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 because it depends on each individual. For some, buying makes more sense, and for others, renting is the best fit.

Buying a home is one of the biggest financial investments you can make in your lifetime. It requires a lot of planning, saving, and determination, and can pay off in the end. After all, you are building equity. But homeownership, which has always been part of the American Dream, is a costly venture. Consider some of the costs associated with homeownership including the mortgage payment, renovations and maintenance, and property taxes—to name just a few.

Renting, on the other hand, 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.

But all of this depends, of course, on where you live. Let's consider San Francisco, California. The city is considered to be one of the most desirable in the United States. But it's also one of the most expensive for both renters and homeowners.

According to Smart Asset, the median income in the city was $96,265 for households and $74,841, which is above the national average of $61,372. 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

  • San Francisco is one of the most expensive cities in the U.S. for both renters and home buyers.
  • Home prices average $1.3 million in the city, and its effective property tax rate is 1.163% of assessed home value.
  • The average monthly rent in San Francisco for a two-bedroom apartment is $4,400.
  • While homeownership may help you build equity, it can be costly. Renting, on the other hand, may be a more affordable option as there are fewer costs associated wtih being a renter.

Buying in San Francisco

As mentioned above, Smart Asset reported that buying a home in San Francisco really isn't that affordable. In fact, the site's 2017 survey found that affording monthly payments of $3,858 would require an annual income of $128,000. Keep in mind, this figure doesn't include any other necessities to live including the cost of food and transportation.

Data from real estate site Zillow shows the median list price for a home in the city was $1,299,000 as of April 2019. Mortgage delinquencies in the city are at 0.2%, well below the national average of 1.1%. The three most expensive neighborhoods in the city were Buena Vista, Corona Heights, and Haight.

As with any city, homeownership comes with many advantages and disadvantages. By buying a home, you're investing in real estate and, thus, building equity. Owning a home can help homeowners build a nest egg for the future because home values generally increase over time. According to Zillow, the median value of a home in San Francisco was $1,375,500 as of April 2019. The value of homes in San Francisco has gone up 3% since 2018.

If you have a fixed-rate mortgage, your monthly costs may be predictable. Unlike rents, which tend to fluctuate, you'll be able to lock in your payment. This means you'll have a better idea of how much you'll have to save each month to make your payments.

But there are certain costs associated with homeownership you may need to consider. First, there are regular costs to maintain your home. And if you're making additions or changes to your home, you'll also need to factor in these as well. As a homeowner, you'll also be responsible for utility bills including heating and cooling, water and sewer charges, and electricity. And if you own a condominium, you'll also be charged a monthly maintenance fee.

Then there's also the issue of property tax. The effective property tax rate in California is 0.79%, which is lower than the national average of 1.19%, according to Smart Asset. But San Francisco's tax rate is almost on par with the nation. For the fiscal year 2018–2019, homeowners were charged 1.163% of assessed home value. So the property tax bill on the median home value of $1,375,500 reported by Zillow would be almost $16,000.

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

Renting in San Francisco

Although it may come with fewer hassles, renting in San Francisco isn't any cheaper. The average rent for a two-bedroom apartment in the city was roughly $4,400, or $52,800 annually, according to Smart Asset. The site's study found that this city needed residents to earn the highest income in the country to be able to pay their rent.

According to Curbed, roughly 65% of San Francisco residents were renters. And even though rents are considerably high, it may be the more affordable option, depending on how you look at it—especially compared to current home values.

While renting may be costly, many renters don't have to contend with the many costs that homeowners face. 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, 2019, and Feb. 29, 2020, the city allowed landlords to increase the rent by a maximum rate of 2.6%.

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.

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 24.6 ($1,299,000 divided by $52,800), 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, 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 all 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.