Why Buying a Home in Southern California is Cheaper than Renting

Buying A Home

Most potential first time home buyers are faced with the same question,… should I rent or buy a home? Most look at straight monthly expenses when comparing the two options, which is understandable but not entirely accurate. By only comparing monthly expenses, you are ignoring some of the greatest benefits of home ownership. Thus, your comparison would be inaccurate. Below are some other factors that you should consider and why buying a home in Southern California is cheaper than renting.

Tax Benefits

There are several tax benefits to owning a home in Southern California. Current tax law allows you to deduct mortgage interest, property taxes, points, and possibly other mortgages expenses from your taxable income. This essentially reduces the amount of taxes that you owe, putting money back into your pocket.

It’s worthwhile to note that only tax payers who have enough deductions to itemize can benefit from these tax breaks. Additionally, itemizing deductions may allow you to deduct other expenses that you may not otherwise benefit from when selecting the standard deduction. Speak to your accountant for additional information on how much benefit you may derive from home ownership.

Avoiding Rising Rental Rates

Rental rates have historically risen over time. Given the desirability of the Southern California market, rental rates will continue to increase in the future. If you have a one-year lease like most renters, your rates would potentially increase every single year.

Now let’s compare this to homeownership expenses. If you purchase a home and select a fixed rate mortgage, your monthly principal and interest payments the same for the entire loan term (i.e. 30 years). You are essentially locking in your expenses, shielding it from market changes and inflation! This can lead to notable savings over time. This can be a major reason why buying a home in Southern California is cheaper than renting.

A Mandatory Savings Plan

When you rent, the money that you pay each month goes to your landlord. There is no return on that expense. When you own a home, you are making an investment. Every month, part of your mortgage payment goes towards interest and the rest goes towards principal (paying down the loan balance). That money is your equity in the home!

If you purchased a home for $400,000 and had a 4.25% interest rate, your monthly principal and interest payment would be approximately $1968/month. In the first year, over $550 per month goes toward principal, totaling approximately $6,744. Every year, the percentage of your payment attributed to principal increases, contributing even further to your equity growth. If you consider this aspect of paying a mortgage, some of that monthly mortgage payment should be discounted by the fact that you are kind of paying yourself in the form of equity.

More on Why Buying a Home in Southern California is Cheaper than Renting

When you compare buying versus renting, do not simply look at the monthly expenses. There are so many other financial factors that you should consider. Home ownership has long been considered the path to financial success, and for good reason. If you consider the tax benefits, equity-building potential, and locked in rates, it’s difficult to justify renting. Buying a home in Southern California is cheaper than renting when you look at the big picture. In addition to the items noted above, some value should also be given to rising real estate market values. When home prices rise, your equity does too. This can amount to significant dollars when the market is hot. Ultimately, not only is buying cheaper than renting, but it offers great potential for return on investment.