Rent or buy? A San Francisco housing investigation

Everyone’s dream is to buy one of these “Full House” houses

Back in the 70’s and 80’s, it was commonplace for our parents to buy their first house in their 20’s and live in it for a number of years before selling it for many times its original value. Today, we see Millenials reaching ages far past young-adulthood without even considering buying a home. Particularly in San Francisco, people cling to their rent-controlled apartments, thanking God they can still afford to live in this city. According to this Bloomberg article,

“The American Dream increasingly involves a lease, not a mortgage.” Further adding: “Most low-income families don’t rent by choice…. And plenty of higher-income households rent because they can’t afford to buy.”

Maybe it’s the defiant youngest-child syndrome in me, but to this I say “Screw that. I’ve got some money. I’m going to buy a house if its the last thing I do!” On a more reasonable note, it makes more sense to buy a house and treat it as an investment than to continue to rent, essentially throwing that money down the drain. This was my first and primary thought when I decided to crack open Redfin and start looking at houses.

Screenshot from Redfin’s search for houses in SF with 4+ bedrooms

Holy cow. Houses are really expensive! In San Francisco, the median home value is $1,058,474. “That’s a 557% rise over 30 years, more than any other US metro area.” Compare that to center city Philadelphia (where I’m from), where you can buy a 4-bedroom house for $500K. I simply don’t understand how anyone, (including executives at Uber, Google, Apple, etc.) can afford to buy a house in this city. Not only are these houses selling at record high prices, but a lot of them are being sold all in cash. Who on earth has that much money sitting around in cash!?

But what if I split a multi-unit home with friend? I was able to find interested partners with the same kind of assets I have. Conceivably, if we found a 2-unit house for ~$1M, we could split it up and each pay around $500K. The only problem is that every house on the market fitting this description is tenant occupied. And thanks to San Francisco’s strict rent control laws, most of these places are renting units well under market price, making it even harder to evict said tenants.

No problem. We’ll just Ellis Act it! For those who don’t know what the Ellis Act is, it is a state law allowing any homeowner to take their house off the rental market. It’ll cost you about $5–20K per unit in “relocation fees”, at minimum 120 days from the date of notice, and up to one year to get out the current tenants. However, after meeting with a lawyer specializing in Ellis Act evictions, he informed me that there is a publicly funded organization called the Tenderloin Housing Clinic (THC) that specializes in finding loopholes to Ellis, often causing landowners to pay upwards of $70k per unit and 1 year for the eviction. After making this point, the lawyer suggested we try to do a buyout first, since it might end up in THC’s hands anyway. That would end up costing $50k in addition to around $5k in lawyer fees.

Needless to say, we never ended up putting in a bid for the house. The Redfin agent later told me “they received 18 offers. 10 of them were over $1.2M. 3 offers were $1.275M. The seller sent out a counter offer at $1.308M to the strongest few buyers. The winner likely went over that number.” So by my calculations, the poor suckers that “won” this house are going to end up paying $1.5M for a house that was listed at $995K. And to add insult to injury, they most likely will not be able to live in it for at least a year. So much for affordability.

So for now… rent it is! Don’t take this as a sign that I’m giving up. I’m going to continue to try to find unique ways to buy property in San Francisco. Rent-to-own? BMR housing? Foreclosure market? Who knows. What I do know is that as long as rent-control exists and the city focuses on protecting tenants over homeowners, it makes much more sense to remain a renter. Sadly.

UX Designer