market values specific to Downtown would be an important component of the overall equation.

    Note: The downtown condo market is vastly different than other areas in San Diego county, and I highly encourage you to learn more about values specific to the category of condos that I complied in the article. To read more about current downtown condo values click the following link: http://www.welcometosandiego.com/2011/11/downtown-market-velocity/

    To keep the article from going on too long, I refrained from explaining the additional tax benefits of owning vs. renting. This number can be significant, and I can create an example

    Scenario- Joe Smith is currently renting a modest 1 bedroom apartment downtown for $1,700 per month. He is a single male, and his anual income is approximately $75,000. Because he has no children or dependents, he has minimal tax write-offs placing him into a tax bracket of approximately 28%.

    Based on these numbers, he would pay approximately $21,000 per year in taxes. The proposition of renting does not allow one to write off monthly rent ($1,750).

    Owning a condo would give the same buyer the opportunity to lower his anual tax base significantly. Here is how it works:

    Joe Smith decides to purchase a $250,000 1 bedroom with $350 monthly HOA dues.

    He put 20% down (50,000) with a loan amount of $200,000. His approximate P&I payment amortized over 30 years would be approximately $1,013 per month. His HOA dues are $350 per month, HO6 condo insurance @ $25 per month, and property tax @ 1.25% of purchase price is $3,125/12 months = $260.42. Adding these numbers together we would have a monthly payment of $1,648 per month.

    Now, you mentioned Closing Cost of the transaction (which is a 1 time deductable expense)let’s say is $5,000. He now has a 1 time deduction of $5,000, his deductable anual property tax @ $3,125, as well as his interest payment (4.5% of Loan amount of $200,000= $9,000/ year) which can now be deducted from Joe’s total anual income of $75,000. The total first year deduction would be $17,125, subtracted from his anual income total = $57,875.

    Now his taxible income base would be significantly lower, @ the same 28% bracket = $16,197, compared to his original $21,000 amount. This is a savings of $4,803.40 his first year, broken down over 12 months = $400.28 per month additional savings.

    Looking at these numbers, you can now compare to what he was paying in rent at $1,700 per month compared to a monthly mortgage payment of $1,170.72/ month for the first year.)

    The second year going forward he would not have the $5,000 closing cost deduction so the numbers would adjust to give him an approximate taxible income of $62,875 =$17,605 per year. Now subtracting the difference from his original taxes of $21,200 = $3,395. Over 12 months is approximately $283 tax benefit per month to own as opposed to renting. This would then give him a monthly payment of $1,365 as opposed to renting at $1,700 per month.

    It is absolutely clear that there are real benefits in saving $335 per month.

    As far as incurred costs to the buyer for listing the home, there are no incurred costs. The seller is responsible for those fees which in the state of California are about 6%.

    You also mentioned maintenance costs. These are included in monthly HOA fees (Structural, plumbing, mechanical, roof, etc). There may be some minor repair costs here and there, but we are talking about fairly new properties that have been built in 2005 or newer, so expectations of internal repairs are nominal.

    I would be more than happy to further discuss with you the benefits to owning a condo in downtown San Diego, as our market is truly a unique niche’. Feel free to give me a call anytime: 858 531-8785

    I hope you found this example helpful.

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