Advice for first time home buyer

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Topic Author
tyu
Posts: 2
Joined: Wed Jul 31, 2019 3:59 pm

Advice for first time home buyer

Post by tyu »

Hi all

This is my first post on the forum. My wife and I have been saving to buy our first home for years now, and wanted to ask if some of you could look at our situation and provide any advice

We currently live in San Francisco, CA and would like to purchase our first home in SF. Mainly because our families and friends are all in SF (we were born & raised here). Given how expensive the housing market is right now, does it make sense to buy now or hold on to the cash and wait for the market to drop? Are we digging a hole for ourselves purchasing in SF with our current situation? There is a lot of mixed opinions about the SF real estate market, whether housing will continue going up or the bubble will pop. I would appreciate any advice here

We are:
Both 31 yo
Household income: $185,000
I currently put 7% into my company pension, $6000/yr into a Roth IRA, and 11% into a 403B
His savings in retirement accounts: $30,000
Hers: None. She just started working and will be contributing ~15% into retirement

Debt: $13,000 for car, which we will be paying off by year end (low interest %). We've paid off all other debt

Cash for down payment in savings account: $190,000
I know, why does he have so much cash and so little put into retirement? Mainly because I'm horrible at personal finance and didn't start saving for retirement until recently. I've been saving for the down payment over the last 5 years, but SF real estate has been going through the roof and we couldn't quite "catch up" to put 20% down on a home

We are planning on saving another $100k (which will probably take 1 - 1.5 yrs). This will bring us close to $300k in cash which we will put 20% down on a $800k home (starter home in SF market) and use the rest of the money for remodeling and our emergency fund

Estimated mortgage/tax/ins: $3800/mo (25% of gross income)
Avg household/food/personal expenses: $4000/mo

We are also planning on renting one of the floors of the home, and the projected income from that is $42,000/yr
wilked
Posts: 2441
Joined: Thu Mar 24, 2011 1:50 pm

Re: Advice for first time home buyer

Post by wilked »

What are you paying for rent?


How can you save $100k in 1-1.5 years on $185k salary with significant retirement savings? Numbers don’t add up to me
Topic Author
tyu
Posts: 2
Joined: Wed Jul 31, 2019 3:59 pm

Re: Advice for first time home buyer

Post by tyu »

Currently $1200/Mo in rent. You’re right it may well take us a little longer to save up that amount
seppatown
Posts: 64
Joined: Mon Jan 05, 2015 1:46 am

Re: Advice for first time home buyer

Post by seppatown »

The $1200/mo in rent changes the story. If

-that is for the both of you combined
-you can live with your commute
-you aren't expecting kids soon

I would continue renting for as long as you don't have kids. You're basically paying the equivalent of property tax with zero ownership responsibilities, and your money can work for you far more easily in the stock market.

Your projected rental income is grossly optimistic even for the bay area...unless you buy a duplex - but that doesn't sound like what you're going for. Very few homes are partitioned for the rental setup you are describing, and most renters don't like to live-in with homeowners (would you?).

Try the following:

https://www.nytimes.com/interactive/201 ... lator.html
Goal33
Posts: 2004
Joined: Sun Apr 12, 2015 12:30 pm

Re: Advice for first time home buyer

Post by Goal33 »

When you say SF do you mean the extended east bay like Livermore? I just don’t see how you’re going to pull this off within your budget.
wilked
Posts: 2441
Joined: Thu Mar 24, 2011 1:50 pm

Re: Advice for first time home buyer

Post by wilked »

Don’t buy an $800k home when renting for $1200 does the job

If you’ve got a $1200/mo rental in SF I would keep riding that as long as possible
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Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Advice for first time home buyer

Post by Watty »

What are your plans for kids?

If you might have any then what would daycare cost and could you afford a home in a decent school district?

You might also need expensive IVF or if your kid has even temporary and minor health problems then using day care might not be possible or desirable so you might need to go down to one income for a while.

If you are planning on having kids then it might make sense to wait to buy until you have the kids and your situation is more clear.

If you do have kids and housing prices keep going up then one thing to consider is what it will be like for your grown up kids when they are your age.

You may be in a catch 22 situation where if you buy a house and it works out well for you since prices keep going up, then it will make things even worse for your grown up kids someday.

It was years ago but when I lived in the Bay Area one thing I saw even back then was that some of my older coworkers had grown up kids that were well into their 20s that were still living with them. The problem was that the kids did not have high paying jobs and could not afford an apartment even with roomates.

In contrast I am in Atlanta now where housing is still reasonable and my 30 year old son went to college and is doing well in his career and was able to afford to buy a house about ten minutes from us so we get to see his family frequently including our two grandkids. Almost all of my son's high school and college classmates that stayed in the area were able to buy homes in their 20's

One friend of ours have a son who is severely dyslexic and barely graduated from high school. At one point he was working at a chain muffler shop which is a good honest job but I am sure that he was not earning a lot. Even he was able to save up and buy a small older house in a marginal but not terrible part of town.

(Disclaimer, I lived in the South Bay years ago right after college and I left when I was around 30 and ready to buy my first house. I am retired now but moving to a much lower cost of living area work well for me. The first house that I bought cost maybe a fifth of what it would have cost in the Bay Area. )
tyu wrote: Wed Aug 07, 2019 6:55 pm Given how expensive the housing market is right now, does it make sense to buy now or hold on to the cash and wait for the market to drop? Are we digging a hole for ourselves purchasing in SF with our current situation?
I don't have a clue and anyone that says they do is very likely trying to rationalize their choices.

One silver lining is that if you don't buy and get priced out of the housing market then you could move to a lower cost of living area.

Something that would keep me up at night is that if you buy and housing prices drop then you could end up being 35 or 40 and have a negative net worth.
tyu wrote: Wed Aug 07, 2019 6:55 pm on a $800k home (starter home in SF market)
....
We are also planning on renting one of the floors of the home, and the projected income from that is $42,000/yr
I have a hard time picturing that.

At least when I lived in the South Bay starter homes that I saw people buy were something like a thousand square feet on a tiny lot.
Ron Ronnerson
Posts: 3563
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Advice for first time home buyer

Post by Ron Ronnerson »

No one knows what will happen to home prices so I would not focus on timing things. Good job on having so much already set aside for your down payment. While you’re trying to add to that amount, I would keep saving something (maybe 15% or so) in retirement accounts as well so that you don’t lose too much of your income to taxes and, of course, I’m sure you want to have some money to live on when you’re older.

Why do you want to give up an apartment with such low rent? Are the living conditions not very good there? I didn’t realize you could find an apartment for $1200 in San Francisco. I’m in the East Bay and people are paying more than double that amount over here. I also didn’t realize that you could find a home in San Francisco for $800k that is big enough that you can also rent out a floor. Are you certain this will be possible for you to do?

Due to prop 13, real estate taxes are based on the purchase price of the home. Additionally, transaction costs involved on home purchases in the Bay Area are not exactly cheap. Also, prices fluctuate and it is entirely possible that home prices will be lower in a few years (again, no one knows in which direction they’ll go or to what degree). For these types of reasons, people in California are not always able to easily move and sometimes find themselves stuck where they initially purchased. So, I would plan to stay in the home you buy for a good while in case things happen to work out that way. If you plan to have kids, consider schools. Even if kids won’t be in the picture, the neighborhood and space (square footage, number of rooms) are important considerations.

If you do want to stay in the area for the long term, buying may make sense. I wouldn’t worry about what the market does. Instead, purchase when you’ve found a place that meets the criteria that is important to you at a price you can afford.
ohai
Posts: 1327
Joined: Wed Dec 27, 2017 1:10 pm

Re: Advice for first time home buyer

Post by ohai »

I don't think there is a "bubble" in real estate prices in San Francisco. There are many households making $500k+ income for real jobs in tech or other industries, with proven long term profitability. While it's probably not reasonable to expect 7%+ annual price appreciation in houses similar to the past 5-10 years, I don't see why we should expect a sudden, violent decline in prices similar to 2008. The most likely outcome is that prices grow modestly over time, more consistent with long term trends.

From what I can tell of OP's situation, the numbers barely make sense. You'll end up 2x leveraged in a "starter home" (whatever this is) until you are middle aged, and compromise a lot of other savings goals in the mean time. Your primary home as an "investment" only makes sense if you end up liquidating it in the end. Furthermore, every person who has ever bought a house ends up saying it costs more than they estimated over time. Make sure you are not skewing the financial picture optimistically based on your ideal situation.

While I understand that most people consider house ownership to be a life goal, this is increasingly a choice or a luxury, and might or might not make sense in someone's long term plans nowadays,
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