To Buy or To Rent in Silicon Valley

 

Silicon Valley is one of the hottest real estate markets in the country, and for many reasons. The weather is incredible, the school systems are excellent, the unemployment figure is below the state’s average, and the cultural arts/music/educational offerings are off the charts!

Choosing Silicon Valley as your home comes easy, but deciding whether renting or buying makes more financial sense is a tougher nut to crack.  These are several factors to consider in making your decision: 

  • Your overall down payment for a home (20% is fairly standard here in Silicon Valley)
  • Amount to be financed and current interest rate (interest rates still remain low and the average loan term is 30 years)
  • Property taxes (on average 1.25% of the purchase price, annually)
  • Homeowners/Hazard insurance (on average $996/year)
  • Homeowners Association fees (will vary by community, however on average $300/month)
  • Tax benefits and possible additional savings associated with homeownership
  • Timing of your purchase and how it fits into your long-term goals

To begin estimating your cost to purchase a home, you can use a simple Mortgage Calculator. Let’s, as an example, calculate mortgage payments for a home in San Mateo County listed at the County’s median price of $1,100,000 using MortgageCalculator.org. With a 20% down payment, the average monthly mortgage payment for a 30-year fixed interest loan at 3.3% interest rate is approximately $5,050. This includes the principal, interest, property taxes, and insurance. After subtracting the tax benefits of homeownership (taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt, or $500,000 if married and filing separately), the total monthly cost of buying this home is $4,050. 

Online Rent Estimate tools like Zilpy provide you with an estimated rent cost for a property by entering its address. This $1,100,000 house, for example, would rent at a median of $5,000/month. Note that online rent estimates are not always accurate; getting a Realtor’s opinion is recommended to get correct comparable rent prices specific to the property and neighborhood you are interested in. 

Like in most things, timing is a key element in determining the possibilities when it comes to home ownership. To decide whether to buy or to rent you will want to know when do the buying costs of the home become less than, or equal, to the renting costs of the home; this is known as the Breakeven Horizon. 

Zillow’s Breakeven Horizon Calculator is a helpful tool to find out, not only the horizon, but also the total costs and gains of buying and renting over time. To do so, it takes into account the price-to-rent ratio, the expected home value appreciation, the expected rental inflation, and the rate of return on non-housing investments. According to Zillow, in this example, the Breakeven Horizon is approximately 4 years.

The total buying cost after 4 years is approximately $486,256. The total renting cost is approximately $273,818. After 4 years, when buying, you will have approximately $521,000 in equity available upon sale. When renting and investing your down payment money (plus other saved costs) at a 6% return rate, you will have earned approximately $51,038; for an estimated total of $263,477 (ROI plus the saved purchase related costs and downpayment).  

Bottom Line
In this particular example and based on costs, equity, and investment potential, if you were to live in this house for more than 4 years, it is financially a better choice to buy than to rent. 

No matter what you decide regarding home ownership in Silicon Valley based upon your mortgage and timing calculations, this Valley is one of the most beautiful, stimulating, gratifying places to live in the country; by making this your home you’ve already made the right choice!