Buying first home in SF - gut check

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kermit
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Buying first home in SF - gut check

Post by kermit »

My wife and I are considering purchasing our first home in San Francisco. A little bit about us:

Age: Both 28
Jobs: stable
Income: ~$430k with vesting RSUs. If you consider salary only then ~$230k
Portfolio: $2.5M (mostly diversified index funds but a small amount of that is vested company stock that I've yet to sell)
Debt: None
Kids: None but the point of this home is we will be having kids in the next few years

The homes we are looking at are around $1.8M for a large 3 bedroom 2 bath in a desirable area (SF is crazy). We would take the maximum mortgage possible while still deducting interest ($1M) and pay the rest from our portfolio ($800K). The banks calculate debt-to-income ratios using your salary, they can't consider income from RSUs, so on paper it looks like a $1M mortgage could put us near a 43% ratio but it actually would be *much* lower.

It feels like a no brainer for us. Yes it's expensive and yes it feels like a bubble. But I think we can afford it and wanted to know what the bogleheads think.
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Raybo
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Re: Buying first home in SF - gut check

Post by Raybo »

Your property tax will be close to $20k/year. While that shouldn't be a problem now, it may be a burden as you get older and closer to retirement. You can't pay off property tax. It is there every year.

Otherwise, you're right, San Francisco is crazy. If it is an older home, check out its earthquake upgrades: bolted foundation, rods linking foundation and roof, etc. check out windows, electrical, and make sure the location is far enough above sea level to withstand rising seas and liquefaction.

I'd also check out deferred maintenance issues like roof, outside materials, painting. I'd check when the house last sold to see if it is being flipped (i.e. cosmetic fixes to hide long term problems).

As for affordability, either the bank will make the loan or not. You might consider getting "per-qualified" for a loan amount to see what the banks are actually willing to lend.

I live in SF and think it is a great place to do so. Welcome!
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

Raybo wrote:Your property tax will be close to $20k/year. While that shouldn't be a problem now, it may be a burden as you get older and closer to retirement. You can't pay off property tax. It is there every year.

Otherwise, you're right, San Francisco is crazy. If it is an older home, check out its earthquake upgrades: bolted foundation, rods linking foundation and roof, etc. check out windows, electrical, and make sure the location is far enough above sea level to withstand rising seas and liquefaction.

I'd also check out deferred maintenance issues like roof, outside materials, painting. I'd check when the house last sold to see if it is being flipped (i.e. cosmetic fixes to hide long term problems).

As for affordability, either the bank will make the loan or not. You might consider getting "per-qualified" for a loan amount to see what the banks are actually willing to lend.

I live in SF and think it is a great place to do so. Welcome!
This is all great advice; thanks! We are already pre-approved (qualified? Not sure the difference) for a loan of this size. And I agree, SF is a wonderful place to live (we've been renting here for 3 years now).
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

Nothing new in that document. We all know the housing market in SF is a crazy expensive. I'm not asking if it is worth it. I'm asking if I can afford it.
ccieemeritus
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Re: Buying first home in SF - gut check

Post by ccieemeritus »

Watch out for the taxes from selling enough of your portfolio to get $800k. Depending on your cost basis you might have to sell well over $1m to net $800k to make the down payment. If you haven't already done so finish your 2013 taxes now to get used to the new tax rates. The average federal tax percentage TT reports seriously understates the total taxes you will pay (state, medicare, social, new investment tax, medicare surplus tax, etc.)

If possible it's helpful to spread the sales between two tax years (sell half in dec, half in January). But it sounds like you have a candidate house. If gains are substantial make sure to sell long term and specify the blocks to your broker so they get reported as such.

Good luck with the kids. Best reason to spend money there is.
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Re: Buying first home in SF - gut check

Post by letsgobobby »

kermit wrote:
Nothing new in that document. We all know the housing market in SF is a crazy expensive. I'm not asking if it is worth it. I'm asking if I can afford it.
You really can't separate the issues. You can afford this, on paper, but only if nothing changes. If the housing market crashes, things will have changed, including, likely, your jobs, and the income from them.

Even with RSUs and an income of $430k, I wouldn't buy a $1.8m house, $800k down or not. Also - and I don't want or expect you to answer this question - how do you come into $2.5m at age 28? I think the way you approach spending that money matters a lot in terms of how you acquired it. And whether you believe you have additional family resources to fall back on if this bubble bursts or your jobs go and things go wrong. In other words, buying a $1.8m home on $250k-$430k income is highly leveraged no matter how you split it. Your psychology about how you'll handle things when leverage turns against you says a lot about whether you can afford this home.
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White Coat Investor
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Re: Buying first home in SF - gut check

Post by White Coat Investor »

kermit wrote:My wife and I are considering purchasing our first home in San Francisco. A little bit about us:

Age: Both 28
Jobs: stable
Income: ~$430k with vesting RSUs. If you consider salary only then ~$230k
Portfolio: $2.5M (mostly diversified index funds but a small amount of that is vested company stock that I've yet to sell)
Debt: None
Kids: None but the point of this home is we will be having kids in the next few years

The homes we are looking at are around $1.8M for a large 3 bedroom 2 bath in a desirable area (SF is crazy). We would take the maximum mortgage possible while still deducting interest ($1M) and pay the rest from our portfolio ($800K). The banks calculate debt-to-income ratios using your salary, they can't consider income from RSUs, so on paper it looks like a $1M mortgage could put us near a 43% ratio but it actually would be *much* lower.

It feels like a no brainer for us. Yes it's expensive and yes it feels like a bubble. But I think we can afford it and wanted to know what the bogleheads think.
No wonder doctors can't afford to live/practice/buy homes in the Bay Area. They're competing with folks like you for 3 bedroom homes. 5 years younger, twice as much income, with a net worth of several million instead of negative several hundred thousand.

I think it's affordable for you, but it's on the edge of my usual ratio (mortgage = 2X salary.) Most people in the Bay Area have to bend my rule quite a bit. I'm sure you'll do fine.
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

letsgobobby wrote:Also - and I don't want or expect you to answer this question - how do you come into $2.5m at age 28? I think the way you approach spending that money matters a lot in terms of how you acquired it. And whether you believe you have additional family resources to fall back on if this bubble bursts or your jobs go and things go wrong. In other words, buying a $1.8m home on $250k-$430k income is highly leveraged no matter how you split it. Your psychology about how you'll handle things when leverage turns against you says a lot about whether you can afford this home.
I came into this money on my own; I'm a software engineer, work hard, and joined the right company at the right time. I grew up very poor and am otherwise extremely frugal. I don't feel it is leveraged when you consider the leftover money in the portfolio could pay off the mortgage and *still* have plenty leftover.
EmergDoc wrote:No wonder doctors can't afford to live/practice/buy homes in the Bay Area. They're competing with folks like you for 3 bedroom homes. 5 years younger, twice as much income, with a net worth of several million instead of negative several hundred thousand.
It's funny you mention this because my wife is a doctor!
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Re: Buying first home in SF - gut check

Post by Valuethinker »

kermit wrote:My wife and I are considering purchasing our first home in San Francisco. A little bit about us:

Age: Both 28
Jobs: stable
Income: ~$430k with vesting RSUs. If you consider salary only then ~$230k
Portfolio: $2.5M (mostly diversified index funds but a small amount of that is vested company stock that I've yet to sell)
Debt: None
Kids: None but the point of this home is we will be having kids in the next few years

The homes we are looking at are around $1.8M for a large 3 bedroom 2 bath in a desirable area (SF is crazy). We would take the maximum mortgage possible while still deducting interest ($1M) and pay the rest from our portfolio ($800K). The banks calculate debt-to-income ratios using your salary, they can't consider income from RSUs, so on paper it looks like a $1M mortgage could put us near a 43% ratio but it actually would be *much* lower.

It feels like a no brainer for us. Yes it's expensive and yes it feels like a bubble. But I think we can afford it and wanted to know what the bogleheads think.
I think you can afford to buy the house.

Remember the tech economy is cyclical, so there may be a moment when your house is worth 20% less than you paid for it. Unfortunately it might coincide with a period of unemployment.

You have to live somewhere and you might as well enjoy where you live. Unless renting is truly cheap relative to owning (and it's not in SF, I don't think?) then you might as well own as long as you have a 5+ year time horizon.
ks289
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Re: Buying first home in SF - gut check

Post by ks289 »

You can afford it.
Go for it and continue to work your (behind) off and save now before the kiddies arrive - that could change everything! Congratulations on getting off to such a great start.
If things do take a turn for the worse, you do have a plenty fat cushion, but bullet-proof armor (paid off house, 25+x expenses saved) is even better. Practically nobody your age is in better shape - except maybe Lebron James...
Good luck.
bigred77
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Re: Buying first home in SF - gut check

Post by bigred77 »

ks289 wrote:You can afford it.
Go for it and continue to work your (behind) off and save now before the kiddies arrive - that could change everything! Congratulations on getting off to such a great start.
If things do take a turn for the worse, you do have a plenty fat cushion, but bullet-proof armor (paid off house, 25+x expenses saved) is even better. Practically nobody your age is in better shape - except maybe Lebron James...
Good luck.
I think if lebron posted here in 10 years people would tell him his withdrawl rate is not sustainable 100% of the time per firecalc and if he were prudent he better find some part time work in retirement to defray some expenses...
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Re: Buying first home in SF - gut check

Post by Grt2bOutdoors »

Frankly, I think borrowing more than 4x gross income is crazy, but then again it's not uncommon for folks with a heck of a lot less assets to purchase homes for 5x or more income in the NY/NJ/CT region. So go figure. The biggest issue with SF like NYC is the region is dependent upon a few select industry sectors to provide the bulk of the income generation. In NYC it is still the financial industry that provides the bulk of tax dollars, even after the continual reductions in labor force. In SF, it's clearly the Silicon Valley effect that is driving up property prices for 25-40 miles in a circumfrence of SF. How the tech market and maybe to some extent biotech (Genetech) goes is how the property market will go - but make no mistake, many industries inevitably go through booms and busts. It's the bust that hurts the most, when almost everyone runs for the door at the same time! :shock:
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investingdad
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Re: Buying first home in SF - gut check

Post by investingdad »

I personally wouldn't be comfortable with it based on the ratios:

OP Mortgage to Income: 1000K / 430K = 2.3x
OP Mortgage to Salary (no RSU): 1000K / 230K = 4.3x
OP House to Income: 1800K / 430K = 4.2x
OP House to Salary (no RSU): 1800K / 230K = 7.8


I don't know, it just looks like a lot to me. If you factor in the portfolio, though, I guess that swings it. He could pay the whole thing off but would chew up 72% of his portfolio in the process.

But if I take his proposed House to Income ratio and apply it to our situation and what we paid for our house in 2010, it would mean we earn only 85K. If I take his House to Salary ratio and apply it to our situation, it would mean we earn only 46K. In reality, we earn a little over 200K.

Ratios seem out of whack to me. But that's just my opinion, which is all the OP is looking for.
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Re: Buying first home in SF - gut check

Post by frugaltype »

A lot of what is attractive about San Francisco is disappearing, as diversity, artists, etc. get driven out by tech people with astronomical salaries. I would not buy a house there now, since I value what's being destroyed. Also, there apparently have been attacks on the google buses and so forth.

[OT comments removed by admin LadyGeek]
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Re: Buying first home in SF - gut check

Post by Grt2bOutdoors »

frugaltype wrote:A lot of what is attractive about San Francisco is disappearing, as diversity, artists, etc. get driven out by tech people with astronomical salaries. I would not buy a house there now, since I value what's being destroyed. Also, there apparently have been attacks on the google buses and so forth.

[OT comments removed by admin LadyGeek]
What about if it took 10 or 20+ years to accumulate? [Response to OT comments removed by admin LadyGeek]
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Re: Buying first home in SF - gut check

Post by technovelist »

Grt2bOutdoors wrote:
frugaltype wrote:A lot of what is attractive about San Francisco is disappearing, as diversity, artists, etc. get driven out by tech people with astronomical salaries. I would not buy a house there now, since I value what's being destroyed. Also, there apparently have been attacks on the google buses and so forth.

[OT comments removed by admin LadyGeek]
What about if it took 10 or 20+ years to accumulate? [Response to OT comments removed by admin LadyGeek]
If someone age 28 has been working for over 20 years, then maybe it's not obliviousness but an arithmetic problem. :mrgreen:

By the way, I know someone who was a multi-millionaire... for a brief time in 2000, due to stock that he couldn't sell. Not for long, though.
In theory, theory and practice are identical. In practice, they often differ.
Valuethinker
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Re: Buying first home in SF - gut check

Post by Valuethinker »

frugaltype wrote:
[OT comments removed by admin LadyGeek]
I don't completely agree.

That person may work (very) hard. What is true is that the returns to working in certain industries (tech, financial services) have risen compared to other industries. The Financial Times had a thing showing bankers in the UK were actually paid *less* than other professionals (academics, engineers, lawyers, doctors) in 1975-- how things change.

It's just possible to make a lot of money if you are in the right profession, right company at the right time. No one doubts Goldman Sachs employees work very hard-- and they make phenomenal average compensation per head (it will be quite skewed towards the top 10%).
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Re: Buying first home in SF - gut check

Post by Jack FFR1846 »

Apart from the numbers.....

Your jobs are diversified. That's good.

The thing to be careful of is if you have kids and your wife decides to stay home with them, can you afford this?

What if that happens and the tech sector goes into the toilet again (it has happened and will happen again....when, who knows). Or your company is bought by Cisco or Microsoft just for their patents and is liquidated (seen this more times than I can count)?

Would your wife be ok with kids at home, her going back to work and you staying home with the kids? Would you be ok with that?

As much as your wife may not plan to stay home, things change with kids. I'm in a similar household.....I'm an engineer and the wife's a nurse. She left nursing at a point where she was a mid manager who built a group out of nothing, and was heading up. Left and now hasn't worked in over a dozen years. Fortunately, our kids came very late, so we had the money and income to cover.
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DanDav
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Re: Buying first home in SF - gut check

Post by DanDav »

letsgobobby wrote: You really can't separate the issues. You can afford this, on paper, but only if nothing changes. If the housing market crashes, things will have changed, including, likely, your jobs, and the income from them.

Even with RSUs and an income of $430k, I wouldn't buy a $1.8m house, $800k down or not. Also - and I don't want or expect you to answer this question - how do you come into $2.5m at age 28? I think the way you approach spending that money matters a lot in terms of how you acquired it. And whether you believe you have additional family resources to fall back on if this bubble bursts or your jobs go and things go wrong. In other words, buying a $1.8m home on $250k-$430k income is highly leveraged no matter how you split it. Your psychology about how you'll handle things when leverage turns against you says a lot about whether you can afford this home.
I think you make a lot of strong points. It may be possible, but it seems like a pretty big gamble to me.
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Re: Buying first home in SF - gut check

Post by random_walker_77 »

I think you can afford it. You have enough to buy it in cash, and your base salary easily covers the property taxes. (What is it in SF - 1.2%? so about $2K / month). Property taxes shouldn't be too bad since you only insure structures, not land, and a 3BR is probably maybe $200K of structure.

Carrying the mortgage is fine too. Just be sure you grok the risks. The interest, at historically low rates, and w/ preferential tax treatment, is very low in real terms (subtract out inflation). But you could end up losing money in a worst case scenario. Figure out if you're ok w/ the risks of an unlikely worst case scenario, accept it, and make your decision.

For example, if the economy tanks w/ the stock market dropping 30%, and an earthquake hits, and you find yourself out of work, underwater, and low on funds b/c your portfolio has dropped, you might have to take some of that reduced portfolio and sell low to make the mortgage payments. Given your position, I think you'd be fine -- the worst that could happen is that you'd lose some portion of your gigantic nest egg. When you don't need the mortgage, but have one anyways, you have flexibility and are unlikely to lose your shirt.

Finally, I'd urge you to also consider your opportunity costs. You've worked hard to get yourself in the right place w/ the right skills, gotten lucky with options, and essentially already "won". In the bay area, it could happen again. But with $2.5M at age 28, time is your friend; compounding works in your favor. If you instead moved somewhere else w/ low housing costs, but a decent job market, then more of that $2.5M would be available to grow. $0.4M could buy you a lot of house in a family-friendly place like Austin, for example. (Texas also doesn't tax your dividends/capital gains, or income for that matter...)
If moving somewhere w/ a lower cost of living is an option, the benefits of compounded growth and lowered cost of living would set you on track for a very early retirement. Plug that $2.5M into a spreadsheet, pick a conservative anticipated growth rate, and see where you'd be at age 40...
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

random_walker_77 wrote:If moving somewhere w/ a lower cost of living is an option, the benefits of compounded growth and lowered cost of living would set you on track for a very early retirement. Plug that $2.5M into a spreadsheet, pick a conservative anticipated growth rate, and see where you'd be at age 40...
Moving isn't really an option. We are pretty tied to the Bay Area. I do have a spreadsheet that tracks this with conservative growth and my current annual contributions; it's fun to see where I could be at 40 even after plunking down this down payment.
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macchiato
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Re: Buying first home in SF - gut check

Post by macchiato »

You're young with a portfolio a person near retirement would envy, congrats on that.

I can't believe I'm saying this, but I'd stretch toward a 4BR if kids are on the horizon. Consider a property that is solid "bones" but needs some work. You're young and can improve the place in small projects over time.

But as to affordability, and having lived here for over a decade, I think that this is indeed a no-brainer with your given parameters.
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Re: Buying first home in SF - gut check

Post by macchiato »

Have to admire Patrick for continuing on this tack for nearly a decade, but lots of places around his area (Los Altos) are up 30% since the 2007 peak.
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Random Musings
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Re: Buying first home in SF - gut check

Post by Random Musings »

Another question would be whether the OP considers household income to grow roughly at rate of inflation or to climb much quicker than that.

Personally, I would never buy at such high ratio's as described in previous posts. I bought at a 2/1 house/income ratio and had a higher net worth/house ratio as well. Your mortgage to income level, with 800K down makes in palatable.

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Re: Buying first home in SF - gut check

Post by XtremeSki2001 »

FWIW, while not as well off financial as you, my wife and I recently purchased a house sans kids with hopes of filling it with kids. Fast forward a year and 1 child with another on the way, my wife has decided not to return to work. My wife and I discussed this at length prior to having kids and planned for her to return to work, but kids change everything. We're now in a house we probably shouldn't have purchased off my income alone. We purchased a house based on the metrics posted above at just under 2x income for the mortgage, but are now at 2.8x. We are doing fine, but things are tighter than we had intended.

Thought I'd share this with you as you make plans for the future.
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letsgobobby
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Re: Buying first home in SF - gut check

Post by letsgobobby »

Yes, it is normal for humans to make plans based on optimistic and best case scenarios.

Meanwhile, my family is considering selling its apartment building in SF after a two and a half decade bull market.

OP should consider - what if wife stays home? what if one job goes away? What if options end up worthless? What if there is an earthquake? What if tech bubble bursts?

He obviously has tons of options and quite a bit of leeway. However I can't separate the 'price' and 'value' when I'm thinking of buying something. He asked for a gut check and mine is, "this is too expensive".
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

letsgobobby wrote:Yes, it is normal for humans to make plans based on optimistic and best case scenarios.

Meanwhile, my family is considering selling its apartment building in SF after a two and a half decade bull market.

OP should consider - what if wife stays home? what if one job goes away? What if options end up worthless? What if there is an earthquake? What if tech bubble bursts?

He obviously has tons of options and quite a bit of leeway. However I can't separate the 'price' and 'value' when I'm thinking of buying something. He asked for a gut check and mine is, "this is too expensive".
What if wife stays home? - Not a problem. My wife is entering her fellowship and thus still in training for at least another 3 years. Her salary during this period is comparatively low and losing it, but gaining a stay at home parent and thus no need for childcare, wouldn't be a huge hit. But we've talked about this extensively and she has no plans to stop working when we have kids. She's been studying for 11 years already (4 years of undergrad, 4 years of medical school, 3 years of residency, and an upcoming 3 years of fellowship); her career hasn't really even started yet.

What if options end up worthless? - Then we are down to the $230K salary I mentioned. I mentioned at the top that the lender only considers salary, not stock grants, when deciding what you can afford. If that happened it would be a stretch but we'd still be able to afford our payments. It's worth mentioning that these are *not* options. They are RSUs. The difference is important. For them to become "worthless" the stock needs to go to zero. Not impossible but less likely than simply going underwater on options.

What if there is an earthquake? - Then we are all screwed. The entire city. But I suppose my portfolio could then buy a bunch of (dilapidated) homes! Just kidding!

What if tech bubble bursts? - My diversified portfolio could pay off the mortgage in the event that I lost my job. Or at the very least tide us over while I search.
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Re: Buying first home in SF - gut check

Post by NoVa Lurker »

What do you need all the liquidity for? In other words, why not use most of your $2.5M portfolio to buy the house?

I'd actually agree with macchiato. In your shoes, I'd be looking at 4BR if you are thinking at least 2 kids. If you buy a house now but move into a bigger one in five years, the taxes and fees from moving could be in the six figures.

Otherwise, wait to buy until kid #1 is on the horizon (and in any case, until your wife knows she won't have to move again for awhile), and just keep growing your portfolio. The house will tie you down - although maybe that's not the worst thing.
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kermit
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Re: Buying first home in SF - gut check

Post by kermit »

NoVa Lurker wrote:What do you need all the liquidity for? In other words, why not use most of your $2.5M portfolio to buy the house?
This is something I've been wrestling with too. We've been debt free for a long time and I'm not sure how I will feel with a mortgage. But the rates are low enough now that I think holding onto the mortgage might be smart? Hence the maximum deductible mortgage idea.
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Re: Buying first home in SF - gut check

Post by FireProof »

Look, it's certainly up for debate whether making a leveraged investment in San Francisco real estate is the best decision - perhaps it would be better to rent (the Bay Area buy vs. rent index is the worst in the country), or invest in Oakland instead.

But obviously the OP can afford it. In the apocalyptic scenario in which San Francisco real estate plummets 50% and stays there (inflation-adjusted) until retirement, his net worth would drop from 2.5 million to... 1.6 million. If $1.6 million net worth with high-paying jobs at age 28 is your black swan, then there's not really a problem.
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Re: Buying first home in SF - gut check

Post by letsgobobby »

kermit wrote:
letsgobobby wrote:Yes, it is normal for humans to make plans based on optimistic and best case scenarios.

Meanwhile, my family is considering selling its apartment building in SF after a two and a half decade bull market.

OP should consider - what if wife stays home? what if one job goes away? What if options end up worthless? What if there is an earthquake? What if tech bubble bursts?

He obviously has tons of options and quite a bit of leeway. However I can't separate the 'price' and 'value' when I'm thinking of buying something. He asked for a gut check and mine is, "this is too expensive".
What if wife stays home? - Not a problem. My wife is entering her fellowship and thus still in training for at least another 3 years. Her salary during this period is comparatively low and losing it, but gaining a stay at home parent and thus no need for childcare, wouldn't be a huge hit. But we've talked about this extensively and she has no plans to stop working when we have kids. She's been studying for 11 years already (4 years of undergrad, 4 years of medical school, 3 years of residency, and an upcoming 3 years of fellowship); her career hasn't really even started yet.

What if options end up worthless? - Then we are down to the $230K salary I mentioned. I mentioned at the top that the lender only considers salary, not stock grants, when deciding what you can afford. If that happened it would be a stretch but we'd still be able to afford our payments. It's worth mentioning that these are *not* options. They are RSUs. The difference is important. For them to become "worthless" the stock needs to go to zero. Not impossible but less likely than simply going underwater on options.

What if there is an earthquake? - Then we are all screwed. The entire city. But I suppose my portfolio could then buy a bunch of (dilapidated) homes! Just kidding!

What if tech bubble bursts? - My diversified portfolio could pay off the mortgage in the event that I lost my job. Or at the very least tide us over while I search.
I didn't realize your wife still has the probability of substantially increasing her income. In my opinion this does change things favorably. I wouldn't discount the possibility of a mother staying home with her children, but her earnings potential will remain high even if she does take extended leave.

The earthquake scenario is one I would not brush off, but I agree you can't live your life based on what ifs. And what happens if you have the note and the money to pay it off but no home due to an earthquake - can the lender come after you for that in CA? In WA we own earthquake insurance for a home costing a fraction of what you are exploring, but it's probably cheaper here, as well.

Certainly my gut feeling is based on absolute prices in SF and NYC. That's probably something you've become inured to.

Afford it? I still see 6x income which makes me shudder; alternatively I see a paid off house, $250k+ income, and $700k in retirement. I suppose that's not a bad place to be at age 28 so congratulations (a la Suze Orman): You are approved!
fareastwarriors
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Re: Buying first home in SF - gut check

Post by fareastwarriors »

Approved as well.
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steadyeddy
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Re: Buying first home in SF - gut check

Post by steadyeddy »

If you had posted that you're 28 with a paid off home, investments worth $700k, and a $230-430k variable income everybody would have been patting you on the back.

It's the leverage that makes this whole scenario too damn risky to endorse. Why not borrow only $500k? Is the possibility of a little higher net worth really worth the risk? I can't help but feel your net worth will be just fine even if you "spend" some opportunity cost to dial down the risk to a truly safe level.
wantrepreneur
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Re: Buying first home in SF - gut check

Post by wantrepreneur »

It seems like you want a Yes for an answer so go ahead and buy the house. It's your life, your money, and you should do whatever you want with it.

That being said, I am very much in the same situation as yours, we probably work at the same company, but I am five years older. My wife and I decided to never buy a house in bay area for as long as we stay here simply because it's way too much money for a house and also limits career options. How so? I am considering making a switch to a start up which will mean that i may make less in base salary and will give up considerable income from RSUs I am leaving behind. I may do it because it makes me happy, and my wife is okay with it. She someday wants a house and we will buy one in Portland or somewhere else in the country once we give it all up in a couple of years and hopefully spend rest of our lives helping people.

Moral of my story : Buying such an expensive house will force you to stay in your job even if you are unhappy. It will prevent from taking risks that you should be taking early in your career. Selling diversified investments to pay off a house isn't a great move, if you are thinking boglehead way.

However, it's your money and do whatever makes you happy at the end of the day. We all have our opinions.
SDBoggled
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Re: Buying first home in SF - gut check

Post by SDBoggled »

Hi,

IMHO if you can afford to pay cash... then you can afford it, and the rest is just a choice based upon your priorities :-)

Just wondered if you had thought of raising kids and school districts in this house. I know you expect kids, but really thinking about all that is involved in raising them may change your priorities for location and size etc. If possible, I like to buy for the long term so I don't lose 6% in selling costs and to maintain the Prop 13 property tax basis.
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Watty
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Re: Buying first home in SF - gut check

Post by Watty »

Be sure to take the risk of the house being damaged in an earthquake into account. It was awhile back but when I looked at buying a house in the south Bay Area I looked into what the risk the was that the house would be damaged in an earthquake. The best that I could figure out was that it might be damaged once in 200 years. That does not sound too bad but it means that if you own it for 20 years there is a 10% chance that it would be damaged while you owned it.

Even if you are willing to take the financial risk with or without earthquake insurance you also have consider how difficult it would be to hire a contractor after a major earthquake. Someone I know has relatives in Florida where Hurricane Andrew hit and their roof was badly damaged. They had insurance and could afford to replace the roof but it took them two or three years to get a contractor in to fix it be cause the contractors were so busy.
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Re: Buying first home in SF - gut check

Post by john94549 »

Grt2bOutdoors wrote: In SF, it's clearly the Silicon Valley effect that is driving up property prices for 25-40 miles in a circumfrence of SF.
Absolutely. Our daughter and son-in-law are looking to move from a smallish two BR in Alameda to something larger in Lafayette, suitable for a growing family. The prices aren't just nosebleed, they're crazy. Techies have discovered BART. Quite "ordinary" 4 BR 2 BA fifty-year-old homes in Burton Valley are going well above the ask. The only stuff below a million I would classify as requiring major rehab, verging on "tear-down". In our neighborhood, north of Hiway 24 just off Pleasant Hill Road, of the six houses nearest us on our street, five are still occupied by the original owners (each of whom bought in the late 70's). As did we.
TRC
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Re: Buying first home in SF - gut check

Post by TRC »

kermit wrote:My wife and I are considering purchasing our first home in San Francisco. A little bit about us:

Age: Both 28
Jobs: stable
Income: ~$430k with vesting RSUs. If you consider salary only then ~$230k
Portfolio: $2.5M (mostly diversified index funds but a small amount of that is vested company stock that I've yet to sell)
Debt: None
Kids: None but the point of this home is we will be having kids in the next few years

The homes we are looking at are around $1.8M for a large 3 bedroom 2 bath in a desirable area (SF is crazy). We would take the maximum mortgage possible while still deducting interest ($1M) and pay the rest from our portfolio ($800K). The banks calculate debt-to-income ratios using your salary, they can't consider income from RSUs, so on paper it looks like a $1M mortgage could put us near a 43% ratio but it actually would be *much* lower.

It feels like a no brainer for us. Yes it's expensive and yes it feels like a bubble. But I think we can afford it and wanted to know what the bogleheads think.
What's your target retirement number? You have a massive portfolio for 28. Why not keep renting and keep investing for another 10 years, then move out of SF and retire early? It's a bubble that will eventually pop.
freddie
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Re: Buying first home in SF - gut check

Post by freddie »

There are a bunch of questions out there

a) is this house affordable? You bet. Figuring out ratios of mortgages to income when you have enough assets to pay cash for the house is stupid. You can afford the house if you want it. Deciding to pay cash, take out a million dollar mortgage, or something in between. You wan to gamble you can get more than 4% on your money over the next 30 years, invest. Sleep better without having your money working for you, pay off the house.

b) Is buying in SF smart. Who the heck knows. Trying to time housing markets is just as hard as the stock market. People have been saying housing prices are going to crash since 1998. Hasn't happened.

c) Is living in SF (NYC or any other high cost area) smart? Depends on your priorities in life. You want to retire in 3 years? You would be better off moving somewhere cheap. Enjoy the area? It is priceless.

d) Is this a good time for you to buy? Maybe you would be better off waiting til after the wife has a job (i.e. to know where to be close to), you save up another 500k and so on. On the other hand putting it off til houses costs 15% more, interest rates are 2% higher and you have paid another 50k in rent, isn't overly appealing either.

e) What about the quakes? Odds are that in the next 100 years or so years, there will be a big quake and your house will be damaged. No one can tell you if that will be 25k of damage or the whole house being leveled.How that balances out against hurricanes in FL, tornados in the midwest, flooding on the coasts, and so on is impossible to say. And yeah quake insurance is brutal.

NoVa Lurker wrote:What do you need all the liquidity for? In other words, why not use most of your $2.5M portfolio to buy the house?

I'd actually agree with macchiato. In your shoes, I'd be looking at 4BR if you are thinking at least 2 kids. If you buy a house now but move into a bigger one in five years, the taxes and fees from moving could be in the six figures.

Otherwise, wait to buy until kid #1 is on the horizon (and in any case, until your wife knows she won't have to move again for awhile), and just keep growing your portfolio. The house will tie you down - although maybe that's not the worst thing.
random_walker_77
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Re: Buying first home in SF - gut check

Post by random_walker_77 »

kermit wrote:
NoVa Lurker wrote:What do you need all the liquidity for? In other words, why not use most of your $2.5M portfolio to buy the house?
This is something I've been wrestling with too. We've been debt free for a long time and I'm not sure how I will feel with a mortgage. But the rates are low enough now that I think holding onto the mortgage might be smart? Hence the maximum deductible mortgage idea.
Mortgage is leverage and it can help you or hurt you, depending on the roll of the dice. You've got the money, so it's a question of whether you want to risk some of it. This isn't necessarily "bad" risk either, but it's a personal decision whether the reward justifies the risk. At your net worth, it seems like it's "just money" -- you're not likely to end up homeless or bankrupt but you might gain some or lose some money.

If... you think inflation might go up and want a hedge, then owing the bank $1M isn't a bad way to hedge inflation. If you think the market returns are going to outpace the mortgage, then it's also a good bet. But then there are the opposing scenarios. And there's the chance that housing really is unsustainably priced.

Do also consider the psychological benefits of owning outright. When we bought, we had a mortgage that we didn't need, but I was making the bet that leverage would pay off, given historically low rates. Then rates dropped even lower and I refinanced since it would have a short payback time. And then, when rates dropped even lower, we ended up just paying it off. My wife feels much better being completely debt-free, and sometimes that peace of mind is priceless.

Finally, given your income levels, do note that there is an income-based phaseout of itemized deductions (which, in a good year, would reduce your tax benefit from mortgage interest). This phaseout went away for a couple years but seems to be back, and if I understand it properly, you lose the ability to deduct 3% of the amount your income exceeds $300K. So if you have a really good year w/ RSU's and pull in $500K, you'd lose 6K of your deduction. Given that the tax benefit from mortgage interest is only that portion of interest that exceeds your standard deduction, this could crimp your tax incentive for carrying the mortgage.

(one reference from google: http://www.hd-cpa.com/blog/2013/06/11/h ... ase-out-2/)
Last edited by random_walker_77 on Wed Mar 26, 2014 10:27 pm, edited 1 time in total.
random_walker_77
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Re: Buying first home in SF - gut check

Post by random_walker_77 »

actually, let me take that back. We're talking california here, and your state taxes already means that you're always going to be itemizing.

Regarding the earthquake stuff, I'm not sure you have any real long-term concerns there. Rebuilding a 1.8M house in SF might not cost that much b/c you're really talking about a $200K house that happens to sit on a $1.6M lot. Short-term, if the house is still livable, prices could even spike as people who are temporarily displaced are going to be looking for a place to live.
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Re: Buying first home in SF - gut check

Post by westcoastinvestor »

I would say go for it, with two caveats.

First, if you are considering having kids, you might not want to max out your mortgage. Having a lower monthly mortgage payment might be very beneficial when one or both of you want a more flexible work schedule when the kids arrive. Having lower monthly expenses makes it easier to work a flexible schedule.

Second, the Bay Area is a boom and bust region. Do not discount the possibility of a period of reduced stock market valuations and/or unemployment. It is hard to envision when riding a boom, but the bust always happens. The good news is that housing in SF typically holds its value because of high latent demand and the lack of new supply.
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Re: Buying first home in SF - gut check

Post by gunn_show »

wantrepreneur wrote:It seems like you want a Yes for an answer so go ahead and buy the house. It's your life, your money, and you should do whatever you want with it.
Agree. End of the day, you have the money and career(s), you can do it.
wantrepreneur wrote: Moral of my story : Buying such an expensive house will force you to stay in your job even if you are unhappy. It will prevent from taking risks that you should be taking early in your career. Selling diversified investments to pay off a house isn't a great move, if you are thinking boglehead way.

However, it's your money and do whatever makes you happy at the end of the day. We all have our opinions.
Best statements of the whole thread IMHO. Why not rent? In 3, 5, 10 years you can buy, or probably retire and move somewhere wicked cheaper, she can still be in medical, you stay at home dad or work remotely, and likely have $4-5m portfolio you can live/retire on. Owning a home is very overrated IMHO, it's not all that it's cracked up to be, the work required, fix up costs, you name it. However, I have no doubt that your $1.8m home will be worth considerably more in the future, so it is not a bad investment either, barring disaster, but unlike many in this thread, earthquakes and other abnormalities would affect everyone, so it is what it is. Tough decision for sure.....
"The best life hack of all is to just put the work in and never give up." Bas Rutten
thomasbayarea
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Re: Buying first home in SF - gut check

Post by thomasbayarea »

kermit wrote:My wife and I are considering purchasing our first home in San Francisco. A little bit about us:

Age: Both 28
Jobs: stable
Income: ~$430k with vesting RSUs. If you consider salary only then ~$230k
Portfolio: $2.5M (mostly diversified index funds but a small amount of that is vested company stock that I've yet to sell)
Debt: None
Kids: None but the point of this home is we will be having kids in the next few years

The homes we are looking at are around $1.8M for a large 3 bedroom 2 bath in a desirable area (SF is crazy). We would take the maximum mortgage possible while still deducting interest ($1M) and pay the rest from our portfolio ($800K). The banks calculate debt-to-income ratios using your salary, they can't consider income from RSUs, so on paper it looks like a $1M mortgage could put us near a 43% ratio but it actually would be *much* lower.

It feels like a no brainer for us. Yes it's expensive and yes it feels like a bubble. But I think we can afford it and wanted to know what the bogleheads think.
Actually 1.8M seems very reasonable in SF. I would buy soon and pay it down quickly. Yes, you can afford it and it with your income the risk is actually very low. I agree - "no brainer".
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Random Musings
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Re: Buying first home in SF - gut check

Post by Random Musings »

random_walker_77 wrote:Rebuilding a 1.8M house in SF might not cost that much b/c you're really talking about a $200K house that happens to sit on a $1.6M lot.
I see your point, but the contractors probably wouldn't go for that.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
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FrogPrince
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Re: Buying first home in SF - gut check

Post by FrogPrince »

tommy_gunn wrote:
wantrepreneur wrote:It seems like you want a Yes for an answer so go ahead and buy the house. It's your life, your money, and you should do whatever you want with it.
Agree. End of the day, you have the money and career(s), you can do it.
wantrepreneur wrote: Moral of my story : Buying such an expensive house will force you to stay in your job even if you are unhappy. It will prevent from taking risks that you should be taking early in your career. Selling diversified investments to pay off a house isn't a great move, if you are thinking boglehead way.

However, it's your money and do whatever makes you happy at the end of the day. We all have our opinions.
Best statements of the whole thread IMHO. Why not rent? In 3, 5, 10 years you can buy, or probably retire and move somewhere wicked cheaper, she can still be in medical, you stay at home dad or work remotely, and likely have $4-5m portfolio you can live/retire on. Owning a home is very overrated IMHO, it's not all that it's cracked up to be, the work required, fix up costs, you name it. However, I have no doubt that your $1.8m home will be worth considerably more in the future, so it is not a bad investment either, barring disaster, but unlike many in this thread, earthquakes and other abnormalities would affect everyone, so it is what it is. Tough decision for sure.....

I agree. I have known people who have banked it and fled the Bay Area, and they are by far the happiest. The ones who buy the show homes are initially happy as they dress it up in high faux-chic pretentious-Martha-Stewart style. The wife is happy, they have a few picture perfect thanksgiving dinners with turkeys that were fed non-GMO grapes as they were sung to. You know what I'm talking about. A few years in, however, they realize they'll never catch up with their friend who was a founder at some hotshot company Facebook just bought, and they now can't escape as their kids are deeply embedded into the community.

Keep in mind that a well-diversified portfolio returns say 7% inflation-adjusted, but a home in the Bay Area is likely to appreciate at about inflation, so that down-payment money is not working as hard as it could in the market. Therefore, the true frugal diehard would rent and put the money in the market. Of course, downside is that you can't invite friends to hang out in the backyard of your portfolio ;)
Wannabe
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Re: Buying first home in SF - gut check

Post by Wannabe »

FrogPrince wrote: I agree. I have known people who have banked it and fled the Bay Area, and they are by far the happiest. The ones who buy the show homes are initially happy as they dress it up in high faux-chic pretentious-Martha-Stewart style. The wife is happy, they have a few picture perfect thanksgiving dinners with turkeys that were fed non-GMO grapes as they were sung to. You know what I'm talking about. A few years in, however, they realize they'll never catch up with their friend who was a founder at some hotshot company Facebook just bought, and they now can't escape as their kids are deeply embedded into the community.

Keep in mind that a well-diversified portfolio returns say 7% inflation-adjusted, but a home in the Bay Area is likely to appreciate at about inflation, so that down-payment money is not working as hard as it could in the market. Therefore, the true frugal diehard would rent and put the money in the market. Of course, downside is that you can't invite friends to hang out in the backyard of your portfolio ;)
Hahahaha! Busted out loud at the grapes thing. I think there's a lot of truth to your comments.
freddie
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Re: Buying first home in SF - gut check

Post by freddie »

You can always sell the house and move it you decide that is best. You would have to have some really bad luck to lose more than 300k or so. If you decide to stay and look to buy in 10 years, you will regret paying 50% more for the house and those 10 years of 3k+/month of rent begin to seem like a waste. Maybe SF prices will appreciate with inflation, but they haven't done so in the past 30 or so years so expecting them to do so now is a stretch. And the character of the area has also been going down hill since at least the 80s (and I bet the 70s also but that is before my time).

Expensive areas (and working:)) aren't for everyone. There are plenty of people that think your dumb for still working. With a 2.5 million portfolio, you could be living on 75k+ for the rest of your life. Why get up and work. Other people ask why live someplace you don't want to save a few lousy dollars. In the end it is your life, and you have to pick what you value.
tommy_gunn wrote:
wantrepreneur wrote:It seems like you want a Yes for an answer so go ahead and buy the house. It's your life, your money, and you should do whatever you want with it.
Agree. End of the day, you have the money and career(s), you can do it.
wantrepreneur wrote: Moral of my story : Buying such an expensive house will force you to stay in your job even if you are unhappy. It will prevent from taking risks that you should be taking early in your career. Selling diversified investments to pay off a house isn't a great move, if you are thinking boglehead way.

However, it's your money and do whatever makes you happy at the end of the day. We all have our opinions.
Best statements of the whole thread IMHO. Why not rent? In 3, 5, 10 years you can buy, or probably retire and move somewhere wicked cheaper, she can still be in medical, you stay at home dad or work remotely, and likely have $4-5m portfolio you can live/retire on. Owning a home is very overrated IMHO, it's not all that it's cracked up to be, the work required, fix up costs, you name it. However, I have no doubt that your $1.8m home will be worth considerably more in the future, so it is not a bad investment either, barring disaster, but unlike many in this thread, earthquakes and other abnormalities would affect everyone, so it is what it is. Tough decision for sure.....
hcj
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Re: Buying first home in SF - gut check

Post by hcj »

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