Advice: Overextending by buying? How much house to buy?

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somekevinguy
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Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Fri Mar 17, 2017 2:14 pm

Would love to get some brutally honest thoughts- would we be overextending by buying a home? How much home would you be comfortable buying given the circumstances?

Financial situation: Dual physician couple, combined income of 260K going to 570K. Down payment savings of ~300K (including ~100K equity in current home). Otherwise maxing out retirement accounts/backdoor Roths/529's etc and no other debts aside from existing mortgage (170K @ 4%). Live well within means (~4K/mo expenses not including housing).

Moving to stupidly high cost of living area (bay area) where 4BR/2BA 2000 sq. ft houses in some "good" school districts can go somewhere around 2-3M. We know the area well and have lived there previously. The caveat is that both of our new employers offer housing assistance that would basically be "wasted" if we didn't buy and effectively decreases the conventional loan amount so that the down payment to avoid PMI is <<10%. Not planning to move in next 10+ years and should have reasonably stable job situations with gradually rising incomes.

Employer housing assistance: Total of 775K
150K salary supplement divided over 9 years
375K zero interest loans (as long as you stay at the employer which is very likely)
250K deferred interest loan (zero interest with deferred interest based on appreciation in home value)

While I'm aware of rules of thumb for purchasing a home like 2-3x gross income or PITI <25-30% of monthly income, those rules seem less applicable in the setting of generous (otherwise wasted if unused) housing supplements, extremely high housing costs, and relatively frugal living in the setting of significant income (i.e. 50% of take home pay for housing means very different things at 6K vs 50K gross monthly income, especially if you are comfortable avoiding too much lifestyle inflation otherwise). The original plan was tentatively to rent for at least a year but given interest rates and the fact we were on the fence anyways, we may end up living with the in-laws (who live in the area) and take a few months to make a purchase instead.

Thanks in advance for your thoughts.

Wellfleet
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Re: Advice: Overextending by buying? How much house to buy?

Postby Wellfleet » Fri Mar 17, 2017 2:22 pm

I don't have your income but seems to me like these sweeteners distract you from the big picture. It's like saying, oh we will now have a washing machine if we buy a house and won't need to go to the laundry and will have $100 a month more to devote to the mortgage! Its funny math that doesn't help you.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Fri Mar 17, 2017 2:28 pm

Wellfleet wrote:I don't have your income but seems to me like these sweeteners distract you from the big picture. It's like saying, oh we will now have a washing machine if we buy a house and won't need to go to the laundry and will have $100 a month more to devote to the mortgage! Its funny math that doesn't help you.


I think I see your point. At the end of the day, what we can afford is what we can afford- that being said, not purchasing anything (even a 300K closet) is at least leaving 150K on the table given the housing salary supplement so I think that has to change the math somewhat. Mostly wanted to get a sense of what similarly minded BH's might consider "reasonable' given the financial situation (vs. just renting for the forseeable future).

andrew1976
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Re: Advice: Overextending by buying? How much house to buy?

Postby andrew1976 » Fri Mar 17, 2017 2:29 pm

I am a physician in the Philadelphia area with 5 kids with an income of $300k living in a house worth about $620k. I think a good metric is to have a 20% down payment ($500k), 15 year jumbo fixed mortgage (3.75%), and your housing payment (mortgage + taxes) to be not more than 25% of your take home income. The monthly payment on a 15 year fixed mortgage would be $14k (no taxes included though). Your gross salary would be about $790k for the 25% rule to work out. I believe PMI is about 1.5% so you'd be saving $30k a year if you were about to put 20% down. I hear you about the Bay Area and its high housing costs. I'd suggest waiting until you had the 20% down payment if possible and even more to get to the 25% housing cost number. Good luck!

remomnyc
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Re: Advice: Overextending by buying? How much house to buy?

Postby remomnyc » Fri Mar 17, 2017 2:35 pm

I consider the value of your employer assistance as max $150k, assuming you stay 9 years, given that the balance is loans, albeit at very favorable rates. The $150k is $16.7k/year, which after taxes is less than $10k/yr , which I don't consider life changing when you're talking about $2-3M homes. The max loan I would do is still 2-3x income, only going to 3x income if you are certain about the jobs (security) and the location (you want to stay in the HCOL area long term), and I would put 20% down to avoid PMI. I would not buy something just because of the subsidies, which must be repaid and may shackle you to a job or area you may want to leave later. I would rent until you are more certain about the jobs and location. Are the subsidies and supplement available later or is this a take it now or leave it?

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Fri Mar 17, 2017 2:41 pm

andrew1976 wrote:I am a physician in the Philadelphia area with 5 kids with an income of $300k living in a house worth about $620k. I think a good metric is to have a 20% down payment ($500k), 15 year jumbo fixed mortgage (3.75%), and your housing payment (mortgage + taxes) to be not more than 25% of your take home income. The monthly payment on a 15 year fixed mortgage would be $14k (no taxes included though). Your gross salary would be about $790k for the 25% rule to work out. I believe PMI is about 1.5% so you'd be saving $30k a year if you were about to put 20% down. I hear you about the Bay Area and its high housing costs. I'd suggest waiting until you had the 20% down payment if possible and even more to get to the 25% housing cost number. Good luck!


Thanks for the reply. I totally agree that those are good initial metrics. That being said, I would have no PMI even on a 3M home as the traditional lender would only be lending 3M-625K (zero interest loans from employers)-300K (down payment)= 2,075,000= 69% of the value of the home. And while 25% of take home income is a good rule of thumb, I couldn't even begin to imagine our family spending more than 10K/month on non-housing expenses, meaning yes we have quick path to FI but may be needlessly scrimping on housing... Maybe I'm talking nonsense?

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Fri Mar 17, 2017 2:45 pm

remomnyc wrote:I consider the value of your employer assistance as max $150k, assuming you stay 9 years, given that the balance is loans, albeit at very favorable rates. The $150k is $16.7k/year, which after taxes is less than $10k/yr , which I don't consider life changing when you're talking about $2-3M homes. The max loan I would do is still 2-3x income, only going to 3x income if you are certain about the jobs (security) and the location (you want to stay in the HCOL area long term), and I would put 20% down to avoid PMI. I would not buy something just because of the subsidies, which must be repaid and may shackle you to a job or area you may want to leave later. I would rent until you are more certain about the jobs and location. Are the subsidies and supplement available later or is this a take it now or leave it?


Available later so definitely not take it or leave it (though I suppose those rates may change over time and there is no guarantee that they stay available). Also, see my comment above re: PMI (would be hard to have to pay PMI given the mortgage lender is going to be lending <<80% of the loan with the employer provided loans. We would consider these basically our dream jobs and where we want to end up long term (have family there and grew up there) but obviously things can change depending on the job circumstances.

ysette9
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Re: Advice: Overextending by buying? How much house to buy?

Postby ysette9 » Fri Mar 17, 2017 4:17 pm

As someone who lives on the Peninsula in the Bay Area and is therefore well aware of the housing prices in this area, I challenge your assumption that to get a decent house in a "good school district" you need to spend $2-3M. Part of it might be readjusting your expectations. Most people do not live in 2000ft^2 houses because unless you have 4 kids underfoot, you just don't need that kind of space. You are well aware of how perfect the weather is almost all of the time, so you can spend so much time outside you don't "need" the indoor space the way you do if you are stuck inside for 6 months out of the year with snow on the ground.

My kiddo is still young enough that she isn't going to school yet, but we have nevertheless been doing our research on schools and academics and generally what kids need to be successful. What I have found so far is that nature>nurture and the fact that our kids have been born to us (healthy, wealthy, intelligent, educated) parents means they are already on third base, figuratively speaking. I expect you read to your kids at home, engage with them in thoughtful conversation, and provide them with enriching activities. If they are in school already, I expect you are engaged with homework and parent-teacher conferences and the like. All of that counts for a ton.

I, too, am wary of under-performing schools and districts. We live in a great neighborhood now that has abysmal schools around, as measured by standardized test scores. When I look at schools and test scores though the following is what strikes me: the scores seem to predict very well the % of English-language learners and the % of subsidized school lunches kids receive at that score. Period. The school might be bad with bad teachers and few resources, or it might have great teachers and resources but be starting with kids who are all behind before they step foot in the door. You just can't know which it is until you visit the school and dig in deeper.

Again, my kid hasn't started school yet, but the one we've picked out for her is a public school with low scores and high % of English-language learners that also has a Mandarin immersion program we find appealing. We visited the school and were pleased with the principle, the teachers we met, and the tour we got of how the classrooms were run.

On the flip side, I worked for several years within walking distance of Gunn HS in Palo Alto, one of the top HSs and a feeder, along with Palo Alto HS, to Stanford. A normal topic of conversation at work was how another teenager threw him or herself in front of the Caltrain to commit suicide from the pressure of expectations to achieve academically. Somewhere in between suicidal academic expectations and schools with metal detectors lies a reasonable school surrounded by houses that are less than $2M.

Good luck wit your hunt and relocation.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Fri Mar 17, 2017 6:24 pm

ysette9 wrote:As someone who lives on the Peninsula in the Bay Area and is therefore well aware of the housing prices in this area, I challenge your assumption that to get a decent house in a "good school district" you need to spend $2-3M. Part of it might be readjusting your expectations. Most people do not live in 2000ft^2 houses because unless you have 4 kids underfoot, you just don't need that kind of space. You are well aware of how perfect the weather is almost all of the time, so you can spend so much time outside you don't "need" the indoor space the way you do if you are stuck inside for 6 months out of the year with snow on the ground.

My kiddo is still young enough that she isn't going to school yet, but we have nevertheless been doing our research on schools and academics and generally what kids need to be successful. What I have found so far is that nature>nurture and the fact that our kids have been born to us (healthy, wealthy, intelligent, educated) parents means they are already on third base, figuratively speaking. I expect you read to your kids at home, engage with them in thoughtful conversation, and provide them with enriching activities. If they are in school already, I expect you are engaged with homework and parent-teacher conferences and the like. All of that counts for a ton.

I, too, am wary of under-performing schools and districts. We live in a great neighborhood now that has abysmal schools around, as measured by standardized test scores. When I look at schools and test scores though the following is what strikes me: the scores seem to predict very well the % of English-language learners and the % of subsidized school lunches kids receive at that score. Period. The school might be bad with bad teachers and few resources, or it might have great teachers and resources but be starting with kids who are all behind before they step foot in the door. You just can't know which it is until you visit the school and dig in deeper.

Again, my kid hasn't started school yet, but the one we've picked out for her is a public school with low scores and high % of English-language learners that also has a Mandarin immersion program we find appealing. We visited the school and were pleased with the principle, the teachers we met, and the tour we got of how the classrooms were run.

On the flip side, I worked for several years within walking distance of Gunn HS in Palo Alto, one of the top HSs and a feeder, along with Palo Alto HS, to Stanford. A normal topic of conversation at work was how another teenager threw him or herself in front of the Caltrain to commit suicide from the pressure of expectations to achieve academically. Somewhere in between suicidal academic expectations and schools with metal detectors lies a reasonable school surrounded by houses that are less than $2M.

Good luck wit your hunt and relocation.


I totally agree with your thoughts. My wife and I both went to not "great" public schools but did totally fine at competitive colleges and managed to make it into good med schools etc because we did start off on third base with great families etc. There are also probably some advantages to not being in a pressure cooker like Palo Alto High, Gunn, etc (although plenty of kids do fine and manage to keep their priorities straight even in those environments).

I'd love your thoughts on where you might look- With jobs in San Jose (with a required weekly trip to Santa Cruz) and in Palo Alto, I was considering places like Cupertino, Los Altos, Saratoga, and Los Gatos. There are probably parts of Sunnyvale, West San Jose, and Campbell that might work too and be more likely to be in the 1-2M range with the hit/miss school situation you mentioned. Where would you be looking for a house if you were me?

WarChest
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Re: Advice: Overextending by buying? How much house to buy?

Postby WarChest » Fri Mar 17, 2017 11:54 pm

A few things.

You are just about to jump total household income by a large margin. Seems premature to take on a big debt load right away. It's good to let big changes in your financial picture age a little bit. That way you get used to the new income level and can bank a bunch of free cash flow while you get settled.

Second, whenever moving to a new area, RENT! There are so many little details to each specific location that buying a big expensive house right off the bat seems imprudent. Get the lay of the land. Rent a place first.

Third, what does your taxable account and combined retirement account balance look like? Seems it may not be wise to have so much of your current and future net worth tied up in real estate right off the bat.

People don't seem to want to wait, but if you can be patient, you can live frugal for a few more years, bank a ton of cash, get more educated on micro-locations that will be your best purchase options, and have less stress.

WarChest
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Re: Advice: Overextending by buying? How much house to buy?

Postby WarChest » Fri Mar 17, 2017 11:58 pm

Side note: All this "employer housing assistance" is nuts. If employers keep doing this they aren't really doing much of a service because all the subsidy does is continue to inflate local property values to the point where more and more subsidy is needed. Shooting themselves in the foot if you ask me.

Also, if your employer knows you just purchased a very expensive house with a big loan...well, there goes your freedom to speak out at work and your bargaining power.

johnra
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Re: Advice: Overextending by buying? How much house to buy?

Postby johnra » Sat Mar 18, 2017 10:10 am

I would balance the above advice with California living!--the real estate market in Calif is unique, you have very high cash flow, and nice incentives. I WOULD buy something. Just don't get too crazy emotionally about the house of dreams, just get something you really like, look forward to coming home to, makes you happy, and where you enjoy weekends. That karma is good for your kids, too. I moved to southern California about 5 years (not much bubble then) and bought a very expensive house that my wife and I love, and in an area that we love -- and we financed it with 10% down, 3% interest, over 40 years! This in contrast to trying to pay off previous house in 15 years, which was quite a stress. Now, the monthly cost is basically like renting, but we own the asset, which has probably appreciated about 50%. My biggest concern for you is the Bay area bubble--where is it? But think of it as a 5 or 10 year decision, who knows what's next for career, family, finances..

staythecourse
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Re: Advice: Overextending by buying? How much house to buy?

Postby staythecourse » Sat Mar 18, 2017 10:36 am

Do as you wish, but don't assume anything, i.e. raises, being sure you won't be moving, job satisfaction, etc... It sounds like you guys are joining corporate medicine and I can GAURANTEE it won't be what you think going forward. Just realize buying this house will be like shackles attaching you to this job. If you are okay with that then do it. If not then don't.

I personally would have a problem putting down that much for a house AND losing the best bargaining chip as an employee (easily being able to quit and move).

Always a tough decision, but being a physician and seeing how medicine operates on the business side I would be MORE hesitant giving up so much freedom then even the money we are talking about.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Rmats
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Re: Advice: Overextending by buying? How much house to buy?

Postby Rmats » Sat Mar 18, 2017 12:45 pm

With your income and given you're relatively new to the area I would rent and wait on a home purchase. You could easily save quite a bit to add to your down payment which would make a huge difference in putting together a competitive offer within our real estate market. Without knowing your timeline, I'd also mention that you can take advantage of favorable market timing (what a concept as a BH!) and purchase when the market is slow. Now through the beginning of the Summer is crazy time around here with multiple offers well above asking very common. I should probably mention I'm a Real Estate Broker based in Cupertino, and prior was a Certified Residential Real Estate Appraiser for over a decade.

With the amount you make I would also seriously consider your school options outside of public schools. Yes, the schools are great in CUSD, Palo Alto, etc., but you can get a lot more home for your money if school district is not as much of a factor. I'd also say that school is quite a bit different now then when we were growing up. The pressures, and subsequent depression/suicide, has been growing for quite a while along with awareness on issues of balance. There are a number of alternative schools, charters, choice schools, magnets, etc. that could be of interest depending on what you are looking for.

Leemiller
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Re: Advice: Overextending by buying? How much house to buy?

Postby Leemiller » Sat Mar 18, 2017 4:47 pm

We are in a similar income range in another HCOL area and kept our mortgage at less than 2x income for a couple of reasons. It gives us flexibility so that we can change jobs or take a lower paying job/ go part time. I'd also like the option of paying my mortgage off early and am not comfortable with alot of debt and such a high concentration in one asset. Around my neighborhood it seems the people with 2-3m homes are often very wealthy, as in law partner income (high six, low seven figures) or business owners who are likely worth tens of millions. In any event, I didn't think we could afford anything close to 2m.

The employer benefits you mention sound more like handcuffs to me. I would rent for at least a year into a new job in any event.

Vanguard Fan 1367
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Re: Advice: Overextending by buying? How much house to buy?

Postby Vanguard Fan 1367 » Sat Mar 18, 2017 5:45 pm

staythecourse wrote:Do as you wish, but don't assume anything, i.e. raises, being sure you won't be moving, job satisfaction, etc... It sounds like you guys are joining corporate medicine and I can GAURANTEE it won't be what you think going forward. Just realize buying this house will be like shackles attaching you to this job. If you are okay with that then do it. If not then don't.

I personally would have a problem putting down that much for a house AND losing the best bargaining chip as an employee (easily being able to quit and move).

Always a tough decision, but being a physician and seeing how medicine operates on the business side I would be MORE hesitant giving up so much freedom then even the money we are talking about.

Good luck.


Interesting thoughts. I know something about corporate dentistry and the pressure to produce income and resulting unhappiness of the dentist. I wonder if corporate medicine has pressure with it as well?

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Watty
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Re: Advice: Overextending by buying? How much house to buy?

Postby Watty » Sat Mar 18, 2017 6:13 pm

somekevinguy wrote:Financial situation: Dual physician couple, combined income of 260K going to 570K.


It would be good to spend the thirty bucks to buy tax software including California taxes and to do dummy tax returns as if you were living there. After Federal, State, and property taxes I would think that you would like not come out much more than $100K ahead. After a huge mortgage payment ($10,000 a month ?) what would your disposable income actually be compared to what it is now?

It sounds like you have kids. One thing to consider about living in a super high cost of living area is that it is likely that your kids may not be able to afford to live near you when they grow up. I lived in Sunnyvale years ago when I was in my 20's and one of the things I saw even back then was that some of my older coworkers had grown up kids that were still living with them because they could not afford an apartment even with roommates.

I don't see how the move makes any financial sense.

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dodecahedron
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Re: Advice: Overextending by buying? How much house to buy?

Postby dodecahedron » Sat Mar 18, 2017 6:33 pm

somekevinguy wrote: At the end of the day, what we can afford is what we can afford- that being said, not purchasing anything (even a 300K closet) is at least leaving 150K on the table given the housing salary supplement so I think that has to change the math somewhat. Mostly wanted to get a sense of what similarly minded BH's might consider "reasonable' given the financial situation (vs. just renting for the forseeable future).


Keep in mind that the $150K is taxable compensation, so (given your federal and CA income taxes), you aren't really leaving the full $150K on the table. (But then again, yes, you will have deductions for mortgage interest and real estate taxes.) Note that mortgage interest is only deductible on principle of up to $1M.

I agree with Watty that you need to spend some serious time with tax software figuring out how this is all going to work out. Also keep in mind that tax rules can change a lot, your real estate taxes could also turn out surprisingly high (since I assume current owner taxes won't predict yours, given Prop 13), so I can see lots of reasons to be conservative. Maybe buy a more modest home than you were thinking of (and you can always upgrade with improvements and additions later if things go well.)

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 7:59 pm

staythecourse wrote:Do as you wish, but don't assume anything, i.e. raises, being sure you won't be moving, job satisfaction, etc... It sounds like you guys are joining corporate medicine and I can GAURANTEE it won't be what you think going forward. Just realize buying this house will be like shackles attaching you to this job. If you are okay with that then do it. If not then don't.

I personally would have a problem putting down that much for a house AND losing the best bargaining chip as an employee (easily being able to quit and move).

Always a tough decision, but being a physician and seeing how medicine operates on the business side I would be MORE hesitant giving up so much freedom then even the money we are talking about.

Good luck.


Yeah- definitely see the advantages to not being tied down, especially initially as you feel out a job(s), no matter how attractive they may sound.

Interestingly enough, we are taking jobs in academics and a part time job at a large managed care organization but from what I understand at least, should not have pressures to hit RVU targets (maybe even the opposite for the non-academic position) and should have reasonable stability based on historical physician turnover.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 8:03 pm

dodecahedron wrote:
somekevinguy wrote: At the end of the day, what we can afford is what we can afford- that being said, not purchasing anything (even a 300K closet) is at least leaving 150K on the table given the housing salary supplement so I think that has to change the math somewhat. Mostly wanted to get a sense of what similarly minded BH's might consider "reasonable' given the financial situation (vs. just renting for the forseeable future).


Keep in mind that the $150K is taxable compensation, so (given your federal and CA income taxes), you aren't really leaving the full $150K on the table. (But then again, yes, you will have deductions for mortgage interest and real estate taxes.) Note that mortgage interest is only deductible on principle of up to $1M.

I agree with Watty that you need to spend some serious time with tax software figuring out how this is all going to work out. Also keep in mind that tax rules can change a lot, your real estate taxes could also turn out surprisingly high (since I assume current owner taxes won't predict yours, given Prop 13), so I can see lots of reasons to be conservative. Maybe buy a more modest home than you were thinking of (and you can always upgrade with improvements and additions later if things go well.)


Agreed that there is a fair amount of uncertainty. At current rates, our marginal bracket would be somewhere around 50% ( making the interest on a 1M loan half of what it might otherwise be). That being said, given the current administration and changes to ACA etc, that could be coming down quite a bit...

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 8:12 pm

Leemiller wrote:We are in a similar income range in another HCOL area and kept our mortgage at less than 2x income for a couple of reasons. It gives us flexibility so that we can change jobs or take a lower paying job/ go part time. I'd also like the option of paying my mortgage off early and am not comfortable with alot of debt and such a high concentration in one asset. Around my neighborhood it seems the people with 2-3m homes are often very wealthy, as in law partner income (high six, low seven figures) or business owners who are likely worth tens of millions. In any event, I didn't think we could afford anything close to 2m.

The employer benefits you mention sound more like handcuffs to me. I would rent for at least a year into a new job in any event.


If I could keep housing to less than 2x income and afford a 3/2 1700 sq foot home with "reasonable" (set some arbitrary GreatSchools.org rating of 6+) schools, I'd definitely do it. Unfortunately, it seems like there is HCOL and then there is the bay area (and specifically the peninsula).

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 8:19 pm

Watty wrote:
somekevinguy wrote:Financial situation: Dual physician couple, combined income of 260K going to 570K.


It would be good to spend the thirty bucks to buy tax software including California taxes and to do dummy tax returns as if you were living there. After Federal, State, and property taxes I would think that you would like not come out much more than $100K ahead. After a huge mortgage payment ($10,000 a month ?) what would your disposable income actually be compared to what it is now?

It sounds like you have kids. One thing to consider about living in a super high cost of living area is that it is likely that your kids may not be able to afford to live near you when they grow up. I lived in Sunnyvale years ago when I was in my 20's and one of the things I saw even back then was that some of my older coworkers had grown up kids that were still living with them because they could not afford an apartment even with roommates.

I don't see how the move makes any financial sense.


Yep-with taxes (although that may be changing with the current administration and ACA etc) I definitely don't expect (or need) a ton of extra disposable income. Like I said, I think I'd have a hard time figuring out how to go from 4K/mo to say 8K/mo of non-housing spending. I agree that unless my kids end up doing incredibly well and marrying someone who also does incredibly well, they're going to have a hard time affording housing here. That being said...that pretty much applies to anyone in the area who isn't independently wealthy.

In terms of financial sense- definitely not moving for finances. It would make a ton more sense to live in a low cost of living area (where pay would likely be higher too), work 5-10 years and have FI without too much hassle. But, the draw of family and quality of life (weather, culture, access to various ethnic foods-recognizing that being used to a frugal lifestyle, we aren't hoping to live into our income but rather content to use a substantial chunk of it to access "decent" housing in the area ) are pretty huge.

TroutMD
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Re: Advice: Overextending by buying? How much house to buy?

Postby TroutMD » Sat Mar 18, 2017 8:51 pm

I probably should keep my comments to myself, but it just seems crazy that anyone would want to live in these kinds of areas! Its a huge sacrifice to your financial independence in the future. I see the sexiness for the young tech family that just knows they will be the next facebook, but as a doctor, its a losers game.

I am a physician, make less than you, have a 4500 square foot 4 year old home that costs less than your combined income. For 3m, I could have the nicest home in town with probably 15K+ square feet and an Olympic pool!

I can make a whole lot of flights to that area and stay in some pretty fancy hotels for the difference. And my kids can go to about any school in town without worry or the private school that is reasonably priced.

That home subsidy is a hook to make someone stay put when they buy a home they end up upside down on, and its a ploy to get people to come to the area and to overlook the house pricing. Can you negotiate them to hand you 100K instead of 150K and you promise a 9 year contract or pay back if leaving, then use for rent or something else?

Good luck, but just imagine if you made that much elsewhere and bought a 'mansion' for 750K and save the rest. In 10 years, you could retire.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 8:59 pm

TroutMD wrote:I probably should keep my comments to myself, but it just seems crazy that anyone would want to live in these kinds of areas! Its a huge sacrifice to your financial independence in the future. I see the sexiness for the young tech family that just knows they will be the next facebook, but as a doctor, its a losers game.

I am a physician, make less than you, have a 4500 square foot 4 year old home that costs less than your combined income. For 3m, I could have the nicest home in town with probably 15K+ square feet and an Olympic pool!

I can make a whole lot of flights to that area and stay in some pretty fancy hotels for the difference. And my kids can go to about any school in town without worry or the private school that is reasonably priced.

That home subsidy is a hook to make someone stay put when they buy a home they end up upside down on, and its a ploy to get people to come to the area and to overlook the house pricing. Can you negotiate them to hand you 100K instead of 150K and you promise a 9 year contract or pay back if leaving, then use for rent or something else?

Good luck, but just imagine if you made that much elsewhere and bought a 'mansion' for 750K and save the rest. In 10 years, you could retire.


100% agree.."In terms of financial sense- definitely not moving for finances. It would make a ton more sense to live in a low cost of living area (where pay would likely be higher too), work 5-10 years and have FI without too much hassle. But, the draw of family and quality of life (weather, culture, access to various ethnic foods-recognizing that being used to a frugal lifestyle, we aren't hoping to live into our income but rather content to use a substantial chunk of it to access "decent" housing in the area ) are pretty huge"

auggiedoggies
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Re: Advice: Overextending by buying? How much house to buy?

Postby auggiedoggies » Sat Mar 18, 2017 9:15 pm

somekevinguy wrote:
TroutMD wrote:I probably should keep my comments to myself, but it just seems crazy that anyone would want to live in these kinds of areas! Its a huge sacrifice to your financial independence in the future. I see the sexiness for the young tech family that just knows they will be the next facebook, but as a doctor, its a losers game.

I am a physician, make less than you, have a 4500 square foot 4 year old home that costs less than your combined income. For 3m, I could have the nicest home in town with probably 15K+ square feet and an Olympic pool!

I can make a whole lot of flights to that area and stay in some pretty fancy hotels for the difference. And my kids can go to about any school in town without worry or the private school that is reasonably priced.

That home subsidy is a hook to make someone stay put when they buy a home they end up upside down on, and its a ploy to get people to come to the area and to overlook the house pricing. Can you negotiate them to hand you 100K instead of 150K and you promise a 9 year contract or pay back if leaving, then use for rent or something else?

Good luck, but just imagine if you made that much elsewhere and bought a 'mansion' for 750K and save the rest. In 10 years, you could retire.


100% agree.."In terms of financial sense- definitely not moving for finances. It would make a ton more sense to live in a low cost of living area (where pay would likely be higher too), work 5-10 years and have FI without too much hassle. But, the draw of family and quality of life (weather, culture, access to various ethnic foods-recognizing that being used to a frugal lifestyle, we aren't hoping to live into our income but rather content to use a substantial chunk of it to access "decent" housing in the area ) are pretty huge"



I get the family piece. Your family is your family, they live where they live. But the quality of life piece sounds like a bunch of bunk to me. Quality of life in California is just as good as it is in a large midwestern city. Sure, we have snow 5-6 months instead of sun....but there's tons of outdoor activities you can do in the snow. And it's not like the snow and cold is so bad that you can't go outside.

Every major part of the country now has "culture" and "ethnic foods". Our country has truly turned into a melting pot. In the medium/large midwestern city I live in, there is every type of ethnic food you can think of available, both in restaurants and small unique markets.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sat Mar 18, 2017 9:36 pm

auggiedoggies wrote:
somekevinguy wrote:
TroutMD wrote:I probably should keep my comments to myself, but it just seems crazy that anyone would want to live in these kinds of areas! Its a huge sacrifice to your financial independence in the future. I see the sexiness for the young tech family that just knows they will be the next facebook, but as a doctor, its a losers game.

I am a physician, make less than you, have a 4500 square foot 4 year old home that costs less than your combined income. For 3m, I could have the nicest home in town with probably 15K+ square feet and an Olympic pool!

I can make a whole lot of flights to that area and stay in some pretty fancy hotels for the difference. And my kids can go to about any school in town without worry or the private school that is reasonably priced.

That home subsidy is a hook to make someone stay put when they buy a home they end up upside down on, and its a ploy to get people to come to the area and to overlook the house pricing. Can you negotiate them to hand you 100K instead of 150K and you promise a 9 year contract or pay back if leaving, then use for rent or something else?

Good luck, but just imagine if you made that much elsewhere and bought a 'mansion' for 750K and save the rest. In 10 years, you could retire.


100% agree.."In terms of financial sense- definitely not moving for finances. It would make a ton more sense to live in a low cost of living area (where pay would likely be higher too), work 5-10 years and have FI without too much hassle. But, the draw of family and quality of life (weather, culture, access to various ethnic foods-recognizing that being used to a frugal lifestyle, we aren't hoping to live into our income but rather content to use a substantial chunk of it to access "decent" housing in the area ) are pretty huge"



I get the family piece. Your family is your family, they live where they live. But the quality of life piece sounds like a bunch of bunk to me. Quality of life in California is just as good as it is in a large midwestern city. Sure, we have snow 5-6 months instead of sun....but there's tons of outdoor activities you can do in the snow. And it's not like the snow and cold is so bad that you can't go outside.

Every major part of the country now has "culture" and "ethnic foods". Our country has truly turned into a melting pot. In the medium/large midwestern city I live in, there is every type of ethnic food you can think of available, both in restaurants and small unique markets.


Agree that quality of life by itself is more difficult to justify as a reason for moving to such a HCOL area. At the same time, I would say quality of life is super subjective and really depends on what your upbringing, interests, etc are. We currently live in a nice midwestern city with decent food options, outdoor activities, cultural activities etc. However, having lived in the bay area before, I can say that for me at least, the weather is a huge difference (I'm not super into snow sports unless its downhill skiing/snowboarding etc and it makes it really difficult to do things like play tennis or have my daughter ride her bike outside 5+ months out of the year). Similarly, yes, there are lots of good food options and by itself it wouldn't be a reason to move, but the Bay Area has far better options in almost every respect (I don't think even a place like Chicago can really compare). Lastly, in terms of melting pots, it is (or at least was) moving in that direction, but being someone who isn't Caucasian, there is a noticeable difference living in the Midwest vs. places like LA, Boston, or the Bay Area. So yes, at the end of the day, quality of life is super subjective and hard to use as a primary justification for moving to a super HCOL place like the Bay Area or NYC, but for us, family and many of our ideas of quality of life are better met there than here.

WarChest
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Re: Advice: Overextending by buying? How much house to buy?

Postby WarChest » Sat Mar 18, 2017 11:34 pm

This thread is getting interesting.

There is so much discussion on these boards about asset allocation, tilting, being frugal, etc. But housing is just so ridiculously expensive in HCOL coastal areas that nothing really even compares in terms of moving the needle with respect to personal finances. The difference between a $400k house elsewhere and a $2mm house in an expensive area is so big that it will dominate everything.

It starts to get really philosophical. You can't take extra money to the grave. But is it worth NEEDING to work an extra 5, 10, 15 or more years just to live in a certain area or have a certain house? Balancing these things without burning your mind is hard.

If I didn't grow up and currently live in a HCOL area I wouldn't understand either. It's totally stupid and nuts. I envy those living in lower cost areas who are totally content. Almost no excuse not to be FI within 15 years in those cases. Much harder to do in HCOL.

Rmats
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Re: Advice: Overextending by buying? How much house to buy?

Postby Rmats » Sun Mar 19, 2017 2:15 am

somekevinguy wrote:
Leemiller wrote:We are in a similar income range in another HCOL area and kept our mortgage at less than 2x income for a couple of reasons. It gives us flexibility so that we can change jobs or take a lower paying job/ go part time. I'd also like the option of paying my mortgage off early and am not comfortable with alot of debt and such a high concentration in one asset. Around my neighborhood it seems the people with 2-3m homes are often very wealthy, as in law partner income (high six, low seven figures) or business owners who are likely worth tens of millions. In any event, I didn't think we could afford anything close to 2m.

The employer benefits you mention sound more like handcuffs to me. I would rent for at least a year into a new job in any event.


If I could keep housing to less than 2x income and afford a 3/2 1700 sq foot home with "reasonable" (set some arbitrary GreatSchools.org rating of 6+) schools, I'd definitely do it. Unfortunately, it seems like there is HCOL and then there is the bay area (and specifically the peninsula).


With your income this is not impossible. At 2x very difficult (there are a couple homes active now), but at 2.5-3x certainly doable. I'd look in Campbell or Willow Glen personally. As for HCOL, yes, housing takes up a huge chunk of money, but also builds up a nice nest egg. A lot of people will stay here for work, then sell and buy in more affordable areas with FI off their home equity. As long as your income matches the cost of living while you're here it is doable.

ks289
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Re: Advice: Overextending by buying? How much house to buy?

Postby ks289 » Sun Mar 19, 2017 5:31 am

I totally understand the appeal of the Bay Area. Many of my college and medical school friends who are physicians have settled there. However, a fair number of them are in specialties with higher incomes (plastic surgery, urology, radiology, etc), and most have not purchased homes in the most expensive towns, despite working in SF and Palo Alto.

There are trade offs in life, and trying to have ALL of your home/geographic/demographic/weather/cultural desires met will cost you a lot of money in this case. If you are definitely set on your jobs, you may decide to live in one of the less expensive surrounding towns. That's what I think I would do. We've chosen a HCOL (not ultra HCOL) that matches or exceeds the Bay Area's amenities in most respects EXCEPT for weather, which we've tried to make the most of (skiing, indoor gym/sports facilities year round, warm vacations, getting AWD vehicles).

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sun Mar 19, 2017 7:35 am

WarChest wrote:This thread is getting interesting.

There is so much discussion on these boards about asset allocation, tilting, being frugal, etc. But housing is just so ridiculously expensive in HCOL coastal areas that nothing really even compares in terms of moving the needle with respect to personal finances. The difference between a $400k house elsewhere and a $2mm house in an expensive area is so big that it will dominate everything.

It starts to get really philosophical. You can't take extra money to the grave. But is it worth NEEDING to work an extra 5, 10, 15 or more years just to live in a certain area or have a certain house? Balancing these things without burning your mind is hard.

If I didn't grow up and currently live in a HCOL area I wouldn't understand either. It's totally stupid and nuts. I envy those living in lower cost areas who are totally content. Almost no excuse not to be FI within 15 years in those cases. Much harder to do in HCOL.


Yep. Even with 570k income and living relatively frugally, there seems to be a general consensus to choose a relatively cheaper neighborhood. It totally becomes philosophical and values driven- whether in microcosm of what neighborhood in the Bay Area or in larger context in some spectrum between rural North Dakota (where fi, given our expenses, could be attainable in <5 years) and NYC/the Bay Area (where fi might take 20+ yrs). I'm sure there's some subjective sweet spot in the middle (Austin, Denver, Portland come to mind) but having the kids grow up close to their grandparents throws a wrench in that math for us.

But yeah, at the end of the day, this dwarfs decisions about asset allocation or daily lattes or fancy cars by orders of magnitude.

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Watty
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Re: Advice: Overextending by buying? How much house to buy?

Postby Watty » Sun Mar 19, 2017 7:43 am

I would question the assumption that the quality of life is fantastic there. You are not talking about living in downtown San Francisco, on the coast, Marin County, on a houseboat in Sausalito, a funky area in Berkeley, etc. You are talking about the south bay which is mostly suburban sprawl.

About nine months after I left Sunnyvale to move up to Portland Oregon I flew back for a long weekend to visit some friends. For the last several months it had been of typical Northwest gray winter drizzle in Portland so when my flight landed in San Jose and it was sunny and clear I was having second thoughts about moving to Portland. I then got in my rental car and left the airport and hit the gridlocked traffic. It was only the middle of the afternoon but the traffic was already a mess and it took the the better part of an hour in stop and go traffic to get to my friends house. By the time I got there I was sure that the quality of life was better in Portland even though the weather is not as good.

I understand what that the family ties can be huge factor in moving there and that could make living there worthwhile to you. Before you move there it would be good to have in depth discussions with your relatives about what their long term plans are especially if they are still working and not elderly. It is not uncommon for people there to work their careers there then "cash out" and retire someplace less expensive. You could be setting up a situation where your family feels that they need to live there because of the family ties and your in-laws also feel like they need to stay there because you are there. The "elephant in the room" could be that no one wants to be the first to suggest that the entire extended family could relocate somewhere else.
Last edited by Watty on Sun Mar 19, 2017 9:42 am, edited 1 time in total.

cherijoh
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Re: Advice: Overextending by buying? How much house to buy?

Postby cherijoh » Sun Mar 19, 2017 8:27 am

johnra wrote:I would balance the above advice with California living!--the real estate market in Calif is unique, you have very high cash flow, and nice incentives. I WOULD buy something. Just don't get too crazy emotionally about the house of dreams, just get something you really like, look forward to coming home to, makes you happy, and where you enjoy weekends. That karma is good for your kids, too. I moved to southern California about 5 years (not much bubble then) and bought a very expensive house that my wife and I love, and in an area that we love -- and we financed it with 10% down, 3% interest, over 40 years! This in contrast to trying to pay off previous house in 15 years, which was quite a stress. Now, the monthly cost is basically like renting, but we own the asset, which has probably appreciated about 50%. My biggest concern for you is the Bay area bubble--where is it? But think of it as a 5 or 10 year decision, who knows what's next for career, family, finances..


A 40-year mortgage with 10% down? You actually own very little of the "asset" at this point! (At the end of the 5th year you will have only paid off about 7% of your mortgage balance). You are lucky that your home has appreciated - anyone who took out a mortgage like this at the peak of the bubble would easily be upside down on the loan.

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Re: Advice: Overextending by buying? How much house to buy?

Postby johnra » Sun Mar 19, 2017 10:17 am

I have lived in big city midwest, mid-sized city Atlantic, rural midwest, Boston, DC, Seattle, and now big city Southern California. I basically liked every place, and always with a sense of pride of my home. I think the common denominator was that I liked what I was doing. The geographic aspects always added enrichment, but were extra, and were not the determining factor.

So key is to make sure you like what you are doing! For many people on this forum, it seems to be not working, or at least not working at what they are doing. I hope they get what they want. But I sure wish they would stop dissing work. Many of us actually like working at what we are doing. I am 64 and I don't want to retire--I'm doing what I want (mostly). When it's over being like that, I'll probably stop.

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vitaflo
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Re: Advice: Overextending by buying? How much house to buy?

Postby vitaflo » Sun Mar 19, 2017 10:55 am

I don't think the HCOL thing is a concern when you have a HCOL income. Really this is just a math problem.

Your income will be $570k + $16.7k salary supplement = $586.7k per year

$586.7k * 3 = $1,7600,000. This is about the max you can afford based on the general 2-3x gross income "rule".

While your housing assistance gets you rid of PMI, it doesn't get you rid of payments. They're still loans you have to pay back, even if they are low interest (its' still an expense). So as far as "what you owe" it's a wash other than the rate.

As such the real "cost" is simply the house price minus your own down payment of $300k. At this point it should be plain to see that even a $2m house will mean you'll need to pay off $1.7m worth of loans. That's right at the max you can afford.

Most people here would not recommend 3x gross for a house. Many advocate for less than 2x if you can. HCOL areas throw this all into disarray but if I were you I'd save some more and at least get the total of all the loans down to a more manageable price, and give up on the $3m house, you can't afford it.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Sun Mar 19, 2017 8:28 pm

Rmats wrote:With your income and given you're relatively new to the area I would rent and wait on a home purchase. You could easily save quite a bit to add to your down payment which would make a huge difference in putting together a competitive offer within our real estate market. Without knowing your timeline, I'd also mention that you can take advantage of favorable market timing (what a concept as a BH!) and purchase when the market is slow. Now through the beginning of the Summer is crazy time around here with multiple offers well above asking very common. I should probably mention I'm a Real Estate Broker based in Cupertino, and prior was a Certified Residential Real Estate Appraiser for over a decade.

With the amount you make I would also seriously consider your school options outside of public schools. Yes, the schools are great in CUSD, Palo Alto, etc., but you can get a lot more home for your money if school district is not as much of a factor. I'd also say that school is quite a bit different now then when we were growing up. The pressures, and subsequent depression/suicide, has been growing for quite a while along with awareness on issues of balance. There are a number of alternative schools, charters, choice schools, magnets, etc. that could be of interest depending on what you are looking for.


Thanks for the advice! I'd love to know when you might recommend buying (more like October-Feb? or?).

Also, what would be your reccs on places to look (Campbell? West San Jose? Sunnyvale?)

Thanks!

pekkle
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Re: Advice: Overextending by buying? How much house to buy?

Postby pekkle » Mon Mar 20, 2017 2:57 pm

Thanks for the advice! I'd love to know when you might recommend buying (more like October-Feb? or?).

Also, what would be your reccs on places to look (Campbell? West San Jose? Sunnyvale?)

Thanks!


While it is true there are other school options, it seems that homes in the better school districts tend to retain their value better in downturns, and shoot up significantly more in upturns.

In terms of zip codes, the more west or the more up the peninsula, the better, typically, if starting from the San Jose area.

There are zip codes and then school attendance zones that subdivide popular zip codes.

Example:

Parts of Campbell and San Jose feed into Easterbrook Discovery (K-8, well regarded it seems) and then either Prospect High or Westmont High. Some folks consider these a step below Cupertino schools.

Los Gatos is very nice, expensive, and has good schools, but somewhat south.
Ditto Saratoga (just south of Cupertino)

95129 (West San Jose) feeds into Lynbrook High (not all parts of 95129 feed into Lynbrook).
95014 (Cupertino) is perennially popular (Monta Vista / Cupertino High).
94087 (West Sunnyvale) is pretty hot right now, especially feeding into Homestead High School. Note: not all parts of 94087 feed into Homestead High.
94043 (Mountain View)
Palo Alto



I'm personally still figuring out how the charter schools work in the area and what happens if a child doesn't get enrolled.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Mon Mar 20, 2017 3:58 pm

pekkle wrote:
Thanks for the advice! I'd love to know when you might recommend buying (more like October-Feb? or?).

Also, what would be your reccs on places to look (Campbell? West San Jose? Sunnyvale?)

Thanks!


While it is true there are other school options, it seems that homes in the better school districts tend to retain their value better in downturns, and shoot up significantly more in upturns.

In terms of zip codes, the more west or the more up the peninsula, the better, typically, if starting from the San Jose area.

There are zip codes and then school attendance zones that subdivide popular zip codes.

Example:

Parts of Campbell and San Jose feed into Easterbrook Discovery (K-8, well regarded it seems) and then either Prospect High or Westmont High. Some folks consider these a step below Cupertino schools.

Los Gatos is very nice, expensive, and has good schools, but somewhat south.
Ditto Saratoga (just south of Cupertino)

95129 (West San Jose) feeds into Lynbrook High (not all parts of 95129 feed into Lynbrook).
95014 (Cupertino) is perennially popular (Monta Vista / Cupertino High).
94087 (West Sunnyvale) is pretty hot right now, especially feeding into Homestead High School. Note: not all parts of 94087 feed into Homestead High.
94043 (Mountain View)
Palo Alto

I'm personally still figuring out how the charter schools work in the area and what happens if a child doesn't get enrolled.


This is great- thanks for your first hand thoughts. I'd love to hear your approach to schooling in the area (i.e. charters vs. traditional public vs. private) if you have some time.

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Watty
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Re: Advice: Overextending by buying? How much house to buy?

Postby Watty » Mon Mar 20, 2017 4:10 pm

One thing to remember is that within a school district they will occasionally change the map of which areas feed into which school high school. This is especially true when they open a new high school.

Tal-
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Re: Advice: Overextending by buying? How much house to buy?

Postby Tal- » Mon Mar 20, 2017 4:31 pm

Rent.

Simply put, you can't afford a $2M house.

That's true because of your income. It's true because you can't afford the down payment. It's true because it would kill your liquidity. It's true because it would introduce huge risk at a time in your lives where you don't need to take on that much risk.

Your point about losing out on the housing assistance isn't a bad one. And yes, I agree that the standard rules get a little gray when talking about someone with 4K vs 50K in monthly income. But, don't lose sight of the of the forest through the trees - you can't afford a $2M house.

With all of that said, I would be open to you guying a starter home. Spend $1M on a house and live in it for a few years. That lets you get the benefit of the assistance programs, is something that you can afford, and lets you re-evaluate in a few years.
Debt is to personal finance as a knife is to cooking.

lgerla
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Re: Advice: Overextending by buying? How much house to buy?

Postby lgerla » Mon Mar 20, 2017 4:37 pm

I would give a lot of thought to the geographic and educational freedom of charter or private schools. Yes, you will have tuition, but it may be less than the cost of the additional housing price in a "good" school district. You will be able to tailor your school choice to your child's interests/abilities and your priorities. If need be, you will be free to move the child to a different school without having to change your residence.

This way, you can pick a house you can afford in a neighborhood you like. Any given school district may not work out as well as you hope in the long term, and districting lines do change, especially for middle and high schools. Public schools are much different than when I went to school, and not in a good way, IMHO.

Rmats
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Re: Advice: Overextending by buying? How much house to buy?

Postby Rmats » Mon Mar 20, 2017 5:05 pm

somekevinguy wrote:
pekkle wrote:
Thanks for the advice! I'd love to know when you might recommend buying (more like October-Feb? or?).

Also, what would be your reccs on places to look (Campbell? West San Jose? Sunnyvale?)

Thanks!


While it is true there are other school options, it seems that homes in the better school districts tend to retain their value better in downturns, and shoot up significantly more in upturns.

In terms of zip codes, the more west or the more up the peninsula, the better, typically, if starting from the San Jose area.

There are zip codes and then school attendance zones that subdivide popular zip codes.

Example:

Parts of Campbell and San Jose feed into Easterbrook Discovery (K-8, well regarded it seems) and then either Prospect High or Westmont High. Some folks consider these a step below Cupertino schools.

Los Gatos is very nice, expensive, and has good schools, but somewhat south.
Ditto Saratoga (just south of Cupertino)

95129 (West San Jose) feeds into Lynbrook High (not all parts of 95129 feed into Lynbrook).
95014 (Cupertino) is perennially popular (Monta Vista / Cupertino High).
94087 (West Sunnyvale) is pretty hot right now, especially feeding into Homestead High School. Note: not all parts of 94087 feed into Homestead High.
94043 (Mountain View)
Palo Alto

I'm personally still figuring out how the charter schools work in the area and what happens if a child doesn't get enrolled.


This is great- thanks for your first hand thoughts. I'd love to hear your approach to schooling in the area (i.e. charters vs. traditional public vs. private) if you have some time.


Campbell is definitely up and coming. One note, Easterbrook is voluntary parent participation and has a more progressive bend to it. Discovery Charter, a related school in Campbell Moreland is full parent participation. Both potentially feed into Prospect or Westmont as mentioned and of the two Westmont is generally considered superior. All of CUSD is good, score wise, but you pay for it. It all gets very complicated, especially when you factor in different elementary and high school districts and choice school within the public system. There's also a vary wide range in styles of education.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Mon Mar 20, 2017 6:17 pm

Tal- wrote:Rent.

Simply put, you can't afford a $2M house.

That's true because of your income. It's true because you can't afford the down payment. It's true because it would kill your liquidity. It's true because it would introduce huge risk at a time in your lives where you don't need to take on that much risk.

Your point about losing out on the housing assistance isn't a bad one. And yes, I agree that the standard rules get a little gray when talking about someone with 4K vs 50K in monthly income. But, don't lose sight of the of the forest through the trees - you can't afford a $2M house.

With all of that said, I would be open to you guying a starter home. Spend $1M on a house and live in it for a few years. That lets you get the benefit of the assistance programs, is something that you can afford, and lets you re-evaluate in a few years.


While I agree with arguments about reducing liquidity and introducing significant risk, I'm not sure about the actual math that says it wouldn't be affordable.

In terms of income, the monthly take home on 586K would conservatively be somewhere around 27K. PITI on a 2 M home would be about 11,500 (4%, 30 year loan) without even taking into account any of the zero interest loans from employers. While yes, that represents 43% of take home pay spent on housing, that also leaves 15,500 of disposable income (and savings). This is where those rules we like to use don't necessarily always apply. Yes, if you plan to inflate your other expenses as your income rises, than 2-3x income makes sense. If instead you capped non housing spending at 8K (which would be double what we spend now), that would still leave a sizeable amount (7500/mo or 90K/yr) left for additional savings. In terms of down payment, as stated previously, the down payment of 10-12% is more than adequate given the employee assistance and avoids PMI (to my understanding, 20% isnt some magical number, just so happens you avoid PMI at that percentage- you could also argue that zero interest loans essentially represent free money and that the mortgage is a reasonable inflation hedge). Again, none of the above math takes into account 625K in interest free loans.

3X income, or 4% withdrawal, or age in bonds are all good places to start and not hard to do but really just a basic starting point. Where it gets tricky for me is really considering our actual expenditures, the housing assistance, rising interest rates, and at least for now, a 50% anticipated marginal tax rate.

thefireguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby thefireguy » Mon Mar 20, 2017 11:31 pm

Sounds like pretty good problems to have. I agree with some others, fascinating thread as this has been of a bit different conversation than you usually see on BH.

With that said, I would side on the renting side. Maybe even renting for a couple of years in one of the "good school districts" that you might be interested in. See how you guys like it and go from there. Save up and give yourself some more flexibility. I get that you are potentially losing the ~ $17k subsidy by renting. Is it possible to ask the question if there is any type of housing subsidy that would be even partial if you rent? Even so, I don't think it changes my opinion.

I think you'll have a tough time convincing many of us on here that it's a good idea to take a 30 yr loan for a couple million dollars even with that large income.

For me at least, financial independence is pretty much about having as many options as possible, as soon as possible. Everyone has their own thought, of course, but I think buying a $2-$3M home right now and saving "only" 70-90k limits those possibilities for you and your family.

Good luck with the move. Either way, pretty good first world problems to have.

-TFG

anoop
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Re: Advice: Overextending by buying? How much house to buy?

Postby anoop » Tue Mar 21, 2017 12:35 am

WarChest wrote:Side note: All this "employer housing assistance" is nuts. If employers keep doing this they aren't really doing much of a service because all the subsidy does is continue to inflate local property values to the point where more and more subsidy is needed. Shooting themselves in the foot if you ask me.

Also, if your employer knows you just purchased a very expensive house with a big loan...well, there goes your freedom to speak out at work and your bargaining power.


It's an inexpensive way for the employer to tie a ball and chain on the employee, so it is actually quite profitable for them. The cost to the employer of recruiting someone and have them leave within a year or two is actually quite high (I've seen articles that estimate it at 1-2x annual salary for executive positions).

To answer the OP's question -- I think it's fine to buy as long as you stay within 3.5 times your pay. That would be my limit. Along with the more expensive house comes higher taxes.

ysette9
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Re: Advice: Overextending by buying? How much house to buy?

Postby ysette9 » Tue Mar 21, 2017 2:36 pm

I'd love your thoughts on where you might look- With jobs in San Jose (with a required weekly trip to Santa Cruz) and in Palo Alto, I was considering places like Cupertino, Los Altos, Saratoga, and Los Gatos. There are probably parts of Sunnyvale, West San Jose, and Campbell that might work too and be more likely to be in the 1-2M range with the hit/miss school situation you mentioned. Where would you be looking for a house if you were me?


I took a break from this thread for a few days and it looks like a missed a lot of good conversation. Let me put on my thinking cap for you here.

I worked in Palo Alto for several years (loved it there!) and lived in San Jose for part of that time. I definitely DO NOT recommend living in San Jose because it is more affordable, which means everyone lives there, which means the traffic is going to be terrible. We sold our nice, new townhouse in San Jose and rented an older, not-nice house in Menlo Park and the quality of life improvement was dramatic. By choosing to live in a smaller, less-nice house that is better located we have reverse commute most of the time.

You don't say where in San Jose one of these jobs is going to be; it is a huge, sprawling city and it can take forever just to get cross town during commute time. Presuming it is in the north/west area of San Jose, I would recommend renting someplace along 280, in between Palo Alto and maybe Cupertino. Traffic on 280 tends to be very good between Apple in Cupertino and Stanford in Palo Alto if you are going the reverse commute direction (south in the morning, north in the evening). You could look at Mountain View, Los Altos, Los Altos Hills, west Cupertino, and south Palo Alto. As others have said, I strongly recommend renting initially. There are hundreds of little pockets with different character, price, commute, schools and community feel and it is really hard to figure out what will work for you from a brief search. If either work is anywhere near Caltrain, I'd recommend living close to a station and biking the rest of the way to avoid the freeways.

You're moving to the Bay Area so I probably don't need to sell it to you, but I can appreciate how people from a LCOL area, especially if you are white, would find it mind-boggling to pay such prices to live here. Personally this area has so much to offer I can't imagine doing without. Every time I go on a business trip I find myself thinking how awful the weather is wherever I go; to hot, too cold, too humid, too many bugs, white stuff on the ground, depressing because all the leaves fell off the trees in the winter. (We CA people are wimps!) :D I can go out my front door and go on a run 365 days a year. We don't have AC. It never freezes. I can find francophone friends down the street from me to practice my language; we can send our kid to daycare in a choice of languages (started out in Mandarin, now in French). She will go to mandarin immersion public school for free (we could also choose Spanish). She is growing up in an area where being mixed race/culture/language is totally normal. These are the things that are harder to quantify that, for me, make it totally worth it.

That said, our household income is $350K and we save around 60% of our income. That is projecting putting us at FIRE around the time we hit 40. Not too bad in my book.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Tue Mar 21, 2017 4:40 pm

You don't say where in San Jose one of these jobs is going to be


Pretty far south San Jose (near Santa Theresa) . That is my major hesitation going too far north up the peninsula, despite a reverse commute for my wife going south.

Given your thoughts though, it seems like my commute going north to PA is going to be a lot worse and so instead of splitting the distance, moving a little more north (as you mention ,between PA and Cupertino), seems like a reasonable option.

You're moving to the Bay Area so I probably don't need to sell it to you, but I can appreciate how people from a LCOL area, especially if you are white, would find it mind-boggling to pay such prices to live here. Personally this area has so much to offer I can't imagine doing without. Every time I go on a business trip I find myself thinking how awful the weather is wherever I go; to hot, too cold, too humid, too many bugs, white stuff on the ground, depressing because all the leaves fell off the trees in the winter. (We CA people are wimps!) :D I can go out my front door and go on a run 365 days a year. We don't have AC. It never freezes. I can find francophone friends down the street from me to practice my language; we can send our kid to daycare in a choice of languages (started out in Mandarin, now in French). She will go to mandarin immersion public school for free (we could also choose Spanish). She is growing up in an area where being mixed race/culture/language is totally normal. These are the things that are harder to quantify that, for me, make it totally worth it.


You've articulated really well why despite living in well regarded areas like southern california, boston, and a nice midwest college town, there really is no place I've found quite like the Bay Area. There's probably a reason (other than the wealth from the tech industry) it costs an arm and two legs to live there.

Thanks again for the advice!

ysette9
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Re: Advice: Overextending by buying? How much house to buy?

Postby ysette9 » Tue Mar 21, 2017 5:11 pm

Pretty far south San Jose (near Santa Theresa) . That is my major hesitation going too far north up the peninsula, despite a reverse commute for my wife going south.

Given your thoughts though, it seems like my commute going north to PA is going to be a lot worse and so instead of splitting the distance, moving a little more north (as you mention ,between PA and Cupertino), seems like a reasonable option.


That is going to be a tough distance to split, anyway you cut it. Depending on the actual location, you could look into Caltrain or Caltrain + VTA lightrail to get to the Santa Theresa work location. I think that living further up the peninsula will help with the commute, but that is a strong reason to rent before buying so you can test out the intricacies.

Will you have control over your schedules? I work aerospace/defense so the culture is that of an early start to the day. If I get into the office by 7:00 the traffic is significantly better than getting in by 8:00. At 8:30 the freeways are gridlocked. If you have the option, going in early and leaving early will help a fair amount, more so in the morning than the afternoon.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Tue Mar 21, 2017 6:12 pm

ysette9 wrote:
Pretty far south San Jose (near Santa Theresa) . That is my major hesitation going too far north up the peninsula, despite a reverse commute for my wife going south.

Given your thoughts though, it seems like my commute going north to PA is going to be a lot worse and so instead of splitting the distance, moving a little more north (as you mention ,between PA and Cupertino), seems like a reasonable option.


That is going to be a tough distance to split, anyway you cut it. Depending on the actual location, you could look into Caltrain or Caltrain + VTA lightrail to get to the Santa Theresa work location. I think that living further up the peninsula will help with the commute, but that is a strong reason to rent before buying so you can test out the intricacies.

Will you have control over your schedules? I work aerospace/defense so the culture is that of an early start to the day. If I get into the office by 7:00 the traffic is significantly better than getting in by 8:00. At 8:30 the freeways are gridlocked. If you have the option, going in early and leaving early will help a fair amount, more so in the morning than the afternoon.


Im pretty sure I will at least and hope to work something like 7-3:30/4 so hopefully thatll help somewhat. Thanks again for your advice.

Frisco Kid
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Re: Advice: Overextending by buying? How much house to buy?

Postby Frisco Kid » Tue Mar 21, 2017 6:41 pm

Any South Bay/Peninsula regular hour commute is a nightmare. Check 511 traffic online and see for yourself. Given your income I don't think the $2m home is unaffordable, just don't go beyond. Another thing about this area is that rentals are also VERY expensive, perhaps $5k+ monthly for what you are looking at. You also might consider giving up some square footage for a smaller home in a better school district. $1.5m will get you a smaller home in a great school district here. Are kids in your future as living on a single income won't work and daycare here is quite pricey

somekevinguy
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Re: Advice: Overextending by buying? How much house to buy?

Postby somekevinguy » Tue Mar 21, 2017 8:04 pm

Frisco Kid wrote:Any South Bay/Peninsula regular hour commute is a nightmare. Check 511 traffic online and see for yourself. Given your income I don't think the $2m home is unaffordable, just don't go beyond. Another thing about this area is that rentals are also VERY expensive, perhaps $5k+ monthly for what you are looking at. You also might consider giving up some square footage for a smaller home in a better school district. $1.5m will get you a smaller home in a great school district here. Are kids in your future as living on a single income won't work and daycare here is quite pricey


Ive heard the traffic has changed a lot (lived in Mountain View 2008-2011). I was even considering getting a plug in vehicle primarily so I could use the HOV lane (although I hear even that gets pretty congested). I've looked at rentals and agree, a comparable rental would be 6k+ most likely. We have a 2 year old and another on the way in a few months but thankfully, have been really lucky to have our parents taking care of daytime childcare duties. My wife is also working part time so that cuts down on the days we need care as well. But yeah, given 2 kids and the desire not to move again anytime soon, I didn't want to go much below 1800 sq feet if possible.

Thanks for your thoughts!


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