Can we afford a $1mil home?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
blackholescion
Posts: 166
Joined: Fri Mar 22, 2019 6:41 pm

Re: Can we afford a $1mil home?

Post by blackholescion »

Watty wrote: Sat Apr 20, 2019 1:55 pm
random_walker_77 wrote: Thu Apr 11, 2019 10:16 pm Silicon Valley pays very well, and there's definitely career benefits to living there, but I don't think many people appreciate how close the pay can be in other locales.
+1

Even in Atlanta where I live it is not hard for ordinary Software Engineers with in demand skills to get well over $100K which goes a long way when you can buy a McMansion for $500K in many of the suburbs.
+2. The cost of living between Raleigh-Durham metro and SF is 95% higher. That means I’d have to earn nearly double my salary to just exist at this same standard of living. No one ever complained about RTP having a lack of good tech jobs with low pay. 4000 square foot McMansions are 5-600k depending on area. Hell there’s a new development of right now in that range down the street. I also live in county and my property tax is less than 0.75% a year.
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Can we afford a $1mil home?

Post by HEDGEFUNDIE »

blackholescion wrote: Sat Apr 20, 2019 10:19 pm
Watty wrote: Sat Apr 20, 2019 1:55 pm
random_walker_77 wrote: Thu Apr 11, 2019 10:16 pm Silicon Valley pays very well, and there's definitely career benefits to living there, but I don't think many people appreciate how close the pay can be in other locales.
+1

Even in Atlanta where I live it is not hard for ordinary Software Engineers with in demand skills to get well over $100K which goes a long way when you can buy a McMansion for $500K in many of the suburbs.
+2. The cost of living between Raleigh-Durham metro and SF is 95% higher. That means I’d have to earn nearly double my salary to just exist at this same standard of living. No one ever complained about RTP having a lack of good tech jobs with low pay. 4000 square foot McMansions are 5-600k depending on area. Hell there’s a new development of right now in that range down the street. I also live in county and my property tax is less than 0.75% a year.
So many things wrong with this.

1. Tech firms in RTP absolutely pay less than those same firms in Silicon Valley. Prime example is Cisco. I used to work there, and I can confirm that they pay RTP employees 30-50% less than San Jose employees at the same level.

2. The cost of living is by no means double in Silicon Valley. North Carolina has a flat income tax of 5.25%. California has a progressive income tax; for my household earning $400k taxable income last year the CA effective tax rate was only 8.5%. Hardly double. Housing might be double, but that’s only an extra $30k/yr or so, more than offset by the higher salaries. CA property tax is only 1.1%. Again, not close to double. Oh, and we get more for paying more. My wife benefited from 6 weeks of State Paid Family Leave last year. How many weeks of Paid Leave does NC mandate?

3. The kinds of growth-stage tech companies that exist in Silicon Valley simply don’t exist in NC or anywhere else. One example is Twilio; if you were an employee 12 months ago, you would have a 300% gain on your RSUs. Name me a RTP employer that has seen this kind of growth. There are dozens of Silicon Valley companies with the same profile.
Last edited by HEDGEFUNDIE on Sat Apr 20, 2019 11:01 pm, edited 1 time in total.
Starfish
Posts: 2015
Joined: Wed Aug 15, 2018 6:33 pm

Re: Can we afford a $1mil home?

Post by Starfish »

I believe is very wrong to judge a professional choice through cost of living.
If you are middle of the pack, maybe. But if you are in top 5% it's a great thing to be in the most interesting place in the world in your profession.
There is no comparison between incomes either. FAANG starts at almost 200k nowadays and 500k after several years pretty common.
RE is also a big deal. Who cares about a 500k McMansion when a house in BA appreciates at fantastic rates (or it did until now)? I would rather have a highly leveraged low interest investment going up 10% a year than a small investment going nowhere.
Lifestyle and climate are other things to consider. In January, February, March, April we alternate weekends at the beach with skiing weekends. Hiking and great biking is between 10 minutes if you are ok with smaller hills and 4h hours if you want bigger mountains.

Educationally, there are 3 universities with a lot of Nobel prices within 1h of driving and at least one more decent university.
There is also the only nice city in US.

So, if you are competitive in the lucrative fields required in BA, there is no place like it. Not even by far.
Misenplace
Moderator
Posts: 2735
Joined: Mon Feb 01, 2016 9:46 pm

Re: Can we afford a $1mil home?

Post by Misenplace »

Starfish wrote: Sat Apr 20, 2019 10:02 pm
Misenplace wrote: Thu Apr 11, 2019 8:57 pm
2marshmallow wrote: Thu Apr 11, 2019 7:40 pm It looks like the PITI for a $1M home with a 20% down payment is a very reasonable fraction of your income. You will have to judge how secure that income is.

Wife and I bought a $900K home in the Bay Area in 2012. That was a bit of a pill to swallow, having moved from out of the area. Today it is worth about $1.7M. Also our net worth during those years increased far beyond our expectations. For those who question life in such a HCOL, it is worth it if you participate in the job market that drives the HCOL.

Good luck to you dee789!
And if you had invested 900k in VTI in April 2012, with dividends reinvested it would be around $2.2 million. Also, the tax on the dividends would be far less than the property tax and upkeep on a CA home. Although if 2marshmallows are living in the house and MFJ they can still exclude a lot of the capital gains when they sell. Not so if it is rented out a certain amount of time.

Just wanted to put it in perspective for OP.
Nobody buys a house with 900k down. People put 20%, 180k, down. Return is >3X. Yes, there is property tax, maintenance, interest rate, but also no rent.
I don't know the future but for last decades RE in Bay Area was a very good investment.
You are correct that there is no rent, but there is tax, upkeep, interest, insurance, etc. I think carrying costs ends up being more than rent. One balances that against having a place of your own and decides if it is worth it.
As you point out, if you leverage, that is multiplying your returns if you get lucky in a rising market. In a down market, well, you don't get returns. But I have to disagree that nobody buys a house for cash. About 20 years ago I sold a house on the Peninsula for a bit under 1M, and the top 5 offers were all cash.

My perspective is that I don't think of my house as an investment, I think of it as a place to live. Sure, it's included in my net worth. I may get lucky (and I've been really lucky with personal real estate), but I don't count on it. I guess we both agree that we don't know the future.
blackholescion
Posts: 166
Joined: Fri Mar 22, 2019 6:41 pm

Re: Can we afford a $1mil home?

Post by blackholescion »

HEDGEFUNDIE wrote: Sat Apr 20, 2019 10:46 pm
blackholescion wrote: Sat Apr 20, 2019 10:19 pm
Watty wrote: Sat Apr 20, 2019 1:55 pm
random_walker_77 wrote: Thu Apr 11, 2019 10:16 pm Silicon Valley pays very well, and there's definitely career benefits to living there, but I don't think many people appreciate how close the pay can be in other locales.
+1

Even in Atlanta where I live it is not hard for ordinary Software Engineers with in demand skills to get well over $100K which goes a long way when you can buy a McMansion for $500K in many of the suburbs.
+2. The cost of living between Raleigh-Durham metro and SF is 95% higher. That means I’d have to earn nearly double my salary to just exist at this same standard of living. No one ever complained about RTP having a lack of good tech jobs with low pay. 4000 square foot McMansions are 5-600k depending on area. Hell there’s a new development of right now in that range down the street. I also live in county and my property tax is less than 0.75% a year.
So many things wrong with this.

1. Tech firms in RTP absolutely pay less than those same firms in Silicon Valley. Prime example is Cisco. I used to work there, and I can confirm that they pay RTP employees 30-50% less than San Jose employees at the same level.

2. The cost of living is by no means double in Silicon Valley. North Carolina has a flat income tax of 5.25%. California has a progressive income tax; for my household earning $400k taxable income last year the CA effective tax rate was only 8.5%. Hardly double. Housing might be double, but that’s only an extra $30k/yr or so, more than offset by the higher salaries. CA property tax is only 1.1%. Again, not close to double. Oh, and we get more for paying more. My wife benefited from 6 weeks of State Paid Family Leave last year. How many weeks of Paid Leave does NC mandate?

3. The kinds of growth-stage tech companies that exist in Silicon Valley simply don’t exist in NC or anywhere else. One example is Twilio; if you were an employee 12 months ago, you would have a 300% gain on your RSUs. Name me a RTP employer that has seen this kind of growth. There are dozens of Silicon Valley companies with the same profile.
Um Wow.

First off I used bankrate’s calculator. It’s not always 100% accurate but it’s a good ballpark figure. Second off, no one is disputing that SIlicon Valley has the most opportunity of tech heavy places in the world.

1) if you’re talking about a difference between 150k and 100k, and your housing costs are 30k of that, are you really paid more? Consider that the same 100k individual doesn’t have to buy a 500k house in RDU but they don’t have a choice on the $1m house in SJ. Now your housing costs are all of a sudden 1/3 of the SJ costs. That’s triple housing costs, not double. Last I checked via pay scale and Glassdoor and via friends who were offered to move to SJ to lead divisions there, the average engineer at Cisco doesn’t make 50% more than the one in RTP. It’s closer to 20%. Even if they did, they would have to be the 1% engineer in order to make appreciably more money. I’m saying 150k doesn’t go as far as 100k in RDU. 200k might but now they are not average which you can cherry pick anywhere.

2) NC doesn’t mandate it but companies compete to retain good employees instead. Due to the lower taxes, they can offer a much greater benefits package (see what I did there?). My wife got 12 weeks fully paid (8 of which were leave and 4 were disability). I got 8 weeks and I didn’t even do anything. We have subsidized childcare that costs me $500 a month. Why can’t your obscenely rich startups offer more?

3) if I name examples, you’ll say bullshit because the companies aren’t well known. The fact is, there is stuff like that here. My neighbor is a VP at a biotech startup, working on sustainable rubber and fuel efficiency on tires. They led a funding round last year that caused his RSUs to go up 250%. Those RSUs could just as easily be worth $0 or less by the time they vest and are actually sellable. There’s no guarantee. I’d wager that the average (again average) engineer isn’t earning millions from their RSUs. How many millions in RSUs have you made? Devs at Epic Games aren’t hurting for money either for another example.

The fact is, OP would be better served earning a similar amount of money in a place like Austin or Atlanta or Raleigh expenses wise. That was my only point in responding to that poster. I wasn’t trying to attack the greatest city on earth (~Hedgefundie). However, you clearly can’t see past your own nose that there are similar circumstances elsewhere. SF isn’t the end all be all for tech. If they were, why do we have constant articles about how someone earning 300k is scraping by? Lots of factors but the point remains. There’s places that earn a similar amount of money for the average person in the role and it goes further. Fact.
Last edited by blackholescion on Sun Apr 21, 2019 8:37 am, edited 1 time in total.
DVMResident
Posts: 1496
Joined: Mon Aug 01, 2011 8:15 pm

Re: Can we afford a $1mil home?

Post by DVMResident »

People, stay on topic. The OP asked if she can afford a 1m condo, not if they should move to another part of the country.

***

OP, you can afford the 1m condo and you can just afford the 20% down to avoid the PMI. With a high salary to rebuild the cash-reserves and backup liquidity in the $290k in taxables investments, you should be fine. The one missing piece of information is HOA fees, which can be extremely high (I've seen an eye-popping $1.2k/mo in newer townhouses). The increased costs should fit within your net budget and still leave ample room for retirement account investing and taxables reduced down to "only" $6k/mo investments (roughly a third savings rate). In addition, you'll start reducing the mortgage principal (minus 10% purchase/sells costs for the round trip) at $1,152/mo + $4 per month into the loan. It's all doable.

On the other hand, you have a lot of variables in the near future: marriage, grad school which may trigger a job search (and in the Bay Area, you don't want to be stuck on the wrong end of a commute), and you have a vague notion you may leave the bay area. The Buy-vs-Rent puts the breakeven point around 5 years and it doesn't sound you're committed to the area.

If I was in your shoes, I would keep renting and continue heavy $7.5k/mo + 401(k) + Roth IRA equity investments until you're married and grad school is done. Priorities tend to change around this life phase. But I don't think it's a huge mistake to purchase if you really hate renting either. Best of luck.
User avatar
Watty
Posts: 20885
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we afford a $1mil home?

Post by Watty »

DVMResident wrote: Sun Apr 21, 2019 7:14 am People, stay on topic. The OP asked if she can afford a 1m condo, not if they should move to another part of the country.
+1

With a net worth of $800K and the uncertainty about grad school I would take buying a million dollar 1 or 2 bedroom condo off the table for now. They seem Ok but not thrilled with their current apartment so moving to a better apartment could be an option to consider.

If they keep saving then the situation might be different in a few years and they could be in a great situation if they want to buy an expensive property there or move somewhere else.
A-Commoner
Posts: 280
Joined: Thu Apr 24, 2014 7:17 pm

Re: Can we afford a $1mil home?

Post by A-Commoner »

The OP can afford the $1 million house as long as her job and income are sustainable. Also, as long as she is still able to save for retirement despite the hefty mortgage, she should be okay.
User avatar
JoeRetire
Posts: 5964
Joined: Tue Jan 16, 2018 2:44 pm

Re: Can we afford a $1mil home?

Post by JoeRetire »

dee789 wrote: Thu Apr 11, 2019 1:48 pm - Income is $340,000 a year gross, about $15,500 per month (after 401k contributions, which we are both maxing)
How stable are both jobs?
- Cash on hand about $215,000

The condos that we like in the areas we like seem to run around $1 million or so for a 1-2 bedroom. I was quoted an interest rate of 4% with 15% down, which would leave a mortgage payment of around $5,000/month (including taxes and insurance).
Does that include a PMI? What could you get with 20% down?
It's also definitely not something we could afford on one income

I am hoping to go back to grad school next year so I don't want us to overextend
When you are in grad school, are you on one income? Won't you be overextended at that point?

IMHO, if you cannot afford 20% down, you cannot afford to purchase.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
KyleAAA
Posts: 8631
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Can we afford a $1mil home?

Post by KyleAAA »

blackholescion wrote: Sun Apr 21, 2019 7:09 am
HEDGEFUNDIE wrote: Sat Apr 20, 2019 10:46 pm
blackholescion wrote: Sat Apr 20, 2019 10:19 pm
Watty wrote: Sat Apr 20, 2019 1:55 pm
random_walker_77 wrote: Thu Apr 11, 2019 10:16 pm Silicon Valley pays very well, and there's definitely career benefits to living there, but I don't think many people appreciate how close the pay can be in other locales.
+1

Even in Atlanta where I live it is not hard for ordinary Software Engineers with in demand skills to get well over $100K which goes a long way when you can buy a McMansion for $500K in many of the suburbs.
+2. The cost of living between Raleigh-Durham metro and SF is 95% higher. That means I’d have to earn nearly double my salary to just exist at this same standard of living. No one ever complained about RTP having a lack of good tech jobs with low pay. 4000 square foot McMansions are 5-600k depending on area. Hell there’s a new development of right now in that range down the street. I also live in county and my property tax is less than 0.75% a year.
So many things wrong with this.

1. Tech firms in RTP absolutely pay less than those same firms in Silicon Valley. Prime example is Cisco. I used to work there, and I can confirm that they pay RTP employees 30-50% less than San Jose employees at the same level.

2. The cost of living is by no means double in Silicon Valley. North Carolina has a flat income tax of 5.25%. California has a progressive income tax; for my household earning $400k taxable income last year the CA effective tax rate was only 8.5%. Hardly double. Housing might be double, but that’s only an extra $30k/yr or so, more than offset by the higher salaries. CA property tax is only 1.1%. Again, not close to double. Oh, and we get more for paying more. My wife benefited from 6 weeks of State Paid Family Leave last year. How many weeks of Paid Leave does NC mandate?

3. The kinds of growth-stage tech companies that exist in Silicon Valley simply don’t exist in NC or anywhere else. One example is Twilio; if you were an employee 12 months ago, you would have a 300% gain on your RSUs. Name me a RTP employer that has seen this kind of growth. There are dozens of Silicon Valley companies with the same profile.
Um Wow.

First off I used bankrate’s calculator. It’s not always 100% accurate but it’s a good ballpark figure. Second off, no one is disputing that SIlicon Valley has the most opportunity of tech heavy places in the world.

1) if you’re talking about a difference between 150k and 100k, and your housing costs are 30k of that, are you really paid more? Consider that the same 100k individual doesn’t have to buy a 500k house in RDU but they don’t have a choice on the $1m house in SJ. Now your housing costs are all of a sudden 1/3 of the SJ costs. That’s triple housing costs, not double. Last I checked via pay scale and Glassdoor and via friends who were offered to move to SJ to lead divisions there, the average engineer at Cisco doesn’t make 50% more than the one in RTP. It’s closer to 20%. Even if they did, they would have to be the 1% engineer in order to make appreciably more money. I’m saying 150k doesn’t go as far as 100k in RDU. 200k might but now they are not average which you can cherry pick anywhere.

2) NC doesn’t mandate it but companies compete to retain good employees instead. Due to the lower taxes, they can offer a much greater benefits package (see what I did there?). My wife got 12 weeks fully paid (8 of which were leave and 4 were disability). I got 8 weeks and I didn’t even do anything. We have subsidized childcare that costs me $500 a month. Why can’t your obscenely rich startups offer more?

3) if I name examples, you’ll say bullshit because the companies aren’t well known. The fact is, there is stuff like that here. My neighbor is a VP at a biotech startup, working on sustainable rubber and fuel efficiency on tires. They led a funding round last year that caused his RSUs to go up 250%. Those RSUs could just as easily be worth $0 or less by the time they vest and are actually sellable. There’s no guarantee. I’d wager that the average (again average) engineer isn’t earning millions from their RSUs. How many millions in RSUs have you made? Devs at Epic Games aren’t hurting for money either for another example.

The fact is, OP would be better served earning a similar amount of money in a place like Austin or Atlanta or Raleigh expenses wise. That was my only point in responding to that poster. I wasn’t trying to attack the greatest city on earth (~Hedgefundie). However, you clearly can’t see past your own nose that there are similar circumstances elsewhere. SF isn’t the end all be all for tech. If they were, why do we have constant articles about how someone earning 300k is scraping by? Lots of factors but the point remains. There’s places that earn a similar amount of money for the average person in the role and it goes further. Fact.
As somebody who moved from a high paying tech job in Atlanta to Seattle, this is not true. Even with the higher COL we are saving more than double the dollars every year. I got several offers in both locations and Seattle was universally higher even after adjusting for the COL, and not just by a little. We came out WAY ahead by moving. Certainly you can make a very good living in RTP and Atlanta, but they aren’t in the same ballpark. And Atlanta isn’t even substantially cheaper than Seattle if you compare apples to apples.
Dilbydog
Posts: 97
Joined: Mon May 23, 2016 10:17 pm

Re: Can we afford a $1mil home?

Post by Dilbydog »

RollTide31457 wrote: Thu Apr 11, 2019 2:36 pm
trustquestioner wrote: Thu Apr 11, 2019 2:33 pm Every Bay Area housing thread leaves me staring at the post hoping there was a typo or something.

Unless you absolutely have to live there, I don’t get it. You can move to the Midwest, live a much better quality of life on half the income and have plenty left over for multiple luxury trips back, should you so desire.
This is the correct answer.
Not really...because you have to live in the mid-west. Some of us don’t find that appealing at any level.
Starfish
Posts: 2015
Joined: Wed Aug 15, 2018 6:33 pm

Re: Can we afford a $1mil home?

Post by Starfish »

blackholescion wrote: Sun Apr 21, 2019 7:09 am Um Wow.

First off I used bankrate’s calculator. It’s not always 100% accurate but it’s a good ballpark figure. Second off, no one is disputing that SIlicon Valley has the most opportunity of tech heavy places in the world.

1) if you’re talking about a difference between 150k and 100k, and your housing costs are 30k of that, are you really paid more? Consider that the same 100k individual doesn’t have to buy a 500k house in RDU but they don’t have a choice on the $1m house in SJ. Now your housing costs are all of a sudden 1/3 of the SJ costs. That’s triple housing costs, not double. Last I checked via pay scale and Glassdoor and via friends who were offered to move to SJ to lead divisions there, the average engineer at Cisco doesn’t make 50% more than the one in RTP. It’s closer to 20%. Even if they did, they would have to be the 1% engineer in order to make appreciably more money. I’m saying 150k doesn’t go as far as 100k in RDU. 200k might but now they are not average which you can cherry pick anywhere.

2) NC doesn’t mandate it but companies compete to retain good employees instead. Due to the lower taxes, they can offer a much greater benefits package (see what I did there?). My wife got 12 weeks fully paid (8 of which were leave and 4 were disability). I got 8 weeks and I didn’t even do anything. We have subsidized childcare that costs me $500 a month. Why can’t your obscenely rich startups offer more?

3) if I name examples, you’ll say bullshit because the companies aren’t well known. The fact is, there is stuff like that here. My neighbor is a VP at a biotech startup, working on sustainable rubber and fuel efficiency on tires. They led a funding round last year that caused his RSUs to go up 250%. Those RSUs could just as easily be worth $0 or less by the time they vest and are actually sellable. There’s no guarantee. I’d wager that the average (again average) engineer isn’t earning millions from their RSUs. How many millions in RSUs have you made? Devs at Epic Games aren’t hurting for money either for another example.

The fact is, OP would be better served earning a similar amount of money in a place like Austin or Atlanta or Raleigh expenses wise. That was my only point in responding to that poster. I wasn’t trying to attack the greatest city on earth (~Hedgefundie). However, you clearly can’t see past your own nose that there are similar circumstances elsewhere. SF isn’t the end all be all for tech. If they were, why do we have constant articles about how someone earning 300k is scraping by? Lots of factors but the point remains. There’s places that earn a similar amount of money for the average person in the role and it goes further. Fact.
1. Housing is part of your NW, not only an expense.
After you pay your mortgage in BA you have a 1 million $ house appreciated to 2 million, not a 300k house appreciated to 350k.
So not really only an expense.
2. 12 months of full paid leave is pretty standard. Also unlimited vacation is thing nowadays.
3. There is no comparison in the start up activity, we can easily agree to that.
If they were, why do we have constant articles about how someone earning 300k is scraping by?
Clickbait.
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: Can we afford a $1mil home?

Post by HEDGEFUNDIE »

blackholescion wrote: Sun Apr 21, 2019 7:09 am 1) if you’re talking about a difference between 150k and 100k, and your housing costs are 30k of that, are you really paid more? Consider that the same 100k individual doesn’t have to buy a 500k house in RDU but they don’t have a choice on the $1m house in SJ. Now your housing costs are all of a sudden 1/3 of the SJ costs. That’s triple housing costs, not double. Last I checked via pay scale and Glassdoor and via friends who were offered to move to SJ to lead divisions there, the average engineer at Cisco doesn’t make 50% more than the one in RTP. It’s closer to 20%. Even if they did, they would have to be the 1% engineer in order to make appreciably more money. I’m saying 150k doesn’t go as far as 100k in RDU. 200k might but now they are not average which you can cherry pick anywhere.
I was talking about rent, which is double in SF but it’s a lower % of your income than in NC. Buying a house is a different animal, you are essentially betting on capital gains by buying in the Bay Area (which has worked out fabulously so far).
2) NC doesn’t mandate it but companies compete to retain good employees instead. Due to the lower taxes, they can offer a much greater benefits package (see what I did there?). My wife got 12 weeks fully paid (8 of which were leave and 4 were disability). I got 8 weeks and I didn’t even do anything. We have subsidized childcare that costs me $500 a month. Why can’t your obscenely rich startups offer more?
I was talking about paid leave ON TOP OF what your employer offers you. So the State of CA paid for my wife to take a few weeks off before the birth and a few weeks after her five month fully paid company leave was over. My wife paid $1k in CA payroll taxes for this benefit and got $7k back.
3) if I name examples, you’ll say bullshit because the companies aren’t well known. The fact is, there is stuff like that here. My neighbor is a VP at a biotech startup, working on sustainable rubber and fuel efficiency on tires. They led a funding round last year that caused his RSUs to go up 250%.
I’m not talking about random startups that you can find anywhere offering private RSUs that could be worthless. I’m taking about publicly traded companies with RSUs that skyrocket while you work there. Some more examples: Zscaler (133% 12 month gain), Coupa (80% 12 month gain), Anaplan (45% 6 month gain since IPO).

The closest comparable in RTP is Red Hat, which even after a huge buyout offer from IBM is still only up 13% over last 12 months. Sad.
Kmzizzle
Posts: 8
Joined: Sat Jan 19, 2019 3:40 pm

Re: Can we afford a $1mil home?

Post by Kmzizzle »

The OP lives in a VHCOL place. He can definitely afford it and could stretch for $1.3M (3x mortgage at 20% down) if he wanted. Y’all need to get out of this 1970s group think where homes are 2x income ratio. Not everyone can just pickup and move to NC/TX/GA
wwtraveler
Posts: 30
Joined: Sun Apr 21, 2019 5:15 pm

Re: Can we afford a $1mil home?

Post by wwtraveler »

Some additional things to consider (these may or may not all apply since not all the details were posted).

* You indicate you are not married yet. Do you intend to hold everything jointly going forward? Plans for a prenup? Of course no one goes in saying "let's plan for divorce" but it happens - but what happens then? Do you have a formal or informal plan for dissolution? (FWIW most prenups are junk IMO -- are you really planning on living effectively separate legal lives - but that's a topic for another conversation - the point is consider you are not married and if you had to unwind what complications would that cause that you don't have today).

* What about HOA dues? How big is the HOA (units & total funds, is it stable, is it fully funded for its reserves? How old is the unit and common areas? Are there potentially expensive fixes or areas of upkeep that the HOA isn't properly funded for? (If it isn't that will become your problem at some point -- don't worry all these problems can always be fixed with more money - ugh). Again the point is, a condo is a bit different than a SFH - you have to consider not just the fact there's an HOA fee but that you aren't the master of your own structure. One issue in condos is that even with an inspection you are inspecting your unit. It's hard to see everything especially if it's a larger complex or tall building.

* How great of shapes are these units in? Are they newer or older? Are there any known immediate repairs for high cost items? In case it's an older unit - do you plan to make renovations day 1? Will those renovations trigger more expensive updates - for example a kitchen reno may require permits and you may be require to upgrade wiring - follow the wire and before you know it you are rewiring the entire unit & upgrading the electrical panel.

* The reason I bring up the HOA & unit condition stuff is because I'm fairly familiar with the Bay Area and there's (excuse me for my insensitivity) plenty of junk masquerading around between $900K-$1.3M where most of the value is in the location and very little of the value is that it's an exquisitely constructed structure.

* Time frame - you stated 3-5 years + grad school as some time frames - Real estate isn't exactly movable. Let's say you get out of grad school and got some great offers but they are in Pleasanton (just picking something that will be a horrific commute assuming you are down the SF peninsula now. ) Now what? Do you want to become land lords? (If so this would further support purchasing). Now multiply this potential situation by 2 since it seems like you are both avid career professionals - what's the chance of new opportunities for each of you taking you further and further away?

* If you had to rent it out, what would it rent for --- if it's profitable on a cash basis month to month then that's terrific - it means you have a way to move without having to sell when you may not want to sell even if you don't want to be a landlord long term.

* Don't TRUST ANY TAX ESTIMATES IN CA that anyone gives you. Research the actual tax of that property and recalculate it for your purchase price. Property taxes vary due to things like mello-roos and bond assessments. CA unlike some other areas of the country is divided up sometimes very funny. I have a friend who has a house and the line for the county land vs. the town land literally runs through the center of his property! (yes really and it is a development that is < 15 years old). So research taxes for each and every property you look at - don't trust estimates. Make sure you consider the new purchase price. In CA you can assume the purchases price is the new cost basis for taxes - it is not physically assessed or estimated like other states.

* It's 2019 - Housing starts are already down (yes even in CA!). Are we getting close to the next housing high water mark? It's impossible to say where we are with certainty but knowing there's been a huge run-up for about 10 years it's probably fair to say it's closer to the end of this run-up than the beginning or the middle.

* If you haven't researched the capital gains exclusions on real estate sales do so. In CA this has some special ramifications since when timed correctly practically nothing will generate after tax returns like this given the total tax burden. If you believe in the unit, the area, the market, each other, that you can hang on to it 5 years (or more especially if you want to later become a landlord), can buy without paying PMI, end up on a CASH basis each month within about 10-20% of where you are now (not considering the effect of things like mortgage interest on your return), and can rent it out and squeak out a profit or +/- a few $100 loss, then it seems to support a go.

* Lastly consider some outs, both using this new situation and your current situation and see how you feel about them in terms of the flexibility it leaves you with. Go to grad school but don't finish. Get married but in 2-3 years it looks like you want to go separate ways. Job opportunities within the next 3 years present themselves elsewhere for either of you and there's no way to stay there. Either of you are out of a job for 3 mos, 6 mos, 1 yr. You do decide you want kids (or perhaps you end up with one unexpectedly) (ok now that's NOT meant as a worst case scenario just that this changes things yet again!)

We were close to a situation like you are but at the bottom of the market. Here was our relative situation and you'll see the risk profile is totally different and why we went ahead with it just like you are while engaged.

Single Family House that could be rented for a cash profit on day 1 (if we had to move). Our pre tax combined income was 97% of the purchase price (yes really - it was the absolute bottom of the market -- we were just lucky). We had 20% down (no PMI) BUT to be fair we were left with a very low amount in cash & investments. The loan rate was 4.125% 30yr mortgage. The home was from the mid 90's so it had modern wiring, HVAC, etc. No HOA, just very basic a few $100 of mello roos for things like street lighting. Our alternatives on a monthly cash basis to rent vs buy were within +/-10-20% depending on the exact choices made.

The risk profile you both are presenting is different than ours. Don't fall into the trap of saying "well it's just magnitude, the percentages works out similar". If it were to all go bad how much in actual $'s would you be ok with it going bad by? $10K, 20K, 50K, 100K, 200K?

The numbers in your situation are just big (compared to the median country wide) - I wouldn't sacrifice too much flexibility when the numbers start getting that big given the relative changes in your life and your current financial situation (which would travel well pretty much anywhere).

Good Luck!
Post Reply