Buying in Bay Area (redux)

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countofmc
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Re: Buying in Bay Area (redux)

Post by countofmc »

Well if it makes you feel any better, with only 30-45k cash on hand and limiting yourself to the Peninsula, you probably couldn't buy even if you wanted to and could get a mortgage, as cash is king in this market.

My wife and I missed the boat by deciding not to buy back in 2009. Now we're basically priced out of this market. But I'm not stressed. Just keep saving money, and if market tanks again we can buy then. If not, we'll just move elsewhere when the time is right if we really want to buy. Or just be lifelong renters and stay here in the Bay Area. Can only control what we can, and that's saving as much $$$ as possible.

That being said, another lesson I learned from the housing boom and downturn is that if you can buy, go ahead and do so while putting as little money down as possible. So if you can do that, I'd strongly recommend buying. California is a non-recourse state. You have very little risk while being able to keep all the reward. My friend purchased a condo during the last boom. By 2010 it was worth 1/2 what he paid for it. Despite making more than enough money to keep making the mortgage payments, he did a "strategic" foreclosure. If that wasn't enough, he got to live there for about 9 months rent/mortgage free while foreclosure proceedings were being set in motion against him. The very next year, he purchased another home. And guess what, he's sitting on about 100k of equity in that home.
Average Investor
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Re: Buying in Bay Area (redux)

Post by Average Investor »

I would not buy in this market. Keep saving and wait for the crash, the cycle in the Bay Area is boom and bust over and over again.

I am fortunate to own a home here, but it is far larger than I need now with a LBYM lifestyle and have started putting plans together to sell next year.

Good luck.
Last edited by Average Investor on Sun Jun 14, 2015 10:41 pm, edited 1 time in total.
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john94549
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Re: Buying in Bay Area (redux)

Post by john94549 »

Carefreeap wrote:
You have heard of Prop 60 & 90, correct?
Correct. But, as I noted ("Prop 13 aside"), it's the federal and state tax hit that anchors us. A sale would push us into the 20% federal cap gains and max CA ordinary income tax rates*, and that's the issue. We plan to leave the house to the kids, with a step-up in basis.

*Even after the $500,000 exclusion.
ryman554
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Re: Buying in Bay Area (redux)

Post by ryman554 »

john94549 wrote:
Carefreeap wrote:
You have heard of Prop 60 & 90, correct?
Correct. But, as I noted ("Prop 13 aside"), it's the federal and state tax hit that anchors us. A sale would push us into the 20% federal cap gains and max CA ordinary income tax rates*, and that's the issue. We plan to leave the house to the kids, with a step-up in basis.

*Even after the $500,000 exclusion.
Can''t you carry the basis over if you buy a new house in the next <N> days? 1031 exchange or something like that? Not sure how Prop 60 and 90 come into play with that, however....
randomguy
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Re: Buying in Bay Area (redux)

Post by randomguy »

ryman554 wrote:
john94549 wrote:
Carefreeap wrote:
You have heard of Prop 60 & 90, correct?
Correct. But, as I noted ("Prop 13 aside"), it's the federal and state tax hit that anchors us. A sale would push us into the 20% federal cap gains and max CA ordinary income tax rates*, and that's the issue. We plan to leave the house to the kids, with a step-up in basis.

*Even after the $500,000 exclusion.
Can''t you carry the basis over if you buy a new house in the next <N> days? 1031 exchange or something like that? Not sure how Prop 60 and 90 come into play with that, however....
1031s are for commercial real estate. They would need to rent the place out for something like a year before they could do the trade and then they couldn't move back in (I want to say it is 3 years but you would have to look it up).
Carefreeap
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Re: Buying in Bay Area (redux)

Post by Carefreeap »

randomguy wrote:
ryman554 wrote:
john94549 wrote:
Carefreeap wrote:
You have heard of Prop 60 & 90, correct?
Correct. But, as I noted ("Prop 13 aside"), it's the federal and state tax hit that anchors us. A sale would push us into the 20% federal cap gains and max CA ordinary income tax rates*, and that's the issue. We plan to leave the house to the kids, with a step-up in basis.

*Even after the $500,000 exclusion.
Can''t you carry the basis over if you buy a new house in the next <N> days? 1031 exchange or something like that? Not sure how Prop 60 and 90 come into play with that, however....
1031s are for commercial real estate. They would need to rent the place out for something like a year before they could do the trade and then they couldn't move back in (I want to say it is 3 years but you would have to look it up).
5 years.
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WhyNotUs
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Re: Buying in Bay Area (redux)

Post by WhyNotUs »

The reason to buy is because you have found "home" a city/neighborhood with enough income to afford to stay for the long term. Based on your posts, it does not seem like you are looking for home but rather to manage rent/invest in real estate. That is a tough game due to the high transactions costs, risk of getting a home with a big problem, and illiquidity.
There are people for whom that ends up working out, even after 5-6% transaction costs, improvements/upkeep, and cost of living someplace longer than desired, but it is not as many as you might think. People are not very good with math.
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Carefreeap
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Re: Buying in Bay Area (redux)

Post by Carefreeap »

john94549 wrote:
Carefreeap wrote:
You have heard of Prop 60 & 90, correct?
Correct. But, as I noted ("Prop 13 aside"), it's the federal and state tax hit that anchors us. A sale would push us into the 20% federal cap gains and max CA ordinary income tax rates*, and that's the issue. We plan to leave the house to the kids, with a step-up in basis.

*Even after the $500,000 exclusion.
At first blush we look like we have about a $900k gain. But once we add in all the cap improvements we've done over the 20 years we've owed the house plus potential sales costs we'll be down to more like $600k. I don't have an issue paying tax on a $100k profit if it makes my life easier and reduces my maintenance costs.

We own properties in cheaper areas (AZ and San Diego) but adding up the numbers we found between utility costs and the convenience of SFO and medical we're better off staying the SF Bay Area.

ETA: We don't have kids and other than some token amounts to family, our money will go first to take care of any existing pets then go to charity.
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lemonPepper
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Re: Buying in Bay Area (redux)

Post by lemonPepper »

My landlord bought his house in the early 70s for 30k. It is now worth around 1.2 mil. Assuming that the rent paid for his taxes and maintenance, he got a 8.5% ROI.

IIRC a diversified portfolio would have given the same ROI. So I'm in the camp that one should own a property or two in the bay area for diversification. I am just not keen with dealing all the rental property issues.
randomguy
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Re: Buying in Bay Area (redux)

Post by randomguy »

lemonPepper wrote:My landlord bought his house in the early 70s for 30k. It is now worth around 1.2 mil. Assuming that the rent paid for his taxes and maintenance, he got a 8.5% ROI.

IIRC a diversified portfolio would have given the same ROI. So I'm in the camp that one should own a property or two in the bay area for diversification. I am just not keen with dealing all the rental property issues.
That is an insanely conservative assumption. You are probably paying rent on the order of 40-60k/year. The taxes are like 2k and maintence probably isn't more than 10-15k. You are looking at another 3-5% return (call it the dividend) on top of the 8.5% (appreciation). Call it 12% (money doubles every 6 years) and you can see how a lot of wealth can be made in a hurry. Obviously the early years weren't as profitable.

Throw in some leverage, and you can start talking about crazy returns:)
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fetch5482
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Re: Buying in Bay Area (redux)

Post by fetch5482 »

As someone who moved to bay area in 2011 and bought a starter townhome in 2014, I strongly recommend people to buy a home in bay area if they plan to stay or keep the place for 6+ years. Buy the smallest home you can afford. My townhome in a above-average school district has almost doubled in value in little over 2 years. I don't expect that runrate to continue, but rents are astronomically high, and the gap between south bay rents and SF rents are high. Over time, it is natural for that gap to reduce and south bay rents to go even higher.

If I had to buy another home, I would consider east bay areas closer to bart stations since all the cool new tech companies are coming up in sf city.
Last edited by fetch5482 on Wed May 18, 2016 8:26 pm, edited 1 time in total.
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Non7WoodUser
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Re: Buying in Bay Area (redux)

Post by Non7WoodUser »

Usually only consider buying if the price per sq ft is < $100.
madbrain
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Re: Buying in Bay Area (redux)

Post by madbrain »

Non7WoodUser wrote:Usually only consider buying if the price per sq ft is < $100.
In the bay area, you might have to wait until a time machine is invented to get back to the previous millennium to see those prices again.
Capsu78
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Re: Buying in Bay Area (redux)

Post by Capsu78 »

I always knew I would live in a Million $ house... I just didn't know it at the time I was living in that basic standard one that backed up to the Freeway in Fremont in 1990 that we had paid $170,000 for! It's at a Million 4 last time I zillowed.
random_walker_77
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Re: Buying in Bay Area (redux)

Post by random_walker_77 »

To add fuel to the fire, I agree that you can potentially make crazy returns in bay area housing. We bought in the middle of '03, and sold at the beginning of '07. The house went up 45%. Considering leverage (we had 30% down), we more than doubled our money during our time in that house. W/ the homeowners tax exclusion, all that gain was even tax free.

But beware, as leverage is a double-edged sword. If it's easy to double your money, it's also easy to lose a lot on the way down. The folks who bought from us are now sitting on a 20+% gain, but during '09, they were probably looking at a 50% loss if they sold.

As a sidenote, that 20% gain might not be all that great when you consider 10 years of inflation, and what they would've gotten from the total stock market.
United2008
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Re: Buying in Bay Area (redux)

Post by United2008 »

Capsu78 wrote:I always knew I would live in a Million $ house... I just didn't know it at the time I was living in that basic standard one that backed up to the Freeway in Fremont in 1990 that we had paid $170,000 for! It's at a Million 4 last time I zillowed.
Ditto. This is the running joke I have with my wife. When we were starting out I would tell her that if we saved and invested aggressively, someday we could live in a million dollar house. Well, about 2 years ago we finally bought a place for a bit over $1 million. The joke (on her) was that the house was roughly 1500 square feet with creaky floors and in desperate need of a kitchen remodel. Nevertheless, I have greatly exceed my commitment as in just two years our place is now worth something north of $2 million. She doesn't find it as funny as I do.
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unclescrooge
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Re: Buying in Bay Area (redux)

Post by unclescrooge »

Non7WoodUser wrote:Usually only consider buying if the price per sq ft is < $100.
So a trailer park in Sacramento?
lemonPepper
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Re: Buying in Bay Area (redux)

Post by lemonPepper »

randomguy wrote:
lemonPepper wrote:My landlord bought his house in the early 70s for 30k. It is now worth around 1.2 mil. Assuming that the rent paid for his taxes and maintenance, he got a 8.5% ROI.

IIRC a diversified portfolio would have given the same ROI. So I'm in the camp that one should own a property or two in the bay area for diversification. I am just not keen with dealing all the rental property issues.
That is an insanely conservative assumption. You are probably paying rent on the order of 40-60k/year. The taxes are like 2k and maintence probably isn't more than 10-15k. You are looking at another 3-5% return (call it the dividend) on top of the 8.5% (appreciation). Call it 12% (money doubles every 6 years) and you can see how a lot of wealth can be made in a hurry. Obviously the early years weren't as profitable.

Throw in some leverage, and you can start talking about crazy returns:)
yeah.. I was making a very conservative assumption for the time spent compared to just a buy and hold portfolio that you rebalance occasionally.

One number that often gets thrown aroung is houses have provided a -0.4% return on investment after accounting for inflation (cash shiller). I just find that the general study is not really relevant for bay area due to a combination of factors like increasing population (immigration), great weather, zoning laws, property tax laws. I might buy a rental property in future if this bubble crashes but I"m doing my research to see if it's a viable idea. If anybody has crunched the numbers, I"d appreciate some pointers
EFF_fan81
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Re: Buying in Bay Area (redux)

Post by EFF_fan81 »

sfchris wrote:
MrMiyagi wrote:I

Don't live with regret. If the housing market tanks, as long as you can make your payments, you're fine. It's paper losses anyway unless you sell.
That advice may hold in locales where a first time buyer could actually buy a place where they could grow old with a family should the housing market collapse.

But in the bay area, your first place will be a "starter shack", which unless you have a windfall, will be too small to do much other than live for a few years until baby comes. Then you have to trade up a couple times until you get a "normal" house. Each time, you run the big risk that you are stuck in a much too small place for a decade or more. It is truly brutal here.

1 bedroom condominums in my neighborhood (where I rent) are $900k to 1.2MM. I am not willing to put that kind of money on the line in the gamble that things will keep going and I can trade up.
I'm sorry, but this has bubble written all over it to me. I work in real estate estate, in another large, expensive city. It does not cost 900k-1.2MM per unit to construct a decent, high-end apartment building. Usually half that. Yes, there are places where extreme supply constriction (e.g., Manhattan (surrounded by water), certain parts of DC (height restriction) plus lots of heavy-handed rules in both jurisdictions) can make things more difficult, but I don't consider those markets as bubbly because one can simply move to a less in-demand area and find cheap housing. For example, in the DC area you can live in Silver Spring (45 minutes outside the city, low crime, good but not great schools) and get a decent house / townhouse / fancy new 2br condo for $400k (less in certain neighborhoods, more in others), which isn't too far above build cost. So the hip areas are above average build cost, but they are also built out and "protected" by lots of rules. But in other parts of the metro area things a different. And the DC area has similar average incomes to the Bay Area.

San Francisco itself may be supply constricted in the same fashion. But if the reports I am hearing are correct -- that it is like this in the WHOLE Bay Area, basically -- then I just don't see how it can continue forever. Too many developers will be salivating to throw up as many towers as possible to compete with that 900k-1.2MM unit on the market. And you can't NIMBY an entire metro area ad infinitum, so at least SOME areas will see declines as newer and fancier condos come on market and those old 1.2MM units start looking less fresh and more old and overpriced. (Arguably single family homes may hold value better, the old "aren't making more land" adage isn't totally wrong.)

The only way SF seems semi-reasonably priced is if you point towards other places (esp. Vancouver and London) that are notorious as places where rich foreigners (often from the third world, often with no paper trail as to where they got all that cash) are parking their funds. Who knows how many places in the world can serve that market though, or which jurisdictions will fall in or out of favor with that crowd.

I dunno. I guess we'll see.
Capsu78
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Re: Buying in Bay Area (redux)

Post by Capsu78 »

If you want a taste of the insanity going on north of the border, this is the guy to follow:
http://www.greaterfool.ca/

I think the Bay Area and certain areas in Canada are working off the same sheet music.
randomguy
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Re: Buying in Bay Area (redux)

Post by randomguy »

lemonPepper wrote:]
One number that often gets thrown aroung is houses have provided a -0.4% return on investment after accounting for inflation (cash shiller). I just find that the general study is not really relevant for bay area due to a combination of factors like increasing population (immigration), great weather, zoning laws, property tax laws. I might buy a rental property in future if this bubble crashes but I"m doing my research to see if it's a viable idea. If anybody has crunched the numbers, I"d appreciate some pointers
Bay area rental property is rarely cash flow positive from day 1 (maybe during the crash but I wasn't following it closely). You basically have to funnel money in for 5-10 years while you wait for rents to inflate enough to pay the bills and you are counting on appreciation to make it worthwhile. Eventually you hit a transition point and it goes from a ok investment to a great one when you are getting huge rent checks and the property is appreciating like mad. Obviously this is a lot riskier than investing in some house that is cash flow positive from day 1. But those houses tend not to have much in the line of appreciation potential.
randomguy
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Re: Buying in Bay Area (redux)

Post by randomguy »

blinx77 wrote:
I'm sorry, but this has bubble written all over it to me. I work in real estate estate, in another large, expensive city. It does not cost 900k-1.2MM per unit to construct a decent, high-end apartment building. Usually half that. Yes, there are places where extreme supply constriction (e.g., Manhattan (surrounded by water), certain parts of DC (height restriction) plus lots of heavy-handed rules in both jurisdictions) can make things more difficult, but I don't consider those markets as bubbly because one can simply move to a less in-demand area and find cheap housing. For example, in the DC area you can live in Silver Spring (45 minutes outside the city, low crime, good but not great schools) and get a decent house / townhouse / fancy new 2br condo for $400k (less in certain neighborhoods, more in others), which isn't too far above build cost. So the hip areas are above average build cost, but they are also built out and "protected" by lots of rules. But in other parts of the metro area things a different. And the DC area has similar average incomes to the Bay Area.

San Francisco itself may be supply constricted in the same fashion. But if the reports I am hearing are correct -- that it is like this in the WHOLE Bay Area, basically -- then I just don't see how it can continue forever. Too many developers will be salivating to throw up as many towers as possible to compete with that 900k-1.2MM unit on the market. And you can't NIMBY an entire metro area ad infinitum, so at least SOME areas will see declines as newer and fancier condos come on market and those old 1.2MM units start looking less fresh and more old and overpriced. (Arguably single family homes may hold value better, the old "aren't making more land" adage isn't totally wrong.)

The only way SF seems semi-reasonably priced is if you point towards other places (esp. Vancouver and London) that are notorious as places where rich foreigners (often from the third world, often with no paper trail as to where they got all that cash) are parking their funds. Who knows how many places in the world can serve that market though, or which jurisdictions will fall in or out of favor with that crowd.

I dunno. I guess we'll see.
It is probably a bubble but SF has some of the toughest geographic restrictions out there. To the west you have an ocean. To the south you have San Jose (i.e. a bigger city) and the pennisulia just isn't that wide. The north and east you have water that requires some impressive bridges. A huge chunk of the north close by is a national park (i.e. no houses). If you go east you hit a mountain range on the other side of oakland (a decent city on its own) and berkley which reduces density and limits commuting. There isn't much in a 45 min drive that would be considered cheap unlike places like DC or even NYC where you can drive a bit and see drastically lower costs. But yeah as prices go up, people are willing to drive more. I knew several coworkers with 75+ min commutes (and this was from people that avoided rush hour. Things like come into work at 11 and go home at 9)

And as far as rich foreigners, SF is loaded with the various asian (china, Taiwan, Korea) the way London gets the Russians. I have no clue if either of those groups is really big enough to move the market but it makes good press stories.

If the tech industry stop making a zillion new millionaires/year who all want to buy houses, SF and the pennisula are in trouble. Until then people can and will pay to avoid commuting. It will be interesting to see if things end with a bang (years of dropping house prices) or a wimper (i.e. houses just stop going up at more than inflation).
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fetch5482
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Re: Buying in Bay Area (redux)

Post by fetch5482 »

randomguy wrote: If the tech industry stop making a zillion new millionaires/year who all want to buy houses, SF and the pennisula are in trouble. Until then people can and will pay to avoid commuting. It will be interesting to see if things end with a bang (years of dropping house prices) or a wimper (i.e. houses just stop going up at more than inflation).
You don't even need a lot of people getting rich. The inventory in most areas is so low, that even if Bay area makes about 0.5% of people rich each year, the demand (and affordability) will outweigh supply!
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