On Monday I received an email from a reader who wanted to see a comparison between the monthly cost of buying a home to that of renting the same basic home. In this post I'm going to look specifically at the Plan 3 homes in the Sage tract at Quail Hill. Sage is a detached condo tract and the Plan 3 is a 3 bedroom, 2.5 bath, 1275 square foot home with an attached 2 car garage and a small private patio. These same, basically exact detached condo floorplans are also found in other villages in Irvine and in the future I may take a look at how pricing differs for the same plan across villages. Today, we'll see what it might cost to buy and rent a Sage Plan 3.
Currently, there are two Plan 3s for sale on the market:
103 Windchime at $529,000 – Listed on 1/2/2012
68 Duet at $450,000 (Short Sale) – Listed 6/20/2011
The actual closed sales for Sage Plan 3's over the last year are:
| 10/10/11 | 18 Duet | $455,000 |
| 9/29/11 | 62 Duet (REO) | $440,000 |
| 8/25/11 | 44 Duet | $449,000 |
| 8/17/11 | 201 Dewdrop (REO) | $445,000 |
| 6/23/11 | 84 Windchime | $515,000 |
| 4/19/11 | 54 Reunion (REO) | $455,000 |
Based on this data, I'm going to use a sales price of $450k. Here's my take on what the cost would be if one were to purchase at $450k and put 20% down.
| Purchase Price | $450,000 | ||
| Closing costs | $13,500 | 3% | |
| Total price | $463,500 | ||
| Down payment | $103,500 | 20% | |
| Loan Amount / Percentage Of Price | $360,000 | 80% | |
| Interest Rate / Period (months) | 4.00% | 360 | |
| Monthly | Yearly | ||
| Mortgage Payment | $1,719 | $20,624 | |
| Interest Component | $1,200 | $14,400 | |
| Property Tax | $394 | $4,725 | 1.05% |
| Special Assessments | $194 | $2,332 | 0.52% |
| Effective Tax rate | 1.57% | ||
| Insurance | $50 | $600 | |
| HOA 1 | $116 | $1,392 | |
| HOA 2 | $120 | $1,440 | |
| Cash Out | $2,593 | $31,114 | |
| Interest paid | $14,400 | ||
| Property tax | $4,725 | ||
| Total deductible | $19,125 | ||
| Tax benefit | $398 | $4,781 | 25% |
| Opportunity cost of down payment | -$173 | -$2,070 | 2% |
| Principal paid in mortgage payment | $519 | -$6,224 | |
| Total Adjustments | $745 | $8,936 | |
| Cost (Cash Out – Adjustments) | $1,848 | $22,178 |
20% down payments, low interest rates, tax benefits and the amount paid towards principal all bring the cost to about $1848/month. Please let me know if you think any of the inputs are incorrect or if you think the spreadsheet is missing something. Another tool is the NY Times Buy versus Rent calculator that takes into account many other details.
So, what is the cost to rent a Plan 3? There is one available on the market right now:
50 Duet – Available for $2450/month
Also, the last Plan 3 that was leased was 84 Windchime which was leased for $2600/month on 8/19/2011. Although these are all Sage Plan 3s, each unit is different and there are factors such as the condition of the home, the quality of upgrades, the location, etc which will all affect the price/rent. Based on the cost of owning versus that of renting a Plan 3, what would you do?
Let me know if you found this post helpful and if there are any other plans/tracts/neighborhoods that you'd like me to look into.
Great comparison.
Your logic assumes the value of your purchased asset (home) is no longer decreasing. While you may be paying $519 toward your loan balance every month, the current environment may have your home value decreasing by a similar or more amount.
In the current housing market, the 20% down payment is then only getting you the tax-deduction, along with the downside valuation risk. So someone like me views the lost tax benefits as the cost of not owning a depreciating asset.
With less than 20% down, with a higher payment and PMI monthly fee, means renting comes out further ahead in this comparison.
Agree with JasonM – if prices go down more due to downward pressure from the middle/upper end falling (upper end in Irvine still costs more to buy than rent) – then you lose money. It also assumes rents will stay the same. I just still have serious doubts that California and Irvine can sustain its lifestyle forever.
Gambling with other people’s or taxpayers’ money is still the name of the game. A FHA backed loan with 3.5% down or have the seller pay all closing cost. If the market goes up – you win. If the market goes down – you win: nothing out of pocket and free squatting. Taxpayers’ will be a smaller loser in the first case (national debt payments and inflation) and a big loser in the second case.
QH has very high rent price premium but is inconvient for driving to Univ. High School. How’s the highway noise and dust?
Thanks Zovall, that was a very interesting article.
Per highway noise/dust – these houses are further from the 405 than the Quail Meadows apartment I rented (bathroom window opened onto the 405 – our back wall was part of the soundwall). You could hear the freeway there, and had to close the bathroom door at night. Dust wasn’t bad though. Further up Quail Hill was a lot better of course noisewise though. Even walking around the apartment complex wasn’t that noisy – the soundwall units mostly blocked it out.
Pretty interesting – follow link as it’s all tables so it doesn’t paste well
Irvine Economic Indicators
http://www.cityofirvine.org/about/econdev/irvine_economic_indicators.asp
I wonder why the housing appreciation data only goes to 2008.
Nice breakdown… I’d like to see more of these in any Irvine neighborhood.
The buy/rent break in QH seems to be at the detached condo level because the buy prices for that product are low yet rentals in that area are still high.
Even some SFR rentals in QH are $4-5k a month which could be break even for the $1mil homes with a larger down payment.
Thanks Zovall.
I agree about the input of principle paid. That assumes zero decline in prices and transaction costs for selling. If you are going to assume zero, then you should factor in the first X years of “principle reduction” is really paying for the re-litters 6% fee when you sell.
that means that for the first 4 years, your ‘real cost’ is $2600/month, no?
Zovall:
Could you do cap rate if one were to purchase with all cash and rent it out?
I got 4.06%. Please confirm.
George
Hi George,
Using the inputs above and a 5% vacancy rate plus ~$70/month for repairs/utilities, I get a 3.69% cap rate if the rent is $2450 and 4.07% if the rent is $2600.
Thanks for the feedback all! There is definitely the possibility for prices to go down further in which case it would be advantageous to rent.
A lot of the factors brought up depend on individual situations (how much you put down, what rate can you get given your credit profile, what the tax benefit is in your situation, how long do you keep the home, etc) and what assumptions you make about the future (do prices go up, down or stay the same; what about rents). The NY Times link I posted seems to allow you to adjust most of those.
An all cash purchase assuming price appreciation would show one set of numbers. A zero down purchase assuming declining property values might should another extreme. What assumptions would you recommend for performing this type of analysis?
The link to Irvine Economic Indicators shows University of California Irvine with 14,700 employees; this is a stunning number, I live in Bellingham WA, 98225, where Western Washington University employs 2,200.
There is a global credit and banking collapse coming very soon, stemming from the European Sovereing Debt Crisis, and most all of those University jobs are going to be amoung the first to go.
Here in Bellingham, the Universtiy is what saved the city from decay after Gerogia Pacific closed its pulp, paper and tissue mill, as realtors bought up properties as they came on the market; and rented them out at $400 a room plus $100 for utilities. Only 28% of the students graduate, so there is a flood of new renters every year; these buy all kinds of things which keeps employment high at Krogers and Target.
The other thing that helped Bellingham real estate was all the Boeing retirees who moved north from Seattle and bought and fixed up homes, buying supplies from Home Depot and Lowes. And then there was a flood of money associated from the staging of the Olympics in British Columbia.
theyenguy: I was also stunned when I learned how many were employed at UCI, having said that, it is also a leading Medical Facility with some of the top Specialists in the US and of course, it brings a lot of Students to the area that spend money in the economy ie: Pizza and Beer 🙂
Here’s a list of the top 10 Employers in Irvine:
1.University of California, Irvine 14,200
2.Irvine Company 3,500
3.Irvine Unified School District 2,473
4.Verizon Wireless Corporate 2,108
5.Broadcom
6.St. John Knits
7.Allergan
8.Edwards Lifesciences
9.Parker Hannifin
10.Capital Group Companies
I would love to know what percentage of the employees of the above companies actually earn enough to buy or even rent in Irvine, I would suspect a very small amount. Hence the gridlock on the 91 freeway every Day. Just because Irvine has some major employers it doesn’t mean it benefits the Irvine economy or Irvine itself.
Or am I missing something?
I think Broadcom is a major employer. 90% of its employees are immigrants i.e. engineers. They all make very good money. 6 figure most of them. Those are the guys who can buy properties.