If a city earns the top spot on a list, it wants that ranking to be for something enviable. Unfortunately, while San Francisco no doubt leads many “Best” lists, it also has had the dubious distinction of being first on GoBankingRate's 2018 list of "How Much You Need to Live Comfortably in 50 Major US Cities" (takes $123,268 annually to live comfortably there, the report says).

And it’s hard to know if renting or buying makes the most sense, because they're both pricey. San Francisco rentals are among the most expensive in the U.S.:  As of April 2018, the median rent for a two-bedroom apartment is $3,442 per month in the city by the bay, according to national apartment search website RentCafé.com, which comes out to (gulp) $41,304 per year.

The city is also expensive for buyers. The median home sales price is $1.32 million, according to September 2018 data from real estate aggregator Trulia. For comparison, the median sales price for existing homes across the U.S. is $264,800 – about 20% of San Francisco’s. With high prices all around, buying vs. renting in the San Francisco Bay Area is a conundrum. Here are some considerations to help you make a decision. (For more, see How Much Money Do You Need to Live in San Francisco?)

Buying vs. Renting Considerations: Price-to-Rent Ratio

The price-to-rent ratio provides clues about whether renting or buying makes better financial sense in a particular real estate market. To calculate, divide the median sales price by the average annual rent for a comparable home. In general, the market favors buyers if the ratio is less than 15 and renters if the ratio is more than 20 (ratios between 15 and 20 can go either way). Using the above figures, the price-to-rent ratio in San Francisco would be 31.9 ($1.32 million divided by $41,304), meaning it’s better to rent. However, while the price-to-rent ratio is a good starting point, it doesn’t tell the whole story.

Time Matters

Financially speaking, perhaps the most important consideration is how long you plan on staying in place. As a general rule it makes sense to buy a home if you’ll be there for at least five to seven years – the time it takes to recoup your upfront costs of getting a mortgage and the backend costs of selling the residence. Any less than five years, and you’ll probably end up losing money.

Speaking of mortgages: Even a small change in interest rates can greatly affect the total cost of buying a home. For example, a $500,000, 30-year mortgage at 4% interest would cost you $287,478 over the life of the loan. With a 5% rate, you pay $373,023 in interest – more than $90,000 more. Clearly, the mortgage rate you can obtain will be an important factor in deciding whether to rent or buy.

Rent or Buy Calculator

Trulia’s Rent or Buy calculator helps you decide if it’s better to rent or buy by comparing the total cost of each. Users can customize results by inputting the target monthly rent, target home price, length of time in the home, income tax rate and mortgage rate. Changing any parameter can influence the outcome and tip the scale from rent to buy or vice versa. Assume, for example, a target monthly rent of $4,550 (San Francisco’s median rent for apartments overall, according to Trulia), a target home price of $1.32 million (the city’s median sales price), a 25% income tax rate and a 4.15% mortgage rate. Buying becomes cheaper than renting after six years. Basically, the lower the mortgage interest rate, the sooner buying becomes the better option.

The Verbhouse Option

Verbhouse is a San Francisco take on the rent-to-own real estate concept (see Rent-to-Own Homes: How the Process Works). Combining the  flexibility of renting with the long-term benefits of owning, the locally based outfit  lets program participants (“Verbees”) move into a residence with the option (but not obligation) to buy later. Verbees lock in rent and a purchase price for up to five years, make monthly payments and build equity toward ownership, which can eliminate the need for a large down payment when it comes time to finance.

The program is designed for aspiring homeowners who don’t have a down payment saved or who have small credit problems that can be fixed within the next few years. “Verbhouse believes the emotional, social and financial benefits of homeownership should be attainable for everybody,” says Verbhouse CEO Marjorie Scholtz. 

The Bottom Line

The decision to rent or buy – in San Francisco, along with anywhere else – shouldn’t be based on finances alone, but on your preferences as well. Some of the non-financial benefits of renting worth considering are greater flexibility, amenities you probably couldn’t afford in a home (swimming pool, tennis courts, gyms, rooftop hangouts, etc.), and a landlord who takes care of most of the repairs and maintenance. The benefits of owning, on the other hand, include factors such as greater stability, the option to customize your home and greater privacy.