For the next three articles, I am going to explain different ways to determine a value for not just the price of the home, but whether or not to buy. The first to explore today is buying versus renting.
Currently, in Los Angeles, market rents are equal to or higher than the cost of home ownership. Why is this important? Because, assuming you get a fixed rate mortgage, year two comes around and while rents climb, your housing cost stays put. I go into more detail on that concept in my past article, Owning versus Renting: It’s Easy Math.
Let’s go through an example using our listing on 534 N. Sierra Bonita Avenue, in the ever popular Melrose District area of Los Angeles. The current list price is $2,745,000. Based on new construction rentals in the area, this home most likely would be in the $15,000/month range, unfurnished. Now, let’s take a look at numbers to own this home (assuming 20% down):
| Mortgage at 4% APR | $10,484/month |
| Taxes (estimated 1.25% of list price) | $2,859.38/month |
| Insurance (estimated) | $150/month |
| Total | $13,493.38/month |
So, in this case, the math makes sense to buy rather than rent. The same principle can apply to condos as well. You just need to add in the Homeowner Association Dues. Take a typical two bedroom/two bathroom condo in Studio City at $500,000 with HOA dues of $400/month. Rents in this area are pushing the $3,000/month range for a place like this.
| Mortgage at 4% APR | $1,909.66/month |
| Taxes (estimated at 1.25% of list price) | $520.83/month |
| Insurance (estimated) | $50/month |
| HOA Dues | $400/month |
| Total | $2,880.49/month |
The numbers don’t lie. However, markets change, so it is good to keep an eye out and run the numbers. Keep in mind you have to have a roof over your head and unless you live with your parents or somehow for free, you only have two options. So make the right one.
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