Seeking advice on 1.2m (now 900K) house purchase

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Ninnie
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Re: Seeking advice on 1.2m house purchase

Post by Ninnie »

If you put down $500k, you can increase to $900k. You can handle a $400K mortgage, although not a good idea to go much higher than that.
Grt2bOutdoors
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Re: Seeking advice on 1.2m house purchase

Post by Grt2bOutdoors »

boglesmind wrote:
Grt2bOutdoors wrote: RSU's? okay, but there is NOTHING to say the company MUST give them to you each year or that the value at Grant date will equal the value at the payout date. You can do what you want, you asked our opinion, and the vast majority of responses have been a resounding no!
I am not commenting on the merits of the OP's desire and ability to buy a 1.2M house.

However, a correction of the misunderstanding (quoted above) by folks not familiar with high tech companies compensation practices. Many tech companies that I know of, grant RSUs vesting over N years (N is usually 4, with a cliff 1st year vesting, and monthly vesting thereafter) and they grant RSUs in terms of guaranteed $X and not in terms of Y number of shares which are currently worth $X. For example, a 200K RSU grant is exactly worth $200K, neither more nor less, and if the vesting period is 4 years with annual vesting, then on each anniversary date the employee gets exactly $50K worth shares less taxes withheld. The company takes the risk of lower stock price or enjoys the benefit of higher stock price. From a reading of OP's initial post, it appears her company follows this practice (so did my employer and my spouse's employer). BTW, Amazon doesn't follow an equal vesting schedule for their RSUs. It starts with only 5% vesting the first year and is back-end loaded.

Boglesmind
That is incorrect and seeing as Goal33 already spelled out how RSU grants work, I will refrain from retyping it verbatim.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
jharkin
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Re: Seeking advice on 1.2m house purchase

Post by jharkin »

+1 There may be some variation in grant practices, butgoal33 explanation is also how my RSUs work- priced on offer date and then 3 year annual vesting. If the stock tanks they can become worthless.

Also don't assume that because you always got them, you always will. I got them 15 years running (used to be nonqual options before the regulatory change) and then out of the blue we get a new CFO who thinks we give out too many RSU. They tightened up the grant pool to a very small group of top performers and *poof* bye bye stocks for most employees... and this was during a time of strong growth, not a reactionary cost cut move so most of us did not see it coming.
cherijoh
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Re: Seeking advice on 1.2m house purchase

Post by cherijoh »

TuesdayGal wrote:Keep renting - On a personal note, I don't like moving (I tend to stay put long-term at a place). While there is a cap on property taxes in California (Prop 13), there does not seem to be a cap on rental prices so I've heard horror stories of rentals shooting up dramatically from one year to the next, causing folks to move around a lot. However, more important is that on a financial note, previously indicated, rent vs buy calculator (with assumptions of course) are stating that I would break-even in 2-3 years, which is what's leaning me towards buying since I do intend to stay in the area long-term.
You seem to be putting an inordinate amount of confidence in the "rent vs. buy" calculator. Rather than running just one scenario with what ever assumptions you have made, I suggest running a "stress test" and going up and down on all the key assumptions and then run all the potential combinations. Also be sure you are fair about what you would consider renting. If you wanted to continue to rent and were in your current situation of having to move, what would you be looking to rent? Something similar in size to your current place?

One scenario I think you should consider that is NOT built into your calculator is that if interest rates move back towards their historical averages then no one may be able to afford to buy at the current lofty prices of the Bay Area. The historically low interest rates have propped up home prices because it is all about the payment and cash flow. Keep in mind that the stock market could still do OK even though the hottest RE markets do not. There isn't a rule that a future RE crash will take down the stock market like the previous recession. This could change your payback period dramatically. Since you are contemplating a much larger down payment than average you are a whole lot more sensitive to this scenario than the average person making 10 -20% down payment.
TuesdayGal wrote:Exactly 40. Fortunately, for the work that I do, I get paid more in a downturn (coz I specialize in business turnaround). The average age for sr. management in my company seems higher than other Bay Area companies, and we've never had a major layoff (again, I work for one of the FANG companies). There are quite a few opportunities for what I do in the Bay Area but in a downturn (like in the last one), I usually get even better pay (I know, the irony). I have been riding bear markets (stocks or real estate) in the past successfully, so I strongly believe in the buy and hold policy.
So are you planning to work until you are at least 70? You are talking about a 30-year mortgage right? By taking on this house you would be taking a major hit on your ability to save. So I don't see any way for you to up your retirement savings to the level where it needs to be to cover making your mortgage in retirement. Your current retirement kitty wouldn't even be able to support withdrawals to pay for 6 months of mortgage payments - let alone other living expenses! You need to think about how much your salary needs to increase in the short term to cover both increased retirement savings and accelerating your mortgage pay down. Is it even feasible? Lots of people in their 40s and 50s find their salaries topping out and if a job loss is involved you will be lucky to get back to your current salary IMO. This comes as a shock to people who have voluntarily jumped from job to job in their 20s and 30s and gotten increased compensation with each move. There are of course exceptions, but do you want to bet on it? If you were to lose your job after buying a 1.2MM house you won't have the luxury of shopping around for the best compensation package.
Gufomel wrote:If your choice were to put almost all of your net worth into Apple vs. buy this house, then those might be comparable choices. Putting your net worth into a broadly diversified portfolio of stocks/bonds vs. buying a single $1.2m real estate property that also turns your cash flow negative and has huge transaction costs on both the buy and sell side are not remotely comparable choices.
+1
Pekkle wrote:I did this and now am stuck in my very old condo b/c I can't afford to move up out of my starter home, given the increases in prices (I'm also being greedy by being unwilling to sell my current place to afford the next one, so it's less unwilling to afford rather than can't). The same percentage increase in a $800,000 2-bedroom condo prices the $1.2 million SFH out of reach. And the holy grail for bay area housing remains SFHs with no HOA on any sized lot.
I hate to burst your bubble, but if you insist on keeping your old place you'll probably never get out of that condo. Even in less stratospheric RE markets than the Bay Area, most people can't afford to cover 2 mortgages. It's not just coming up with the second down payment - lenders won't count rental income as a counterbalance to the original mortgage until you have an established rental history. So to qualify, you have to cover both mortgages with just regular income.
somekevinguy wrote:As someone who is also looking to buy in the heart of the Bay Area and similarly concerned re: housing expenditures relative to income (although we're a dual income non-tech family looking at closer to 3.5x income), I certainly sympathize and understand where you're coming from. I also get arguments about moving to somewhere LCOL, renting a cheaper place, etc but there's probably a reason why those that can (or even those that can't) afford to live there decide to live there and while nothing is guaranteed, while other housing markets decline, it does seem that some of these areas (ie Palo Alto) just plateau even during the housing crisis, making bay area RE seem like a very worthwhile investment. I tend to agree that those that live outside the bay area have a very different perspective than those that live within but it is also nice to get the perspective from outside the SV bubble.
Good past results don't make something a good strategy going forward. IMO you are making a major mistake by viewing a home purchase as investment. Go back and review the psteinx post near the top of page 2 about what could go wrong with Bay Area RE to knock the props out of the price support you cite above. IMO super hot RE markets function like a giant Ponzi scheme where the early participants come out like bandits, but eventually someone gets stuck holding the bag. Just because the Bay Area market has been resilient in the past doesn't provide any proof that it will stay that way - especially if interest rates climb back to historical norms. The supply of people who can pay those prices would dwindle dramatically!
fnmix
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Re: Seeking advice on 1.2m house purchase

Post by fnmix »

TuesdayGal wrote: Company is located at the triangle intersection of 85, 101, and 237 (Sunnyvale). I currently am renting in Sunnyvale (near Apple). Since there's nothing under 1M in my area, I've been looking at longer commutes (Campbell, San Jose, Fremont, East Palo Alto, etc.). No work from home options officially.
TuesdayGal - I live in this area and can empathize with your quandary. I went through some similar decision making a few years ago and decided to buy.

It seems to me that for emotional/psychological reasons you want to buy. This is fine - I did too. I would encourage you to work out the "bad" scenarios and lay down a plan for each scenario. Examples: what do you do if you lose you job? have a health problem? need money for emergency repairs? Company stock price dips significantly? If you end up with a plan in each of these cases that is convincing (have somebody else - a friend or family member - check it), buying a house could work.

Not everything can be boiled down to pure $s and cents for everybody all the time. At the same time, it would be imprudent to take a big risk without a well thought out backup plan.
edge
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Re: Seeking advice on 1.2m house purchase

Post by edge »

If you like the Bay Area you should find a higher paying job.
pekkle
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Re: Seeking advice on 1.2m house purchase

Post by pekkle »

If you don't care about school districts, then any SFH with some reasonable sized lot close to where you work or would like to work would be OK.

There is a significant premium attached to the desired school districts (Cupertino, West San Jose, Los Gatos, etc.) that pushes desirability and prices up sky-high. Second priority seems to be commute distance and time (as you'd might expect), pushing prices up even in Santa Clara (places in areas that listed for less than $1M last summer are listing for over $1M this summer). Third priority may be walkability (proximity to the area's downtown or the new town centers cropping up).

With respect to a SFH, if you can find something with a lot size >= 6000 sq ft you might have room and greater flexibility to expand / renovate the SFH in the (far) future. With condos and townhomes you have limited options when it comes to renovations, and only on the interior.

For those saying a 3/2 place is too large for a single person, most of these SFHs around $1M are < 1500 sq ft large, so total overall square footage is still fairly small, especially if you're renting rooms out (with renting rooms you have 2+ individual lives and things that don't really have advantages of scaling together).
KlangFool
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Re: Seeking advice on 1.2m house purchase

Post by KlangFool »

OP,

Some points for you to consider.

1) CA is a non-recourse state. You could walk away from your mortgage and they can only take your house and nothing else. So, why would you want to put more than 20% down payment for your house? To protect yourself financially, you may want to put less into down payment. If there is a housing crash, you can walk away from your house.

2) Property price increasing. As a house owner, it does not help you that the property price is increasing. You will pay more property tax. The only times that property price matter to you is when you sell. The property price could be increasing for X number of years but it crashes when you sell.

3) If your PITI is 20% to 30% lower than your rent, then, you could buy. You do not need price appreciation.

KlangFool
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GulfCoast
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Re: Seeking advice on 1.2m house purchase

Post by GulfCoast »

Tuesdaygal, I haven't gotten through all the posts yet, so forgive me if this has already been mentioned. But would you be able to, or open to, renting a room or two out (depending on how many bedrooms the house has, of course). I imagine if you could rent the rooms for $1.5k each or so (don't know the going rate for SF), you could easily afford the house and continue with your investments.
pmelon
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Re: Seeking advice on 1.2m house purchase

Post by pmelon »

TuesdayGal wrote:Exactly 40. Fortunately, for the work that I do, I get paid more in a downturn (coz I specialize in business turnaround). The average age for sr. management in my company seems higher than other Bay Area companies, and we've never had a major layoff (again, I work for one of the FANG companies). There are quite a few opportunities for what I do in the Bay Area but in a downturn (like in the last one), I usually get even better pay (I know, the irony). I have been riding bear markets (stocks or real estate) in the past successfully, so I strongly believe in the buy and hold policy.
So are you planning to work until you are at least 70? You are talking about a 30-year mortgage right? By taking on this house you would be taking a major hit on your ability to save. So I don't see any way for you to up your retirement savings to the level where it needs to be to cover making your mortgage in retirement. Your current retirement kitty wouldn't even be able to support withdrawals to pay for 6 months of mortgage payments - let alone other living expenses! You need to think about how much your salary needs to increase in the short term to cover both increased retirement savings and accelerating your mortgage pay down. Is it even feasible? Lots of people in their 40s and 50s find their salaries topping out and if a job loss is involved you will be lucky to get back to your current salary IMO. This comes as a shock to people who have voluntarily jumped from job to job in their 20s and 30s and gotten increased compensation with each move. There are of course exceptions, but do you want to bet on it? If you were to lose your job after buying a 1.2MM house you won't have the luxury of shopping around for the best compensation package.




I totally agree.

Further, the OPs comment about working for a FANG and senior management being of an older age group doesn't mean job security. Past history is just that. Companies change strategy according to the prevailing winds of the economy as quickly as the board of directors change their underwear. Anyone who's 40 and over and working in the tech industry (especially in the Silicon Valley) should be very strategic about their investments and prospects of being laid off. Exit strategies built into house of cards situation is the best course of action.
bloom2708
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Re: Seeking advice on 1.2m house purchase

Post by bloom2708 »

GulfCoast wrote:Tuesdaygal, I haven't gotten through all the posts yet, so forgive me if this has already been mentioned. But would you be able to, or open to, renting a room or two out (depending on how many bedrooms the house has, of course). I imagine if you could rent the rooms for $1.5k each or so (don't know the going rate for SF), you could easily afford the house and continue with your investments.
Would going from a rented apartment for $1,900/month to a single family home with 2 roomates to go with the $400-$600k mortgage (and using $500k of investments) be an upgrade?

At 40 having roommates again? Whew, college throwback I guess. With the new longer commute, the OP will be home less to deal with roommates. I'm trying to envision asking my new roommates to clean the kitchen and stop leaving their dirty dishes in the sink. :shock:

If I was the OP, I would revisit the need to buy a house in the SF area. Buy now and get in on the lottery type gains that may or may not last? Is that the draw and mystique of SF? Lottery rush?

Head scratching stuff. The "American Dream" of home ownership. :confused
Last edited by bloom2708 on Thu Jul 06, 2017 4:17 pm, edited 4 times in total.
WageSlave
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Re: Seeking advice on 1.2m house purchase

Post by WageSlave »

TuesdayGal wrote:Rents have increased since and rent vs buy of a 3 bedroom house is around 3500 vs 3737 (PITI - with 600K downpayment).


Did I miss where the details of that were posted? Intuitively, I can't see how giving up the re-investment returns of that $600k down payment can possibly be made up for so quickly.

TuesdayGal wrote:I'm looking at 3 bedroom so that I can rent out a room.
Do you have experience as a landlord? Obviously, it's not for everyone. But even if it turns out to be your thing, if you've never done it before, you're taking on three huge changes at once: radical change to your finances; the actual move, with new neighborhood, new commute, new routine; and becoming a landlord. Everyone handles change differently, but when I have control over change, I like to take it in smaller, spread-out chunks.

TuesdayGal wrote:That's exactly my quandary - I have long subscribed to the Boglehead philosophy when I was living in another state (Oregon) and have done OK. In the Silicon Valley, everyone around me is doing something different (they're faring better not in terms of cash flow, but in terms of net worth). When I moved here, I continued to be faithful to Bogleheads philosophy of keeping expenses low (which caused me to stay put renting in the same place for over 5 years) - though I'm practically priced out of the market now.
So it sounds like the Bay area is the poster child for Keeping Up with the Joneses Syndrome... I would go so far as to call that mentality anathema to the Boglehead philosophy. Just because you don't have a $1.2m house and are "priced out of the market" doesn't mean you're worse off than your peers. I think in your current position you're far better off than everyone else, even if superficially it seems like you're behind. I know you're going to get kicked out of your current place soon, but even considering that, you're in a position to fairly easily weather a lot of bad stuff happening. But if you buy this house, as everyone else has pointed out, you're basically parking yourself on thin ice.

I've seen people ask the question, do you want to eat well or sleep well?

cherijoh wrote:So are you planning to work until you are at least 70? You are talking about a 30-year mortgage right? By taking on this house you would be taking a major hit on your ability to save. So I don't see any way for you to up your retirement savings to the level where it needs to be to cover making your mortgage in retirement. Your current retirement kitty wouldn't even be able to support withdrawals to pay for 6 months of mortgage payments - let alone other living expenses! (...snip...)
I have the same question. Without a major windfall or bump in income, buying this house means early retirement is completely out of the question, and even typical-age retirement looks like it might take a little luck. I'm basically the same age as OP, and I can say with 100% confidence that my 20-year old self had no clue what my current nearly-40 year old self wants/needs/considers important. So I think it's reasonable to assume that my mindset at 60+ will likely be quite different than it is now. Given that, I try to give my future self as many options as I can.

Ultimately I think a lot of conversations here boil down to current needs/wants versus future needs/wants. It's a continuum where everyone has to ultimately make up their own mind where on it they wish to land. Most people try to strike a balance between being comfortable today but also ensuring tomorrow will be comfortable as well.

I can't help but think that for "everyone" in the Bay area---who in this thread has been characterized as over-extending themselves to buy the crazy-expensive real estate---must either (1) make considerably more money than the OP, or (2) has an exit strategy that involves eventually moving to a lower cost of living area.

If OP wants to stay forever in the Bay area, that's great. But IMO she needs to lower her expectations for the kind of residence she'll keep. Or she needs to make more money. At the end of the day, it's clearly silly-expensive to live in Silicon Valley. So if you want to spend the rest of your life there, you either have to make the big bucks or live very modestly.
WL2034
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Re: Seeking advice on 1.2m house purchase

Post by WL2034 »

How much rent do you expect to collect from renting out a room (or 2)? Financially, that may actually be the best option if you feel that it is a reliable income. I have no experience in Bay area real estate or renting, so could not even venture to guess. You will still have the added risk of having much of your net worth in one asset, but it would improve your cash flow and ability to continue saving.

Of course, the roommate / landlord situation is much more of a personal / lifestyle choice than a financial decision. But if you think you would enjoy it, I agree it is worth considering.
cherijoh
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Re: Seeking advice on 1.2m house purchase

Post by cherijoh »

WL2034 wrote:How much rent do you expect to collect from renting out a room (or 2)? Financially, that may actually be the best option if you feel that it is a reliable income. I have no experience in Bay area real estate or renting, so could not even venture to guess. You will still have the added risk of having much of your net worth in one asset, but it would improve your cash flow and ability to continue saving.

Of course, the roommate / landlord situation is much more of a personal / lifestyle choice than a financial decision. But if you think you would enjoy it, I agree it is worth considering.
Before considering renting out a room to cover expenses, OP needs to look into local landlord/tenant rules. it could be very difficult to kick out a deadbeat tenant. See this hair-raising thread for a tale about how things can go wrong. This guy was an experienced landlord to boot.
MrJones
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Re: Seeking advice on 1.2m house purchase

Post by MrJones »

bloom2708 wrote:Rent with a shorter commute. Life is too short.

I wonder if the HGTVification is to blame. House Hunters and the like show people "fulfilling" their dreams buying their "dream house".

To go backwards and jeopardize financial security for a house with a long commute. I just don't get it sometimes.
+10
denovo
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Re: Seeking advice on 1.2m house purchase

Post by denovo »

KlangFool wrote:OP,

Some points for you to consider.



2) Property price increasing. As a house owner, it does not help you that the property price is increasing. You will pay more property tax. The only times that property price matter to you is when you sell. The property price could be increasing for X number of years but it crashes when you sell.


KlangFool
jharkin wrote:Don't do it... you haven't even accounted for property tax increases and the cost maintenance. Yes you have assets now but this house could, likely will, bankrupt you even so.

I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.

In CA, we have something called Prop. 13, which was a cons. amendment passed in 1978. Property tax assessments are limited to annual increases of no more than 2 percent, no matter how much home prices have increased. However if home prices decline after purchase, you can apply for a downwards reassessment.

https://en.wikipedia.org/wiki/Californi ... he_measure
Under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This "assessed value," may be increased only by a maximum of 2% per year, until and unless the property has a change of ownership.[11]
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denovo
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Re: Seeking advice on 1.2m house purchase

Post by denovo »

jharkin wrote:Even with 50k stock you are taking about a house 6x your income. The usual safe limit that banks allow is closer to 4x, and many of us here...me included.. feel better at 2-3x.
Banks do not use comparisons of salary to home price to do underwriting. It makes no sense. (like changing your oil every 3k miles, these rules of thumbs are discredited relics of the past) A $300k mortgage when interest rates are 3 percent on a 30 yr will cost $1,265 a month, but $2,414 a month at 9 percent. How does 3x,4x of sales price/income account for interest rates? How does it account for property taxes which are limited to 1 percent of the home sale price in CA, but can be 3,4,5 percent in some localities in TX or NJ?

In the real world, they use debt to income ratios.


fortunately, decades of financial data have produced computerized models that help to determine how much a person can afford to spend on housing and debt. To learn more about this, I recently spoke with Robb Severdia of Guarantee Mortgage in Portland. I asked him to describe how the process works. (If I have anything wrong here, it’s my fault, not Severdia’s.)

Traditionally, lenders have used the debt-to-income (DTI) ratio to estimate how much a homeowner can afford to borrow. This ratio is computed by comparing your expenses to your gross (pre-tax) income. The lower the number, the better. If you make $3,000 a month before taxes, and you pay $300 toward debt, your debt-to-income ratio is 10%.

Banks and mortgage brokers look at two numbers:

The “front-end” debt-to-income ratio, which includes total housing expenses: mortgage principal, interest, taxes, and insurance.
The “back-end” debt-to-income ratio, which includes all of the above plus other debt payments: auto loans, student loans, credit cards, etc.
http://www.getrichslowly.org/blog/2008/ ... ou-afford/
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jharkin
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Re: Seeking advice on 1.2m house purchase

Post by jharkin »

I am well aware banks don't use price to income ratios. They use debt ratios, and the typical 28% PITI ratio with 20% down works out to something between 4 and 5x income at today's mid-4 APRs.

I was paraphrasing all that into a simple statement. The logic still stands, 6x income with negative cash flow is UNNAFORDABLE by any sane metric.
Last edited by jharkin on Thu Jul 06, 2017 7:35 pm, edited 1 time in total.
KlangFool
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Re: Seeking advice on 1.2m house purchase

Post by KlangFool »

denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
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denovo
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Re: Seeking advice on 1.2m house purchase

Post by denovo »

KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
The way you clipped my post removes the relative context. You said the OP would be liable for hefty property tax increases and she is not. You are not familiar with CA law.
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jharkin
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Re: Seeking advice on 1.2m house purchase

Post by jharkin »

KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
Agreed 1000%

If the Bay Area was 10 or 20% outside the median we could write it off as a special case... But the Bay Area is so far out that sooner or later it has to come crashing down. And when it does, it's gonna hurt.
denovo
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Re: Seeking advice on 1.2m house purchase

Post by denovo »

jharkin wrote:I am well aware banks don't use price to income ratios. They use debt ratios, and the typical 28% PITI ratio with 20% down works out to something between 4 and 5x income at today's mid-4 APRs.

I was paraphrasing all that into a simple statement. The logic still stands, 6x income with negative cash flow is UNNAFORDABLE by any sane metric.
There you go,again. :happy You're using the price to income ratios. What does 6x matter? A $600k mortgage has the same monthly payment whether the down payment is $1,000 or $1,000,000. (Obviously the home insurance and property tax will differ a bit. These rules of thumbs are a crutch tha precludes giving reasonable analysis.

Re; negative cashflow, I suggest reading OP again, she's only negative cash flow ignoring the change in tax liability from the new mortgage interest deduction and ignoring her RSU's. Also ignoring her 401k contributions....
Last edited by denovo on Thu Jul 06, 2017 7:45 pm, edited 1 time in total.
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jharkin
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Re: Seeking advice on 1.2m house purchase

Post by jharkin »

denovo wrote:
KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
The way you clipped my post removes the relative context. You said the OP would be liable for hefty property tax increases and she is not. You are not familiar with CA law.
Laws can change. I know how 13 woks... here in Mass we have a similar but much weaker rule called Prop 2 1/2 (only limits rate increases) Our rule allows override votes however and they are getting more and more frequent since the cap on tax rates causes severe cuts to school funding, road maintenance, police, fire, etc.

When the budget criises get bad enough and voters get fed up with service cuts the law can and very well may change. Don't count on that protection forever.
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Re: Seeking advice on 1.2m house purchase

Post by jharkin »

denovo wrote:
jharkin wrote:I am well aware banks don't use price to income ratios. They use debt ratios, and the typical 28% PITI ratio with 20% down works out to something between 4 and 5x income at today's mid-4 APRs.

I was paraphrasing all that into a simple statement. The logic still stands, 6x income with negative cash flow is UNNAFORDABLE by any sane metric.
There you go,again. :happy You're using the price to income ratios. What does 6x matter? A $600k mortgage has the same monthly payment whether the down payment is $1,000 or $1,000,000. (Obviously the home insurance and property tax will differ a bit. These rules of thumbs are a crutch tha precludes giving reasonable analysis.

Re; negative cashflow, I sugges reading OP again, she's only negative cash flow ignoring the change in tax liability from the new mortgage interest deduction and ignoring her RSU's. Also ignoring her 401k contributions....
There I go with what?

The OP themselve mentioned the negative cash flow and that the situation made them cringe. since 401k contributions "erase" the negative cash flow problem, please explain to me how she is going to use those 401k deferrals to pay the electric bill?
KlangFool
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Re: Seeking advice on 1.2m house purchase

Post by KlangFool »

denovo wrote:
KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
The way you clipped my post removes the relative context. You said the OP would be liable for hefty property tax increases and she is not. You are not familiar with CA law.
denovo,

<<You said the OP would be liable for hefty property tax increases and she is not. >>

Okay. I give you that. But, it does not change the fact that price increase of the house does not benefit the house owner. It leads to property tax increase. It only helps when the house owner sells the house.

KlangFool
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2pedals
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Re: Seeking advice on 1.2m house purchase

Post by 2pedals »

TuesdayGal wrote:Anything else that I miss (especially Bay Area folks)?
Find a significant other preferably with similar income and savings.
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Uncle Pennybags
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Re: Seeking advice on 1.2m house purchase

Post by Uncle Pennybags »

OP; something doesn't add up. I took a Google Map trip and didn't like what I saw. Some questionable areas had outrageous housing prices. How can an area have above average hosing cost and below average income?

94103 ZIP Code
Median Home Value $628,000
Median Household Income $43,364
EddyB
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Re: Seeking advice on 1.2m house purchase

Post by EddyB »

KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
When reality doesn't fit the model, which is wrong?

That many of the people with the widest range of choices DO choose to live and work in the Bay Area suggests to me that you're overlooking something.
KlangFool
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Re: Seeking advice on 1.2m house purchase

Post by KlangFool »

EddyB wrote:
KlangFool wrote:
denovo wrote:
I agree with LiveSoft that OP should probably talk to other people familiar with the Bay Area because they have a different housing market, or at least people familiar with the CA market. These comments illustrates why.
denovo,

Or, they should talk to folks outside of Bay Area. At the same job and same level, they do not get paid substantially more to live and work in this VHCOL area. So, why would a rational person do this? They do not have to move out of California. Just outside of LA and Bay Area.

KlangFool
When reality doesn't fit the model, which is wrong?

That many of the people with the widest range of choices DO choose to live and work in the Bay Area suggests to me that you're overlooking something.
EddyB,

There is more than one way to look at things. We are on a personal finance forum. Whatever is right for someone else may not be right for us. I am offering an alternate point of view. It may or may not change anyone's mind. But, they get to look at a complete picture and make an educated decision.

KlangFool
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PaFromFL
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Re: Seeking advice on 1.2m house purchase

Post by PaFromFL »

I'd try to avoid buying into a frenzied market where most homeowners can't afford to buy their own home at current market prices. It is risky to make a leveraged investment near the peak of the market, particularly if many other buyers are heavily leveraged.
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cchrissyy
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Re: Seeking advice on 1.2m house purchase

Post by cchrissyy »

I think the main mistake you are making to justify this, is telling the rent vs buy calculator to compare a rented 3 bedroom house versus a mortgaged one. The right way to do this and not deceive yourself is to compare your current apartment with a 3 bedroom house. then, looking forward to when you'll have to move out, compare a market rate 1 or 2 bedroom apartment to that 3 bedroom purchased house. there is simply no way it still says you should buy and break even in 2 or 3 years. no way.


- signed, east bay renter and landlord, who never understood the need to own the place I'm living in
60-20-20 us-intl-bond
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unclescrooge
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Re: Seeking advice on 1.2m house purchase

Post by unclescrooge »

bloom2708 wrote:Rent with a shorter commute. Life is too short.

I wonder if the HGTVification is to blame. House Hunters and the like show people "fulfilling" their dreams buying their "dream house".

To go backwards and jeopardize financial security for a house with a long commute. I just don't get it sometimes.
LOL, OP is looking at a starter home!

There's a reason why all these shows are based out of Texas or Toronto. You actually get something for your million dollars.
forevernaive
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Re: Seeking advice on 1.2m house purchase

Post by forevernaive »

TuesdayGal wrote:I am considering a purchase of a 1.2M house (cringing), single (ie. no safety net), and would like get your opinion on
....
Anything else that I miss (especially Bay Area folks)?
When I rented in a VHCOL neighborhood in CA, I lived the life of Kato Kaelin in a converted garage until I had to move. I feel your pain and understand your desperation to buy in a rising market.

Let me offer an alternate way of thinking about this: Your market timing is terrible. I think you should wait, stockpile cash for more down, and buy on your terms when the market drops. Sadly this means you may have to move, but you are letting the loss of your rental influence your timing on your house purchase.

Suppose the matter were flipped, and you owned a number of well-diversified real estate properties across the region. But then you found out your trusted advisor was closing your mutual fund where you kept your retirement funds. You had also noticed that during that same time the prices of FAANG stocks had gone through the roof, and you were considering getting in on one of them before they rose too much more to buy a significant interest in one, but you'd have to sell all your diversified RE property to really make it happen. Would you take that bet?

Of course, it isn't a perfect analogy though does illustrate the perils of concentrating your wealth. The disanalogy is equally important: Where you live really does matter to quality of life in a way that owning this or that stock doesn't. Still though, and like most everyone else--I even agree with KlangFool on this thread--I counsel patience. If you wait and suffer now, in a few years you can likely purchase a good Bay Area home to live in and enjoy for 25-30 years into your first retirement.

You see, I think your timing is also off in another way: At 40, I think you are both strangely too young and too old to buy in today's Bay Area market. If you were 25 or 30, you could buy and fill a 3-4BR house with interesting renters a la Douglas Coupland's Microserfs. Their rents could pay the mortgage for you for a few years until at 40 you could gradually decrease their numbers as you could afford it. But I think you are probably too old to put up with all that.

On the flip side, at 40 you are just a little too young to have enough cash stockpiled to buy now. Instead, just continue to stockpile cash to buy the right place at at a time when Bay Area houses are cheap(er), loans are hard to get, and cash is king. I won't bore you with the details of my RE travails, but I eventually figured out how to buy a well-situated smaller home on very expensive land in the HCOL neighborhood of my dreams. The short answer boiled down to having accessible cash in 2008 when the mortgage market froze up and sellers were desperate (though the deal actually closed before prices hit bottom, the property I wanted was available and there was no bidding war). I'll wager you can do the same over the next decade, maybe even within the next half of the decade.

My advice: Set a goal of buying with mostly cash by the time you are 50, and be ready to pounce like a lioness. Timing is everything.
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TuesdayGal
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Re: Seeking advice on 1.2m house purchase

Post by TuesdayGal »

jharkin wrote:
denovo wrote:
jharkin wrote:I am well aware banks don't use price to income ratios. They use debt ratios, and the typical 28% PITI ratio with 20% down works out to something between 4 and 5x income at today's mid-4 APRs.

I was paraphrasing all that into a simple statement. The logic still stands, 6x income with negative cash flow is UNNAFORDABLE by any sane metric.
There you go,again. :happy You're using the price to income ratios. What does 6x matter? A $600k mortgage has the same monthly payment whether the down payment is $1,000 or $1,000,000. (Obviously the home insurance and property tax will differ a bit. These rules of thumbs are a crutch tha precludes giving reasonable analysis.

Re; negative cashflow, I sugges reading OP again, she's only negative cash flow ignoring the change in tax liability from the new mortgage interest deduction and ignoring her RSU's. Also ignoring her 401k contributions....
There I go with what?

The OP themselve mentioned the negative cash flow and that the situation made them cringe. since 401k contributions "erase" the negative cash flow problem, please explain to me how she is going to use those 401k deferrals to pay the electric bill?
The electric bill is included in the Expenses portion
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TuesdayGal
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Re: Seeking advice on 1.2m house purchase

Post by TuesdayGal »

Uncle Pennybags wrote:OP; something doesn't add up. I took a Google Map trip and didn't like what I saw. Some questionable areas had outrageous housing prices. How can an area have above average hosing cost and below average income?

94103 ZIP Code
Median Home Value $628,000
Median Household Income $43,364
Try looking at East Palo Alto - once home to highest crime
https://www.redfin.com/city/5401/CA/East-Palo-Alto

This is our Silicon Valley world...
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MossySF
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Re: Seeking advice on 1.2m house purchase

Post by MossySF »

Uncle Pennybags wrote:OP; something doesn't add up. I took a Google Map trip and didn't like what I saw. Some questionable areas had outrageous housing prices. How can an area have above average hosing cost and below average income?

94103 ZIP Code
Median Home Value $628,000
Median Household Income $43,364
94103 is where my company's office used to be before the landlord jumped the rent on us 4X to $32K a month. The neighborhood is overrun with millenial hipsters buying $10 coffees and $15 artisan toast working for VC-funded startups that will probably never see a dime of profit. (Hence our rent jump.)

There are many newly constructed 1.5M-2M condos there ... with homeless sleeping in the doorways at night. So you when you get up in the morning, you gotta gently negotiate with them to move out of the way so you can go to work.

The cheaper SFHs there are all old -- from about the 1950s. The remodeled houses will go for millions. Street parking is tough even with a neighborhood parking sticker. (If you don't like putting a sticker on your new car, too bad.)
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bogleblitz
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by bogleblitz »

I'm like a clone of the OP. Same salary, same age, same net assets.

I bought last year a house about 1 million. 400k down payment and took out a 600k mortgage.
I'm doing fine and have positive cash flow. no regrets.
Topic Author
TuesdayGal
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by TuesdayGal »

Original posting updated!
Topic Author
TuesdayGal
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by TuesdayGal »

bogleblitz wrote:I'm like a clone of the OP. Same salary, same age, same net assets.

I bought last year a house about 1 million. 400k down payment and took out a 600k mortgage.
I'm doing fine and have positive cash flow. no regrets.
Are you living in the Bay Area?
sfchris
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Re: Seeking advice on 1.2m house purchase

Post by sfchris »

TuesdayGal wrote:
Anything else that I miss (especially Bay Area folks)?
If you can get a job in SF eventually, you might consider getting a rent controlled place here. It's not guaranteed long term due to CA Ellis evictions, but often times it works out and is quite a bit like owning.
bayview
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by bayview »

TuesdayGal, I sympathize, but we lived in the Bay Area (as renters) as the economy was slowly starting to recover from 2008-2009. In fact, we rented a lovely Victorian from a professional who lived in the unfinished basement, because she could no longer afford her mortgage. She was wildly upside down.

Keep renting, hang on to your cash, wait for the next housing crash to come (it will) -- if you're still employed, you'll have your pickings. If you're not still employed, you'll be glad that you're not stuck with a house in which you've lost a ton of equity.

It's a lot more fun to be a buyer in a buyer's market.

Best of luck to you! We loved the Bay Area, and we'd live there now if we could afford it.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
cherijoh
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Re: Seeking advice on 1.2m house purchase

Post by cherijoh »

PaFromFL wrote:I'd try to avoid buying into a frenzied market where most homeowners can't afford to buy their own home at current market prices. It is risky to make a leveraged investment near the peak of the market, particularly if many other buyers are heavily leveraged.
+1

What the Bay Area defenders are ignoring is that if the vast majority of potential buyers can't afford the houses at these historically low interest rates, what happens if (when?) interest rates return to levels closer to the historical mean? Unlike real estate prices (which are locally determined), interest rates are really not. (Some markets may be more competitive than others wrt to interest rates, but this is basically around the margins).

In the past, falling interest rates allowed people to refinance their mortgages and make their payments more affordable, so they could justify a bit of a stretch. (I did the same when I bought a condo in 1982 and assumed a mortgage with an interest rate of 14.25% :shock:). As interest rates dropped, buyers could also tolerate a higher purchase price since the payments were still within reach. We are now facing potentially significant interest rate increases - uncharted territory for most of today's home buyers. I'm sure fear of increasing interest rates is fueling some of the "now or never" frenzy - but that doesn't mean you have to participate.

Check out historical mortgage rates here.
cherijoh
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Re: Seeking advice on 1.2m house purchase

Post by cherijoh »

forevernaive wrote: You see, I think your timing is also off in another way: At 40, I think you are both strangely too young and too old to buy in today's Bay Area market. If you were 25 or 30, you could buy and fill a 3-4BR house with interesting renters a la Douglas Coupland's Microserfs. Their rents could pay the mortgage for you for a few years until at 40 you could gradually decrease their numbers as you could afford it. But I think you are probably too old to put up with all that.

On the flip side, at 40 you are just a little too young to have enough cash stockpiled to buy now. Instead, just continue to stockpile cash to buy the right place at at a time when Bay Area houses are cheap(er), loans are hard to get, and cash is king. I won't bore you with the details of my RE travails, but I eventually figured out how to buy a well-situated smaller home on very expensive land in the HCOL neighborhood of my dreams. The short answer boiled down to having accessible cash in 2008 when the mortgage market froze up and sellers were desperate (though the deal actually closed before prices hit bottom, the property I wanted was available and there was no bidding war). I'll wager you can do the same over the next decade, maybe even within the next half of the decade.

My advice: Set a goal of buying with mostly cash by the time you are 50, and be ready to pounce like a lioness. Timing is everything.
Great post! Being a contrarian really paid off for you.
pmelon
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by pmelon »

I was born and raised in San Francisco. We've owned property from San Jose to outer SF. You couldn't pay me to enter this overpriced, ridiculous market again. I look at MLS and Trulia now if I'm having a bad day and need a good laugh. Junker homes in the outer mission of SF (where I grew up) going for over 1 million. Houses built in the early 20th century with LOTS of deferred maintenance. Knock yourself out people - I'll wait on the sidelines until the next dip. And a dip WILL happen....
twins2012
Posts: 32
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Re: Seeking advice on 1.2m house purchase

Post by twins2012 »

forevernaive wrote:
TuesdayGal wrote:I am considering a purchase of a 1.2M house (cringing), single (ie. no safety net), and would like get your opinion on
....
Anything else that I miss (especially Bay Area folks)?
When I rented in a VHCOL neighborhood in CA, I lived the life of Kato Kaelin in a converted garage until I had to move. I feel your pain and understand your desperation to buy in a rising market.

Let me offer an alternate way of thinking about this: Your market timing is terrible. I think you should wait, stockpile cash for more down, and buy on your terms when the market drops. Sadly this means you may have to move, but you are letting the loss of your rental influence your timing on your house purchase.

Suppose the matter were flipped, and you owned a number of well-diversified real estate properties across the region. But then you found out your trusted advisor was closing your mutual fund where you kept your retirement funds. You had also noticed that during that same time the prices of FAANG stocks had gone through the roof, and you were considering getting in on one of them before they rose too much more to buy a significant interest in one, but you'd have to sell all your diversified RE property to really make it happen. Would you take that bet?

Of course, it isn't a perfect analogy though does illustrate the perils of concentrating your wealth. The disanalogy is equally important: Where you live really does matter to quality of life in a way that owning this or that stock doesn't. Still though, and like most everyone else--I even agree with KlangFool on this thread--I counsel patience. If you wait and suffer now, in a few years you can likely purchase a good Bay Area home to live in and enjoy for 25-30 years into your first retirement.

You see, I think your timing is also off in another way: At 40, I think you are both strangely too young and too old to buy in today's Bay Area market. If you were 25 or 30, you could buy and fill a 3-4BR house with interesting renters a la Douglas Coupland's Microserfs. Their rents could pay the mortgage for you for a few years until at 40 you could gradually decrease their numbers as you could afford it. But I think you are probably too old to put up with all that.

On the flip side, at 40 you are just a little too young to have enough cash stockpiled to buy now. Instead, just continue to stockpile cash to buy the right place at at a time when Bay Area houses are cheap(er), loans are hard to get, and cash is king. I won't bore you with the details of my RE travails, but I eventually figured out how to buy a well-situated smaller home on very expensive land in the HCOL neighborhood of my dreams. The short answer boiled down to having accessible cash in 2008 when the mortgage market froze up and sellers were desperate (though the deal actually closed before prices hit bottom, the property I wanted was available and there was no bidding war). I'll wager you can do the same over the next decade, maybe even within the next half of the decade.

My advice: Set a goal of buying with mostly cash by the time you are 50, and be ready to pounce like a lioness. Timing is everything.
OP, listen to him/her.
KlangFool
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by KlangFool »

TuesdayGal wrote:Updated Post:

Max. House Price = $900K ($500K downpayment, $400K loan)

PITI = $2895 ($400K loan, prop tax = 1.25% at 10K)
TuesdayGal,

The rent is around $2,500 to $3,000 for your current place. Let's say it is the same as the PITI. Assuming 5% ROI for the 500K down payment, it is 25K per year. You had at least increase your housing expense by 25K if not more. It is cheaper to rent.

KlangFool
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A-Commoner
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by A-Commoner »

The OP was able to amass $1.4 million in net worth at age 40 despite living in a very high cost of living area. Seems like the HCOL didn't stop her from accumulating wealth that 95% of Americans will never get to attain in their lifetimes.

Two possible takeaways from this is 1.) the OP should continue what she is doing accumulating wealth primarily in stocks and continue renting, or 2.) diversify some of that wealth into real estate, with the added benefit that she can also live in that asset instead of just looking at it on her brokerage account statements.

If the OP can somehow find a house or condo for $700k and keep the other $700k of her net worth in liquid assets, I think that is a reasonable compromise.
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Uncle Pennybags
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Re: Seeking advice on 1.2m house purchase

Post by Uncle Pennybags »

sfchris wrote:If you can get a job in SF eventually, you might consider getting a rent controlled place here. It's not guaranteed long term due to CA Ellis evictions, but often times it works out and is quite a bit like owning.
Renting is never like owning. The 99 year lease of Hong Cong by the UK is a good example.
runner540
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Re: Seeking advice on 1.2m house purchase

Post by runner540 »

unclescrooge wrote:
bloom2708 wrote:Rent with a shorter commute. Life is too short.

I wonder if the HGTVification is to blame. House Hunters and the like show people "fulfilling" their dreams buying their "dream house".

To go backwards and jeopardize financial security for a house with a long commute. I just don't get it sometimes.
LOL, OP is looking at a starter home!

There's a reason why all these shows are based out of Texas or Toronto. You actually get something for your million dollars.
Unclescrooge, are you talking about the Toronto in Canada? Housing there is just as high priced as SF.
Topic Author
TuesdayGal
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Re: Seeking advice on 1.2m (now 900K) house purchase

Post by TuesdayGal »

KlangFool wrote:
TuesdayGal wrote:Updated Post:

Max. House Price = $900K ($500K downpayment, $400K loan)

PITI = $2895 ($400K loan, prop tax = 1.25% at 10K)
TuesdayGal,

The rent is around $2,500 to $3,000 for your current place. Let's say it is the same as the PITI. Assuming 5% ROI for the 500K down payment, it is 25K per year. You had at least increase your housing expense by 25K if not more. It is cheaper to rent.

KlangFool
Here are the Rent vs. Buy assumptions I made (hopefully the numbers are populated in this link): I assumed 5% after tax ROI for the downpayment. Also, 5% increase in property prices per year. The graph you had previously provided showed an average of 8% appreciated per year. It's important to note that my tax bracket this year falls into the 33% as well.

http://dinkytown.com/java/MortgageRentv ... xePxAF8gA$
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