My wife and I finally completed the process of buying a new home and selling our condo. You always hear a lot about how “great” of an investment a home is, especially in Los Angeles because of its strong economy and lack of supply. It is harder to find concrete details, however, since the websites extolling ownership are the ones that benefit from it: banks, realtor associations, individual agents, and so on. The condo was my first home ownership experience, so now I have actual experience, albeit an n of 1, to share. Since it is so hard to find concrete examples, I offer ours to the world.

Some background: we bought a 1,520 square foot condo in zip code 90029 in December 2016 at a 3.75% fixed rate for 30 years. The condo has 2 bedrooms and 2.5 baths, no neighbors above and below, a tandem parking spot, and approximately 300 square foot storage room. The complex has 12 units total and no amenities, but it was designed by a boutique firm that clearly put thought into the complex and units. At purchase, the monthly HOA dues were $350, rising to $480 by the time we sold, a 3.58% annual increase.

The following calculations overwhelmingly use percentages because I do not feel comfortable giving specific numbers.

After 9.25 years, we sold for 31.25% more than we paid, an annual increase of 2.9%, which is flat growth in real terms, using the heuristic of a 3% annual inflation rate. 2.9% is also less than the appreciation rate of single-family homes in Los Angeles, which I calculated as about 7.26% since 1975 and 6.76% since 2016; these estimates come from the Federal Housing Finance Authority’s House Price Index data.

Nonetheless, our actual return was much higher. The downpayment we made more than doubled over the same 9 years: it increased by 108%. This return works out to an 8.01% annual return. That rate is less than the stock market achieves, but it is now comfortably above the inflation rate. This magic is due to the fact that we took on leverage, i.e. a mortgage, to buy the house.

That is not the full story, however: it costs money to live in the house. Specifically, we had monthly payments for the mortgage principal and interest, plus property taxes, insurance, and home owners association dues. Over the 9.5 years, these costs came out to 160% more than the downpayment and 147% more than the gain. If you account for the PITI plus HOA costs, we lost money. Not much, however: $1,132 per month, a price much lower than renting anything reasonable, regardless of location.

This is the power of ownership: we paid $1,132 per month to live in a nice condo in a good neighborhood. Fortunate to have money, we used less money to live than someone who could not get on the home ownership ladder.

Any discussion of the finances of ownership quickly turns to whether it is better to rent. From a strictly financial perspective, the answer is almost always that renting is better, assuming that down payment money would have been invested in the stock market. For my situation, I asked Claude to write me a script comparing my home ownership outcome with a scenario where I invested our 2016 downpayment in the S&P 500 and rent started at $3000 per year and increased 4% per year. In the last 9 years, the S&P 500 has had very strong performance, so renting comes out ahead: we would have about 40% greater net wealth if we had rented, a difference of about $1800 per month.

Looked at this way, home ownership cost us $1800/month compared to renting. Did we therefore make a bad decision? I have no regrets. For one, there is value in stability, in not worrying about rental price increases or having to move. For another, home quality is usually higher quality than rental quality, and it certainly is assuming a $3,000 rent. In other words, to rent a place of comparable quality would have likely required more than $3000/mo in rent or living in a worse neighborhood. For a third, the S&P 500 since the Great Recession has had one of its greatest period of performance in history, making renting look like a much better outcome than if the S&P 500 returned 10%, its average return. Most importantly, these comparisons rely on a heroic assumption, that we, or anyone else, would have invested that huge chunk of money in the stock market and, if we did, would have achieved the same returns as the market itself. In 2016, only 20% of our downpayment was invested in the market, and I doubt we would have invested the other 80%. In other words, scenarios where renting wins make homo economicus assumptions that reflect how few people operate.

Perhaps the ultimate conclusion is that Los Angeles real estate is great, if you can afford it.