California Prop 13 Rent-vs-Buy Calculations?

[ultros1234]

Hi Mustachians --

I need some help from Californian mustachian real estate whizzes.

DW and I are young mustachians living the Bay Area (aka, the nation's most ludicrous real estate market). We'd like to be homeowners eventually, but we live in a place where the rent-vs-buy calculation tilts pretty strongly towards rent under most assumptions.

I've been playing with rent-vs-buy calculators -- this one (http://michaelbluejay.com/house/rentvsbuy.html) is the best I've found -- but I'm frustrated that I can't factor in the effects of Prop 13.* This makes a HUGE difference in the calculation. Being a stats nerd, I'd like to get a little more precise, or at least make a better estimate.

*For non-Californians, when you buy property here, the state property tax is set at 1% of the assessed value of the home. Then the tax basis assessed value of your home is assumed to increase by 2% each year or CPI, whichever is lower. In other words, your property taxes decrease in real terms every year. This adds up. (Subtracts down?)

This publication (http://taxfoundation.org/article/facts-figures-2013-how-does-your-state-compare) suggests that the mean property tax rate in California was about 0.8% in 2013. I can plug that into the calculator as an assumption, but of course, your property tax starts higher than that -- maybe 1.2% when you factor in local bond measures and parcel taxes? -- and then eventually drops below it, so it makes a big difference how long you stay in your home.

Any Californians have suggestions about how to quantify Prop 13? I thought about constructing my own rent-vs-buy calculator, but it's an intimidating proposition. Maybe someone out there has made a California-specific calculator?

[arebelspy]

Over a long time it may make a large difference, but in the short run it likely won't, which is where most buy vs. rent calculators matter (break even times of 5-10 years).

You can easily estimate it yourself though by putting in a property tax on the high end, and the low end, and then seeing what the difference in the break even point is.

[Another Reader]

If you believe that 0.8 percent baloney, you will make a large mistake in your calculations.  Haven't looked at their calculation method, but they must mean as a percentage of market value, not assessed value.  The way it works is the base value is set when you buy the property.  In most cases, that will be the purchase price.  The assessed value will rise 2 percent every year after that (compounded), unless the market value drops below the assessed value.  If that happens, you will qualify for a temporary reduction in assessed value until the market recovers.  You may have to request a reduction or file an appeal, but you should receive a reduction for that period of time.

The basic property tax is limited to 1 percent of the assessed value.  On top of that, you have bonds, special assessments, and parcel taxes that the voters continue to pass.  When I bought this house almost 25 years ago, the total tax bill was around 1.15 percent of the assessed value.  Over time, the percentage has grown to around 1.5 percent of the assessed value.  To determine the exact total applicable to a specific property, you need to know the tax rate area in which the property is located.  Your assessor's office can help you find the TRA and the tax collector can help you with the rates.  However, if you start with 1.3 percent, that's probably not too far off.

To do the math, just increase the property value by two percent for each year of your holding period and apply the tax rate to that value.  The savings over time can be significant, but discounted back to present value less so.  My assessed value is in the $520k range after adjustment for the homeowner's exemption.  Market value would be around twice that, so after 25 years, it makes a very big difference.  At least here in Silicon Valley it does.  However, as Arebelspy points out, most people stay in their houses 5 to 10 years.

The problem with the Bay Area and Silicon Valley is demand for rentals is as high or higher than for properties to buy.  Rents tend to increase at rates higher than inflation as more and more financially well off people choose to live here. Today there are two houses for sale and none for rent in my zip code.  Rent vs buy calculators that work in markets with lower demand don't work as well here.   Being a stats nerd may not help you as much as it might elsewhere.

[SnackDog]

Just make a simple spreadsheet with your own assumptions about inflation, appreciation, etc. Use 1.15 for taxes if you like. California home values are tricky to forecast so there is a huge amount more uncertainty in that part of the calculation than there is in the taxes. Some parts of the Bay area are currently at 2003 valuations, for example.