Buying vs. Renting in San Francisco: An Overview

Should you buy your home or rent it? This is an age-old debate that really has no right or wrong answer. That's because it depends on you, your personal financial situation, and your long-term goals. For some, buying makes more sense, and for others, renting is the best fit. Whichever option you choose, of course, depends on where you live. San Francisco is considered to be one of the most desirable cities to rent or own property in the United States. But it's also one of the most expensive for both renters and homeowners.

According to Smart Asset, the median household income in the city was $96,265 and $74,841 for individuals, which is above the national average of $61,372 for households. If you want to afford to live in the city as a homeowner, you'd have to be making $128,600, while renting would require an income of $188,000. And it’s hard to know if buying or renting makes the most sense because they're both pricey. But there are key differences between the two in San Francisco. We've listed some of the main ones below.

Key Takeaways

  • Homeownership may help you build equity, but it can be costly.
  • Renting may be a more affordable option as there are fewer costs associated with being a renter.
  • San Francisco is one of the most expensive cities in the U.S. for both renters and home buyers.

Buying in San Francisco

As with any city, homeownership comes with many advantages and disadvantages. By buying a home, you invest in real estate and, thus, commit to building equity. Owning a home can help homeowners build a nest egg for the future because home values generally increase over time. But there are certain costs you may need to consider such as your mortgage payment, property taxes, maintenance costs, money for any renovations you make, and utilities. If you own a condominium, you'll also be charged a monthly maintenance fee. Keep in mind, this doesn't include other expenses such as food and transportation.

Buying a home in San Francisco really isn't that affordable. According to real estate site Zillow, the median value of a home in San Francisco was about $1.41 million as of September 2020, with prices expected to climb as high as 5.0% by September 2021.

If you have a fixed-rate mortgage, your payment amount is locked in your monthly costs are often predictable. This means you'll have a better idea of how much you'll have to save each month to make your payments. But there's also the issue of property taxes. The effective property tax rate in California is 0.77%, which is lower than the national average of 1.08%. The property tax rate in San Francisco was 0.65%, meaning a home valued at $927,400 had an annual property tax payment of $6,019. 

San Francisco residents pay more for food than most other Americans.

Renting in San Francisco

Renting is a whole different beast. Paying rent monthly to someone else was once considered a waste since the renter was believed to be throwing money away. But for someone who doesn't want to deal with maintenance, it may make more sense. You don't have to deal with repairs or other expenses, and many of your bills may be covered in your lease. And the rent is often far cheaper than a mortgage payment.

Despite the absence of additional hassles, renting in San Francisco isn't any cheaper than buying. In fact, the average rent for a two-bedroom apartment in the city was roughly $3,108. This amounted to about $38,000 annually. Although this is lower than most years, the rent is still significantly high—almost $2,000 higher than the national average.

Cutting a check for the rent may be worthwhile when you don't have to pay for property taxes, repairs, condo fees, or utilities if your lease includes the cost of water, heat, and electricity. So you may have a little extra income to save up for your own property further down the road. But that doesn't mean you're out of the woods. Rents tend to fluctuate as the economy strengthens and weakens. San Francisco landlords can set the rental amount at any level they choose on a vacant unit, but the city does have rent control. This means landlords are only allowed to increase the rent by a certain amount if it is occupied. Between March 1, 2020, and Feb. 28, 2021, the city allowed landlords to increase the rent by a maximum rate of 1.8%.

Special 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.

The market generally favors buyers if the ratio is less than 15 and renters if the ratio is more than 20, while ratios between 15 and 20 can go either way. Using the above figures, the price-to-rent ratio in San Francisco would be 37.1 ($.41 million divided by $38,000), 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.

Verbhouse

Verbhouse is a San Francisco take on the rent-to-own real estate concept. Combining the flexibility of renting with the long-term benefits of owning, the locally-based program allows participants, or Verbees, to move into a residence with the option—but not the obligation—to buy it at a later date.

Verbees lock in their rent along with a purchase price for up to five years. They then make monthly payments and build equity toward ownership. This 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.