Rent Vs. Home Ownership Part Two: A Hypothetical

As a follow up to my most recent post about renting versus home buying I decided to do a little numbers experiment. It turns out we often approach financial questions with faulty logic like ‘this is what everyone does’ when in fact we should be approaching the situation with our math brains. For most of my life I’ve just sort of accepted that renting is a waste of money and the only way to get ahead in life is to buy a house. That idea is changing for me though, so I decided to do a hypothetical.

My ideal place to live when I’m all grown up is Santa Monica, CA. A beautiful beachy area with a bustling night life, just close enough to downtown LA and Hollywood and all the great jobs LA has to offer. I had the opportunity to live there as a munchkin while my mom attended school and I’ve always wanted to go back. The thing about Santa Monica is it has all the overpriced LA rent prices you hear about coupled with the bonus of being close to the beach. The closer to the beach you are, the more ridiculous the rent.

In many ways Santa Monica mirrors other cities where families just can’t afford a house so they choose to commute. There are 700sq ft houses in Santa Monica that cost $700,000. Go ahead and stand in 1 sq ft of space and let me know if that feels like it’s worth $1,000 to you. It’s no wonder people are fleeing to the surrounding suburbs. There is just one gigantic problem: in order to get to Santa Monica you have to use the notorious 405 through the Sepulveda pass which has the accolade of being the fourth worst traffic bottleneck in the world. 400,000 eager professionals cross this stretch of highway every day on their way to the better paying jobs and the promise of a higher standard of living.

For a period of time I worked for a laboratory company that required me to commute all over LA County. One summer I commuted to Santa Monica everyday from Thousand Oaks which is about 40 miles north west. With traffic it took me about an hour and twenty minutes to get to work one way. I got to have the experience of what it’s like for the many families who have to commute. Sure, I got to drive PCH everyday which is that awesome stretch of highway where they shoot all the new car commercials but it just didn’t feel worth the time it took out of my life.

People spend at least an hour each way commuting. I know people who live in Palmdale who work in Los Angeles, that’s nearly two hours and 70 miles each way! And for what?  A backyard? Better schools for the kids and the conveniences of the suburbs? I think this line of thinking deserves another look and a math magnifying glass because something doesn’t seem to be adding up.

The Costs

So here’s my rough estimate of the difference between renting and owning. I’m going to use Thousand Oaks as my example suburb because it’s where I used to live and I know the house pricing pretty well there. Keep in mind that there are cheaper areas to live that are equally close to Los Angeles but they aren’t exactly suburbs, they’re more like uglier areas on the outskirts of LA (the San Fernando Valley comes to mind).

-Median home price Thousand Oaks: $615,000

-Median home price Santa Monica: $958,000

Mortgage on a $615,000 house assuming $123,000(20%) down: $3500 monthly


  • 80 miles/day
  • 400mi/week
  • 1,600mi/month
    • 1,600mi÷35mi/gal=45 gal of gas per month (gas mileage will be much worse if you own a truck or an older vehicle or just generally drive like a jerk)
    • 45 gal x $3/gal=$137 per month to commute to work


  • 120min/day
  • 10hr/week
  • 40hr/month x $30/hr salary= $1200

Total commuting and opportunity cost plus mortgage cost: $1337+$3500=$4,837

I’d like to point out a few things about this math. First, I’ve left out all the extra expenses a home comes with such as property taxes, maintenance and repairs, closing costs, and insurance. I’m also assuming you were able to save for a 20% down payment to avoid PMI. Let’s be real, what non-millionaire is able to save $123,000 anymore. So in truth the operating cost of this home could be as much as $1,000 more monthly.

Additionally I’ve assumed your car gets great gas mileage and, at least for the time being, gas prices are pretty affordable. Time is really an important factor when you make the decision to live far from work. As you can see this hypothetical person could work an extra part-time job with all the time they spend in the car. This calculation assumes your time is worth $30 an hour or about $60,000 a year.

Apartment Price in Santa Monica: $3228/month





Included in the price are heating and A/C, allows pets, doesn’t mention parking price.

  • 10 miles/day
  • 50mi/week
  • 200mi/month
    • 200mi÷35mi/gal= 5gal of gas per month
    • 5 gal x $3/gal=$17 per month

Total cost of rent and commute: $3245

I really like this place, it’s a newer development with all the nice extras I like: granite counter tops, stainless steel appliances, a balcony. It’s about 1,000 sq ft 2 bed 2 bath so definitely small for a medium sized family but appropriate for a couple. Best of all, it’s on 6th street which means it’s within walking distance of all the places in Santa Monica I love like the 3rd street promenade and my favorite organic foods yuppie grocery store on Broadway not to mention the beach. This part of the city is incredibly walkable. When you drive in Santa Monica you almost feel like pedestrians own the city. There are crosswalks at all intersections, lots of bike racks and BikeShare stations, myriad bus stops and the new metro rail that’ll finally connect Santa Monica to DTLA, Long Beach, and the San Fernando Valley. In other words, if you live in this area you don’t really need a car.

For my hypothetical I’ll assume you work 10 miles away possibly up Wilshire closer to Westwood and you just want to drive because it’s more convenient.  There are some extra costs you incur living in the city that you wouldn’t have living in the suburbs. For one you might have to pay for a parking permit which seems to be $20/year from what I’ve read. Other costs are insidious like the fact that your grocery bill is going to be higher. When you go out to eat on a saturday night you’ll have to make a reservation because everything is more busy.

Brass Tax

So clearly I’ve demonstrated that with these two particular cities at this particular moment in time, renting is a lot more affordable. The difference in cost is $1,609 in favor of renting, annual savings of $19,308. $19,308 invested @ 5% per year for 5 years equals $112,023. In my last article I mentioned the fact that historically home prices have never returned more than 3% annually. Either way you slice it, your greenbacks are doing better work for you if you rent.

If you commute to Santa Monica for five years using the exact same numbers, never adjusting for inflation and rising gas prices, you’ll spend $8,220 on gas. You’ll have spent 2,400 hours or 100 days sitting in traffic. You’ll put 96,000 extra miles on your car not counting whatever non-work driving you do on the weekends. Your insurance will cost more, your car will depreciate in value faster, your car will need service and repairs more often. If you rent close to your job you won’t even need a car.

This is the kind of magnifying glass we all need to start applying to our financial decisions. I suspect that home prices in my area will have to go down significantly before home ownership makes sense again. My advice? If you want to buy an affordable home make sure you can work nearby. If you live close to work all of a sudden the math flips, it may cost the same or even less to own. Of course, outside the big city you’ll make less….but will you make $19,308 less? Probably not. Most people don’t go to the hassle of crunching the numbers and it’s really their loss. None of this is hard to figure out it just happens to take some time.

One Comment

  1. lisa says:

    California, when it comes to buy/sell/rent, is a whole different type of animal compared to the rest of the US. That being said, prices are high and so is the cost of living. That’s just the way it is.
    When looking to buy or rent, looking at the monthly payment will determine what you can do. When buying, never believe that the bank says you can afford. Buy only what you know you can make the payment for. Same for rent. Avoid PMI in buying by putting down the 20%. You may have to buy a smaller place to do it. Also, don’t read all the negative aspects of people going overboard and “buying too much house” and only working to pay the bills for it. We’re smarter than that!! Buying isn’t a bad thing. The only difference in renting/buying is how much work do you want to put into a house as far as upkeep. The cost each month (mortgage or rent), utilities, sewer and so forth have to get paid either way. Why do the elderly move into apartments and assisted living centers? Not because it’s cheaper. Only because it’s easier.
    In the second article here, things like gas, job commute, and car insurance really has nothing to do with factoring into the pros/cons of renting vs home ownership. That’s the COST of LIVING. Jobs are necessary to fund everything that you need to live. And the owner determines where their shelter is located, the cost of mileage and car maintenance. We all do that. And we evaluate our situation as years go on.
    We purchased a small home in 2001. Spouse drove 1 hr each way to work. I worked nearby part-time and took care of the kids the rest of the time. Then came the job losses. We had a savings acct to help us through the times….We refinanced for smaller monthly payments as a job would roll around. We did what we had to and got jobs near the home. Rental prices for my home match our mortgage. Our home value has increased. To us, not a bad investment. But that’s due to knowing our limitations on what we can afford, buying small, and location location location.

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