To Rent or Not to Rent? The Great South Bay Home Question

To rent or not to rent? This is by far the most prominent question I get asked today.

Homeownership is still top of mind for our clients along with the belief that over the long term, owning real estate is a safe and reliable investment.

All that said, surging interest rates have significantly eroded purchasing power leaving many to wonder if renting is the right move in hopes that real estate might become a little more affordable in the future.

There are few catalysts in the short term to push prices higher and it seems as if real estate headwinds get stronger each week.

While I do not have a crystal ball of what will happen next, the best advice I can offer to clients in times of uncertainty, in real estate and other markets, is to run the numbers.

My answer is basic and perhaps too simple but I do find that clients typically fail to run the fundamental numbers to help make decisions around buying and selling real estate. While it will not answer every question for you, it can help create some clarity over complex investment decisions and soothe the emotional swings when it comes to homeownership.

This week I want to run a very simplistic set of numbers to lay out options. You can use these as a buyer or seller to assist in how you approach this quickly shifting home market.

Lunada Bay Rent vs. Own Numbers

Palos Verdes Estates had one of the best runs of any South Bay city during the two-year Coronavirus crazed home market.

Lunada Bay was a huge beneficiary of this home appreciation run, and as a result of rising prices and surging interest rates, affordability has taken a huge hit. Let’s see the costs of renting versus owning by first establishing rental rates and then calculating homeownership costs.

Below is an example of typical Lunada Bay starter rental.

2100 Chelsea Road

• 3-beds, 2-baths, 1,961 sq. ft.
• Leased: $7,500 per month

If you want a premier location of lower Lunada Bay, a great comparable is 2100 Chelsea Road that recently rented at $7,500 per month which is on the higher end of 3-bed options thanks to some great staging, paint, and smart upgrades to an older home.

Now let’s explore a recent sale on Chelsea Road for comparative purposes.

2325 Chelsea Road

• 3-beds, 2-baths, 2,225 sq. ft.
• Sold: $2,292,900

We will use this comp as a datapoint for a purchase price at almost $2.3 million when the market was just starting its shift and interest rates were rising (but certainly much lower than they are today).

That leads me to an excellent example that is not only for sale, but also for lease.

2808 Via Pacheco

• 3-beds, 3-baths, 2,205 sq. ft.
• Asking Rent: $7,800 per month

OR

• Asking Price: $2,681,000

If you study location, size, and condition – you can see why they are asking slight premiums to our rental comp and sales comp. Now we all figure there is likely some negotiating room on both asking prices, so let’s assume $7,500 per month and $2,500,000 price with 20% down for round numbers.

I am going to take a 6% interest rate for today’s mortgage; and take a 3% interest rate for a year ago and 10% lower on price.

• $14,500 per month own today
• $7,500 per month rent today
• $10,000 per month own a year ago

You can see how significantly the numbers have changed in just one short year.

Some individuals may choose to still buy, while others may believe renting is the choice. It all depends one’s unique position, but wow, the raw numbers really help to clearly define how your decisions might be affected by the market and change in borrowing costs.

Tree Section Rent vs. Own Numbers

Now let’s rattle offer another set of rental and sales comps in Manhattan Beach’s Tree Section which also did exceptionally well during the Coronavirus crazed housing market.

653 31^st Street

• 4-beds, 4-baths, 3,503 sq. ft.
• Leased: $13,000 per month

3301 Walnut Avenue

• 4-beds, 3-baths, 3,205 sq. ft.
• Leased: $12,900 per month

613 31^st Street

• 5-beds, 5-baths, 3,751 sq. ft.
• Leased: $13,000 per month

These are clear-cut rental comps for Tree Section homes. One can expect to find a 3,500-ish single-family home in the Trees for around $13,000 per month and then adjust from there on condition and location.

A current listing confirms an owner asking in the same realm as the comps too.

1720 Elm Avenue

• 5-beds, 3-baths, 3,500 sq. ft.
• Asking: $13,900 per month

Now onto some recent sales in the Tree Section with similar statistics to find a sales price which will allow us to calculate our numbers like we did in Lunada Bay.

3112 Maple Avenue

• 5-beds, 4-baths, 3,350 sq. ft.
• Sold: $4,100,000

595 35^th Street

• 6-beds, 4-baths, 3,704 sq. ft.
• Sold: $4,085,000

2913 N Poinsettia Avenue

• 5-beds, 4-baths, 3,170 sq. ft.
• Sold: $4,420,000

1420 Elm Avenue

• 5-beds, 4-baths, 3,432 sq. ft.
• Sold: $3,650,000

Again, you will see a range of final sales prices, but it would be fair to start a consensus of around $4 million for this batch of Tree Section homes.

This time around I do not have a for sale and for lease listing like we have on Via Pacheco in Lunada Bay, but it is fair to assume that most homeowners will look at similar rent /sale comps like Pacheco and come to the same conclusion on asking prices, etc.

So again, of course you must always consider adjustment for location, size, and condition. If you read my blog last week, then you know that Manhattan Beach is incredibly strong and negotiating room is likely not much. Additionally, these higher price points will likely require more money down, so I am going to go with 30% down in this example.

A $13,000 per month rental assumption and $4 million price point seems fair.

This section will stay the same, I am going to take a 6% interest rate for today’s mortgage and a 3% interest rate for a year ago and 10% lower on price.

• $21,000 per month own today
• $13,000 per month rent today
• $14,000 per month own a year ago

Pretty incredible to see the numbers, right?

Now of course, some individuals might have less to put down or far more to put down, etc. but seeing these numbers might instill confidence to go one way or another based on unique circumstances.

Conclusion

I find these simplistic exercises to be valuable for clients’ perspective.

My buyer clients are sometimes shocked to see that homeownership today has become significantly more expensive than last year and that the rental option is far more compelling for them monthly. Other buyers remain undeterred when factoring in debt repayment, tax incentives, and the stability of controlling your own property.

On the flip side, sellers study these numbers to calculate their ROI as a rental versus a sale. Some sellers consider the market far too expensive and want to capture a sale today if they believe the market must adjust downwards. Others like their rental ROI or feel the rent/own trade-off is still compelling.

Each client has a unique position that will guide their decision-making. In this rapidly changing environment, any numbers you can run to help simplify your approach to buying or selling is valuable.

Whether you are a buyer or seller – advanced or beginner – always study the numbers.

Cheers.

Richard Haynes

DRE: 01779425

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A leader in South Bay real estate for the better part of a decade, Richard thrives as an advisor to his clients with over $248 million in sales as a broker or investment principal at his boutique agency, Haynes. Richard is known for his keen local market insights which have been featured in the L.A. Times, The Street, and Forbes, along with his weekly South Bay real estate blog. [read more]