Buying a second home in Bay Area or investing in Stocks

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
juneponal
Posts: 2
Joined: Sun Apr 19, 2020 6:30 pm

Buying a second home in Bay Area or investing in Stocks

Post by juneponal »

Hello Everyone,

Im in my mid 30s with $1M in net worth.

Our Gross Income is (my and my wife): $412K
RSUs/ESPP: $50K/Year

We have a home in the Bay Area. We purchased this house for $1.18M but now its valued at $1.72M.

First House :

Purchase Price: 1.18M
Interest Rate: 3%
Remaining Mortgage: 890K
Property tax: 1.18%

My and my wife are contemplating to move to a new bigger house because we need more space. The price for the second house will be around ~2.2 M. My wife feels that we should still keep our old house and buy the new house. However, I feel that we should not be taking too much loan and instead sell the first house, reduce the loan amount for the new house, pay off the new house, while we continue to invest in the market. Once the second home is paid off, we could invest in Stocks more and also buy another house as investment paying it off in full cash.

I tried looking around the forum but I couldn't find any thread related to bay area. Since the properties in Bay Area appreciate faster/higher than the rest of the nation, I would love to hear what people think. Also, any math/spread sheet that will help us understand which route will be profitable will also be helpful for us in making the decision. Please let us know.
mervinj7
Posts: 2335
Joined: Thu Mar 27, 2014 3:10 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by mervinj7 »

juneponal wrote: Mon Aug 01, 2022 4:35 pm
I tried looking around the forum but I couldn't find any thread related to bay area. Since the properties in Bay Area appreciate faster/higher than the rest of the nation, I would love to hear what people think. Also, any math/spread sheet that will help us understand which route will be profitable will also be helpful for us in making the decision. Please let us know.
https://www.google.com/search?q=site%3A ... s-wiz-serp

Plenty of threads on housing in the Bay Area. We make sightly more than you in income. If we ever decided to upgrade our house, we would 100% sell our first place. Not worth the risk of having multi millions in the same real estate market.
User avatar
JoeRetire
Posts: 13315
Joined: Tue Jan 16, 2018 2:44 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by JoeRetire »

juneponal wrote: Mon Aug 01, 2022 4:35 pmMy wife feels that we should still keep our old house and buy the new house.
Does that mean keep the old house and rent it out? Or live in two homes?
Since the properties in Bay Area appreciate faster/higher than the rest of the nation, I would love to hear what people think.
I think you really mean that it has appreciated faster/higher than the rest of the nation in recent years.
I think I don't know how long (or even if) that will continue.
I think I wouldn't want to be a landlord. My son owns a rental in the bay area and is already owed 14 months worth of rent (and counting) that he is unlikely to be able to collect.
I think I would sell the old house when buying the new house.
This is gonna be my time. Time to taste the fruits and let the juices drip down my chin. I proclaim this: The Summer of George!
User avatar
squirrel1963
Posts: 545
Joined: Wed Jun 21, 2017 10:12 am
Location: Portland OR area

Re: Buying a second home in Bay Area or investing in Stocks

Post by squirrel1963 »

DW and I lived both in the SF Bay (Santa Clara & Mountain View) as well as in Seattle Eastside (Bellevue) which is at this point very similar to the SF Bay in regard to the real estate market. We owned 5 homes in these two areas in the past, we always made a little money in selling 3 of them, and made a lot of money (70% profit over purchase price) in 2 of them. This was between 1996 and 1 month ago, we are now retired in the Portland area.

I am of the opinion that as long as you have enough income and assets to be able to hold them thru recessions you will probably come out ahead, but I am also of the belief that owning two houses is a lot of concentrated risk, so it boils down to how much money you are willing to hold in a concentrated asset.

As to whether rent it (I assume you'd want to rent your first house if you keep it), I don't know. Some people are natural landlords and make good money in this business, we are not. We always sold when buying another house.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
123
Posts: 8802
Joined: Fri Oct 12, 2012 3:55 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by 123 »

juneponal wrote: Mon Aug 01, 2022 4:35 pm ...Since the properties in Bay Area appreciate faster/higher than the rest of the nation, I would love to hear what people think...
Yep they're going up faster/higher until they don't (and likely decline). How much of your assets, and liabilities, do you want in them when that happens? A significant quake could shake things up (and more likely down) out there as well.

Why not capture the tax-free capital gain in your home and move on? If you want to be a landlord buy another house with the proceeds and that capital gain proceeds could immediately increase your equity in the rental house your purchase.
The closest helping hand is at the end of your own arm.
Californiastate
Posts: 1252
Joined: Thu Feb 04, 2021 11:52 am

Re: Buying a second home in Bay Area or investing in Stocks

Post by Californiastate »

I'd sell the primary home to recover the $500k capital gains exclusion.
User avatar
Watty
Posts: 25474
Joined: Wed Oct 10, 2007 3:55 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by Watty »

juneponal wrote: Mon Aug 01, 2022 4:35 pm Since the properties in Bay Area appreciate faster/higher than the rest of the nation, I would love to hear what people think.
That could mean that it is due to underperform now that mortgage interest rates are over 5% instead of 2.5%.

You likely qualify for the federal homeowners capital gains exclusion which you would lose if you kept it for a rental for very long.

Having two Bay Area home would be a big diversification problem. With two houses you would own about $4 million in Bay Area real estate. You have a net worth of $1 million dollars. If the Bay Area real estate drops 25% your net worth would go down to $0. That is less than the net worth of my neighbors kid who "failed to launch" and struggles to hold down an hourly retail job. Do you really want to risk that?

I am not necessarily predicting that but don't kid yourself, a 25% drop in Bay Area real estate is very possible especially as interest rates go up.

You would also be owning real estate in an earthquake prone area. I lived there years ago and when I was thinking of buying my first house there my best guess was that if I bought a house it might have significant earthquake damage may every 200 years. (make your own guess). That does not sound too bad but you need to consider that if you own the property for 20 years then that means that there is about a 10% chance that it will have significant earthquake damage while you own it.

You also make really good money in your day jobs so your time is valuable. Even with a property management company you will need to spend a fair number of hours each year running your million dollar+ rental house business. You will have a hard time earning enough with the rental property to make it worth your time, and if you do make some money it will be taxed at a very high tax rate.

From what people have posted it also sounds like the Bay Area also has laws that are very unfavorable for landlords.

Selling it is a no-brainer easy choice from the information that you have posted.
Last edited by Watty on Mon Aug 01, 2022 6:01 pm, edited 2 times in total.
jarjarM
Posts: 2209
Joined: Mon Jul 16, 2018 1:21 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by jarjarM »

As someone who actually live through the '89 earthquake and dot com bust here in bayarea, I would not advise invest in such concentrated position (2 houses in a local area). While $1.7mil and $2.2mil is not expensive house here by the bay, it's going to be a significant part of your net worth. It's best to diversity with asset classes (stock/bond/etc) and/or geo location (if real estate investment is desired). Also, you want to take advantage of the $500k capital gain exclusion while you have it. Bay area housing price don't always appreciate and certainly don't appreciate faster than the rest of US all the time. There had been 2 - 3 price depreciation in the last 30+ years so beware of recency bias. Good luck.
User avatar
Wiggums
Posts: 5201
Joined: Thu Jan 31, 2019 8:02 am

Re: Buying a second home in Bay Area or investing in Stocks

Post by Wiggums »

I would not want to be a landlord with two big mortgages.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
Big Dog
Posts: 3444
Joined: Mon Sep 07, 2015 4:12 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by Big Dog »

Do you actually want to be a landlord? Don't forget, the BA is very tenant friendly. Future rent control is something to consider.

Personally, I'd take the $500k tax-free cap gain exclusion too.
Ron Ronnerson
Posts: 2841
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Buying a second home in Bay Area or investing in Stocks

Post by Ron Ronnerson »

I live in the East Bay and would likely sell in your situation.

You say that your net worth is $1m and that you have home equity of $830k ($1.72m home value minus $890k remaining mortgage). Are you including or excluding home equity as part of your net worth?

Another thing I’d take into consideration is that the new home will not only cost more, but the loan on it will be at a higher interest rate than your current 3% rate and you would also pay more in property taxes. So your monthly outflow will likely be quite a bit higher. If you haven’t done so already, run the numbers carefully to make sure this home fits in your budget.

On a positive note, you’ll be able to capture the $500k capital gains exclusion on the home sale so the timing of the transaction does make sense on that front. As for your next home, I’d buy a place I want to stay in for a good long while. If you move within the state after age 55, you can keep your property tax base with you. It’s a nice benefit if you can take advantage of it.
Ron Ronnerson
Posts: 2841
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Buying a second home in Bay Area or investing in Stocks

Post by Ron Ronnerson »

Watty wrote: Mon Aug 01, 2022 5:55 pm
I am not necessarily predicting that but don't kid yourself, a 25% drop in Bay Area real estate is very possible especially as interest rates go up.
I'm in the tri-valley region of the Bay Area (nice neighborhood, good schools) and home values have already dropped around 10-15% during this summer season as interest rates have gone up. According to both sources such as Zillow as well as recent comps, my home has dropped in value from around $1.4m three months ago to $1.2m now (15% drop) and I would not be the least bit surprised if it drops some more from this point on, especially if rates go up more. By the way, my home was valued around $850k at the start of last year so it makes sense that prices are at least somewhat coming back down to earth after such a fast increase in such a short amount of time. I agree with you that the OP shouldn't count on increases like what we've seen in the recent past. While anything is possible, banking on it is not prudent. In fact, not only can prices come down, it's already beginning to happen (at least where I live).
uglymcmuffin
Posts: 17
Joined: Mon Jul 25, 2022 12:27 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by uglymcmuffin »

We are in a similar boat in the Bay Area. We now own 2 houses in the same neighborhood of similar value 1.5M and 2M, and >50% of our net worth is in 1 stock.

We figured while we are young and dont need the money and we can stomach the risk, we are ok with all the eggs in 2 baskets. We are planning on hunkering down here for the next 30+ years. We are considering renting the old house now. We can try renting it for 3 years before losing the 500k exclusion. Maybe we will like it, maybe we will hate it. But we know everything about our house, and i dont mind fixing it up as needed. We bought it ~10yrs ago so there is some non-zero rental profit to be made from it along with some non-zero amount of headache.

The older your purchase on a Bay Area home the better it would be for rental because the property tax now is obscene and the financing is harder for an investment property. So if for whatever reason you were interested in renting in the Bay Area, your older home is a better candidate. If its like our home, its smaller and more suitable for renting as well.

Buying the 2nd home without selling is harder to get a bigger loan because your DTI is higher without closing out the mortgage on the first home. We ended up putting about 50% down on the new house to shrink the loan so the lender would approve the DTI.

I recently ran the calculations and selling the old house would definitely be a nice windfall of money, but I’d just put it in index funds. I guess because i dont know exactly what i would do with the money immediately I’m not sure if i would sell it. We are planning some remodels on the new house, but need to get the cost estimate first to decide how to finance it.
mchampse
Posts: 297
Joined: Mon Feb 26, 2007 1:45 am

Re: Buying a second home in Bay Area or investing in Stocks

Post by mchampse »

I’ve owned a home that I used to live in but don’t anymore in the Bay Area since 2005. Every time I consider selling, I run the numbers and it ends up not making sense because of the low property tax basis and the large amount of capital gains that I would owe.

Your situation isn’t the same as you would owe relatively little capital gains and your property tax basis isn’t as low. I’d sell while you can still get the $500k exemption.
User avatar
Sandi_k
Posts: 1919
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Buying a second home in Bay Area or investing in Stocks

Post by Sandi_k »

Californiastate wrote: Mon Aug 01, 2022 5:47 pm I'd sell the primary home to recover the $500k capital gains exclusion.
+ 1,000.

$500k tax-free?! That is an amazing gift of the US tax code, and I'd take it.
random_walker_77
Posts: 1883
Joined: Tue May 21, 2013 8:49 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by random_walker_77 »

If you keep the old house, with a mortgage, you can make a super-leveraged concentrated bet on bay area real estate. With 20% equity, if it goes up 20%, you've doubled your money! Of course, if it goes down, you could lose a lot too.

If you keep the old house long term, you're also giving up the 500K capital gains exclusion. At your income, you're looking at 23.8% federal tax on those 500K in gains, plus another ~10-11% of state tax? That's like $170K of tax breaks you're giving up, for the privilege of being a landlord.
cmr79
Posts: 169
Joined: Mon Dec 02, 2013 4:25 pm

Re: Buying a second home in Bay Area or investing in Stocks

Post by cmr79 »

It sounds from your post that you want to be a landlord at some point, but it also sounds like you and your wife 1) both work and 2) aren't on the same page about when to get involved in real estate in that way. That is probably a bigger issue, and something that we can't help you with directly. I'd certainly echo most everyone else here that you would be taking on a lot of concentrated risk if you do this now, and with some disagreement with your wife about the timing of becoming landlords (and I presume that either one or both of you are in somewhat stressful tech startups from the background info you provided?), there is the potential for major marital drama if you have a negative landlord experience early on.

You have high incomes and probably don't need to take on a ton of risk unless you have aggressive FIRE plans. More information on how this would or wouldn't fit with your IPS would help to guide more specific and actionable responses.
Post Reply