The Argument Against Renting

INFLATION. PERIOD.

This is such debated topic when home prices are through the roof (no pun intended). I get the perspective of renting a place while the market cools. But my issue with this is that the market may not cool. It may go up or stay the same. Secondly, rent paid is money you'll NEVER get back. And rents are expected to increase 4-5% each year. Mortgage paid, if you hold on the property, is money you'll get back in the form of equity when you sell at the right time. And a 30 year fixed loan during inflation times? No brainer.

But did you know that homeowners have on average at least 50,000 in wealth equity in Los Angeles, while renters have about $600.00?

And here's the other kicker. Anyone who has bought a detached house in LA in the past 12 years is sitting on at least 20% equity. This is the average percentage of increased value since COVID. Crazy.

And don't forget, you don't have to be responsible for the entire mortgage. There's also the hybrid argument. You can rent a place, but still buy an investment property to rent out to someone else who will pay for half your mortgage!

REMEMBER, there's never a bad time to buy real estate, only a bad time to sell.

Good News for Investors

Those who own multiple homes and investment properties have some good news coming. With housing prices high and more or less remaining high (even with micro ups and downs), more people will remain renters. Many who have thought of buying will continue to rent longer.  And more renters means more demand for rental housing. Landlords can expect to benefit from this.

A client of mine was planning on selling to buy a larger home. I ran some numbers and it turns out she would have pretty good cash flow on her current home since rents have gone up a lot in her neighborhood. And her property isn't under rent control laws. Her lender has increased her borrowing amount based on this potential income. She is now going to keep this property, rent it out, and buy her larger dream home. This is when real estate gets fun.

AirBnB Causing High Rents?

More and more articles are coming out stating that AirBnB is contributing to the high rents. It's hard to say if this is true across the board, but there seems to be some merit it it. What it comes down to is that Landlords are laughing and renters are getting salt poured on wounds. Activists in LA and NY are taking measures to fight AirBnB.

According to the NY Times:

In Manhattan’s Hell’s Kitchen and Chelsea neighborhoods and the Midtown Business District, which accounted for about 11 percent of all Airbnb listings in New York City in 2016, average monthly rents increased by $398 between 2009 and 2016, of which $86, or 21.6 percent, was a result of Airbnb’s presence, the report said. In Greenpoint and Williamsburg in Brooklyn, the study said, rents went up 18.6 percent in those years because of Airbnb listings.

Airbnb makes it easy to rent apartments to tourists, taking units off the market for full-time residents, the report said.

“For years, New Yorkers have felt the burden of rents that go nowhere but up, and Airbnb is one reason why,” the city comptroller, Scott M. Stringer, said in an interview. “It’s just simply supply and demand. Fewer apartments to rent means higher prices, and that’s the Airbnb effect.”

According to the Wall Street Journal:

Researchers looked at rents and home prices in the 100 largest metro areas in the U.S. between 2012 and 2016. They found that a 10% increase in Airbnb listings leads to a 0.39% increase in rents and a 0.64% increase in house prices.

From the LA Times:

The rental crisis is real: Far too few units are available, and residential rents are far too high. Airbnb does contribute to the problem. Landlords remove rental units from the long-term market because they can make more money from short-term Airbnb rentals. Reduced supply, coupled with constant demand, means higher prices.

What really matters, however, is not whether Airbnb drives up rents — it's by how much. And the truth is that we don't know the magnitude of the problem, because it's been insufficiently studied.

Airbnb critics often cite a 2016 article in the Harvard Law and Policy Review that claims the service has caused rent increases approaching 3% in some Los Angeles neighborhoods. 

As Long as Inventory is Low, Prices High, and Yet People Are Still Buying

Interest rates are now up to 4.4% for a 30-year fixed--it was 3.95% just a few months ago. Normally, this causes some slowdown. But things aren't normal. Inventory is unusually low. And the increase in the interest rate wasn't enough to scare off buyers.

This means that prices are still high. So why are people still buying? Because homeownership can be pretty lucrative if you can wait out low cycles. The average home owner has a net worth of $195,400 while the average renter has an average net worth of $5,400.

Plus you aren't subject to the pains of having to deal with annual rent increases. Or awful landlords. And you can make changes to your property. You can AirBnB your place if it's a single family home. You can add roommates. And you can deduct your mortgage interest and property taxes. And best of all, if you've done a 30-year fixed loan, your monthly "rent" won't change for 30 years!

If Prices Are So High, Why Aren't People Selling?

Sure there's a lot of equity out there. Owners can make a killing. Then why are so few owners not selling?

Prices are too high to rent. If they sell, the rents are way higher than their current fixed mortgage.

Prices are too high to buy. If they sell, it's hard to upgrade these days unless you move to a different location. Most people might make a lateral move or even downsize, but it's hard to upgrade.

At the end of the day, it's better to own.

Sounds Crazy, But Renting More Affordable Than Buying in LA

The rent increases in LA have been unreal. For $2500/mo, you might find a 650sf studio in Downtown without parking.

If you think Renters have it bad, Buyers actually have it worse. The most recent Home Price Index from CoreLogic showed home prices increased 7% from November 2016 to November 2017.

"Renting is now more affordable than buying a home in the nation’s top 14 most populated counties including Los Angeles County, California; Cook County, Chicago area, Illinois; Harris County, Houston area, Texas; Maricopa County, Phoenix area, Arizona; and San Diego County, California."

Rent prices are also continuing to rise, though, so ultimately, it's still more ideal to own and get into a 30-year fixed mortgage rather than dealing with the 4-6% rent rises LA has been experiencing every year. 

"Not Paying Some A**hole's Mortgage"

I ask all my buyer clients why they've decided to buy. A client of mine who just bought a small house in NELA had told me it was because he was sick of paying rent to a Landlord who was a piece of work. After the relationship had continued to get worse and his non-rent-control house increased to $3200/mo, my client decided that was it. No more paying someone else's mortgage.

He ended up buying a house where his PITI (principal, interest, taxes & insurance) equated to about $3350/mo. For $150 more per month, he is now paying himself to own a place in which he can paint, remodel, add onto, landscape, and park 24/7. 

With prices what they are currently, it's difficult to own for cheaper than you rent. We aren't in 2011 anymore. But sometimes the peace of mind and pride of ownership is worth every penny. 

Plus he gets to write off a mortgage interest and property taxes, and rent out the detached studio as an AirBnb whenever he wants. And he's still close enough to the neighborhoods he frequents, which are DTLA, Pasadena Glendale & Atwater. 

Minimum Salary Around $100k to Afford a Home in LA

Using the National Association of Realtors’ data on housing affordability, Business Insider gathered a list of the US metro areas where the minimum salary required to qualify for a mortgage, after a 20 percent down payment, is highest. What they found was that the salary needed to qualify in the top-five metro areas — four of which are located in California — exceeds $100,000.

Here’s what it you need to be earning to buy in New York, Miami and Los Angeles.

The New York-Newark-Jersey City, New York/New Jersey/Pennsylvania metro areas ranked 13th overall in BI’s list. With a population of 20,182,305 and a median home cost of $414,000, the salary you need to buy is $76,613.

The Miami-Fort Lauderdale-West Palm Beach, Florida, metro area ranked down at number 20. With a much lower population of 6,012,331 and median home cost of $335,000 the salary a sunshine state buyer needs is $61,994.

Meanwhile in Los Angles-Long Beach-Glendale, California weighed in at number seven. The population is 10,170,292 and the median home cost was $514,000. That means that the salary you’ll needed to buy is $95,156.

If you were wondering about what metro area took the top spot, well, that would be San Jose-Sunnyvale-Santa Clara, California. The salary needed to buy there was calculated to be $218,996. 

TRD

Condo Prices Stay Stronger Than SFR Prices

As housing prices continue to climb, condo pricing is among the strongest, and where are the highest concentration of condos? DTLA of course. Condo prices in Downtown LA rose 2.4 percent in the first three months of this year, according to Douglas Elliman.

From January to March, condos in DTLA sold for a median price of $599,000, up from $585,000 in the same time period last year. And, the average DTLA condo spent 67 days on the market—a drop from 82 days in the first quarter of 2016.

There's a huge reason as to why. People are getting priced out of the SFR market, and condos often have a more affordable price point. For instance, a 1 bed condo in WEHO with nice amenities could cost you about $650k, while a 2+1 home will cost about 1.1k. The discrepancy is price is huge and you're not always getting a whole lot more for that upcharge.

In DTLA, you can snag a condo with nice views and parking and amenities like a pool, gym, lounge, concierge, for about $700k. You'd have to plunk down about $850 to get a semi-decent remodeled 2+2 in Highland Park, and you may not even have a garage.

The second reason is the upkeep. Condos are relatively headache free--just maintain your AC unit and keep the plumbing in good shape. While a house needs regular maintenance for the roof, basement, gutters, landscaping, etc, and this isn't for everyone. 

Year End Stats for DTLA

Since the crash in 2008, the market has been steadily increasing in L.A. and downtown in particular. There's a lot of speculation about what's to come in 2017. Interest rates are supposed to be lowered, causing more demand for houses and as a result, prices to continue going up. 

So will it be a good time to sell? 

- Yes. 

Should I rent out my condo?

- If you're planning on renting out your unit, then expect a lot of competition from the many rentals that will be on the market so your place may sit longer than 30 days on the market before getting rented. 

Will it be a good time to buy? 

- If you're planning on holding for 3-5 years then yes. 

- If you're planning on flipping in 1-2 years, then no.

Year        Average Sold Price/SF

2016        $636/SF  

2015        $614/SF

2014        $554/SF

2013        $494/SF

2012        $384/SF

Buying is Cheaper Than Renting in LA & SF

According to a recent study by C.A.R., "San Francisco and Los Angeles are two of the least affordable rental markets." DTLA is a prime example where a studio easily rents for $2000/mo and 1 bedrooms average around $2500/mo. If you're able to save for a $15% downpayment, then you might consider buying instead of renting because of the benefits of the year-over-year equity value increases and mortgage interest write-offs. Ask your accountant what makes sense and maybe 2015 will be the year to buy...