As a San Diego homeowner and self-proclaimed financial planning nerd, please allow me to share my thoughts on San Diego real estate.
Let me begin by saying:
I love getting a good deal.
That’s why I shop at Costco, put low-ball offers on used items on eBay, and scrounge Craigslist for free stuff.
I do this because I know that I have a limited amount of money. So, to make my money last, I put in a little effort to get a good deal.
And, in my opinion, buying real estate in San Diego is not a good deal!
But, do you know what is?
Renting in San Diego IS an absolutely fantastic deal!
How do I know this? Math!
The Math of Buying vs. Renting in San Diego
Let’s compare buying versus renting in San Diego to another place – like Marion, Indiana.
Why Marion, Indiana?
Because buying in Marion, Indiana is an absolutely fantastic deal – at least compared to renting.
Let’s start our analysis with San Diego.
Real estate in San Diego is expensive; a starter home is at least half a million dollars. But, you could rent that same home for a bit more than two grand a month.
|Metric/City||San Diego, CA||Marion, IN|
|Time until Rent Paid = Price||18.12||3.75|
Real estate in Marion, Indiana is cheap! And rent is cheaper in Marion than in San Diego – but not compared to the cost to buy a home.
Consider what rent and homes go for in Marion: you could buy a home in Marion with less than four years of rent.
In San Diego, it takes more than 18 years to do that!
But, I don’t want to live in Marion, Indiana!
No kidding! (And you’ve obviously been spoiled, by beautiful, sunny San Diego.)
To be clear: I’m not saying “buy your home Marion, IN.”
Buying a home ISN’T a good deal in San Diego. RENTING a home in San Diego is a good deal!
Home Ownership is Not an Investment
Allow me to completely steal this next point from Taylor. (He just didn’t mention it in his blog post about buying or renting in San Diego). What’s the next point?
Your home is NOT a great investment!
Many homeowners make the mistake of seeing (and miscalculating) their home as an investment.
To prove the point of how poor an investment in San Diego real estate is, let’s use my home as an example.
I bought my home in February 2015, for $410,000. Right now, the value of the home (averaged between Redfin & Zillow) is $560,000.
Holy Toledo! I just made $150,000, right?
Wrong! Here’s why:
Were I to sell the house today, I’d likely pay a 6% sales commission to the real estate agents.
On a $560,000 house, that’s a commission of more than $33,000. (No wonder my real estate agent keeps calling me to sell my house. They want that commission!)
Because of this $33,000+ sales commission, my profit drops from $150,000 to $116,000. But, $116,000 is still pretty good, right?
Wrong! Because costs don’t end with the sales commissions alone!
(This is why it’s important not to buy and sell your home frequently. The fees will eat you up!)
We’ve lived in the house for roughly three and a half years. That means we’ve paid three and half years of property taxes.
If you’re a homeowner, you know that property taxes aren’t cheap. After adding in three and a half years of property taxes to our cost of home ownership, our net profit is now shy of $100,000.
But $100,000 is still great, right? Right? Guys?
If renting a home is paying someone rent to live on their piece of land, then mortgage interest is the cost to rent someone else’s money.
We’ve paid roughly $30,000 in mortgage interest since we’ve owned the house. Considering that we’ve paid three and a half years worth of mortgage interest on our home, our profit is now down to just a bit over $70,000.
Maintenance & Upgrades
But the joys (#sarcasm) of homeownership don’t end there. Here are a few more expenses we’ve incurred over the three and half years we’ve suffered from homeownership:
- Paint, flooring & counter top rehab: $12,000
- Replace a fence: $700
- Air conditioning installation: $6,000
- Plumbing maintenance: $100
- Appliance maintenance: $100
- Xeriscaping the front lawn (twice, because we did it ourselves after having done it wrong the first time): $500
- Pest control: $1,840
- Failed gardening project: $200
- Asbestos remediation: $900
- Other stuff that I’m sure I’m forgetting: $100
After all that, our net profit is roughly $50,000.
And of course, this ignores other costs like new, gigantic utility bills that you usually don’t have when you rent! (Our water bill is almost $200. I’ve never had a $200 water bill – or any water bill – whenever I’ve rented.)
San Diego Real Estate versus the Stock Market
Funny how our profit of $150,000 got sliced down to $50,000 when you consider all the costs of homeownership.
Given our down payment, that means we earned about an 8.6% return since we’ve owned that home.
That’s not bad. But, without a point of comparison, that’s a meaningless figure.
So, how did the stock market do over the same period? Approximately 10.8% per year.
And if you invested in the stock market, you wouldn’t have to spend your weekends replacing fences or stamping decomposed granite into place. (Finally, here’s a resource if you really want to nerd on real estate vs stock marketing investing.)
Home Ownership is a Lifestyle Choice
Now that we’ve established that homeownership is not an investment, what is it?
It’s a lifestyle choice. Think of buying a home as one of the most expensive things you’ll ever buy – and NOT as one of the biggest investment you’ll ever make.
Thinking of buying a home as buying the oversized luxury automobile that you absolutely do not need.
• • •
This article talks about buying versus renting in San Diego. But, the takeaways don’t relate to San Diego alone. Whenever you’re in a big, expensive city, the same thing applies: rent – don’t buy a home! Of course, that only applies if you want a good deal.