Is it me or does a 20% ownership premium seem obscenely low? Lets look at DLJ’s 3 factors.
1.) No rent increases: If we assume a modest 3% rent increase for an average ownership period of say 10 years we are paying 35% higher rent in year 10. Sure you may stay shorter but if you are buying it should be in your plan to stay that long. Also an average of 3% annual increases is probably overly optimistic. Any way I look at it, this alone has to be worth a 10% premium. Note this is subjective and different folks may feel differently about how long they would stay.
2.) Peace of Mind: Not only peace of mind but moving is expensive and disruptive to one’s life. Don’t know about you, but I would pay 5 to 10% higher rent to have security knowing I was in control and could do what I want with the property. Note that this is very subjective and some folks actually enjoy moving every 12 to 24 months.
3.) Tax Advantage: Most of us are in a 28% marginal tax bracket federally and 9% state taxes in CA. If you figure that about 80% of what pay in PITI is tax deductible that’s another 30%. This is not subjective and depends only upon your marginal tax bracket.
I just dont see how anyone can claim a 20% premium is reasonable. I think a 40 to 50% premium for a white collar professional is not unreasonable.
