Homebuying in Los Angeles - Advice Needed

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Topic Author
poppy42
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Homebuying in Los Angeles - Advice Needed

Post by poppy42 » Mon Nov 11, 2019 1:11 pm

Hi all,

Long time lurker here - thank you all for your awesome retirement/investing advice over the years!

My husband and I live in Los Angeles with our one and only child, who is 3. We are in our late 30s. We both work, we both like our jobs, we have family here. We like living in LA but don't love it, but we're going to stick with it for now.

The plan is to spend the next 15 years living here, working hard, enjoying our jobs, enjoying our kid, and socking away money. When our kid is grown up we'll figure out what comes next.

We rent, and we're trying to figure out whether buying a house makes sense. We currently rent in a great area with good schools, but we want to move from our current small apartment to a house with a yard. We are going to wait until at least 2021 to move to see what happens with the election and the market. Housing prices in our area are insane.

The current minimum prices for a house we would want - school district and commute wise - are currently around $1.25M or $5K/month in rent. You could easily spend more than that for a "modest" 1500 sq ft 3 bedroom house. We are hoping this might come down, but it's SoCal, so no guarantees.

We currently make about $500K combined. We max out our retirement accounts (401K, backdoor Roth, mega backdoor Roth). We have excellent credit and no debt.

We have $250K of down payment money in a CD earning about 2%. We have emergency savings. Our current expenses are about $8500 a month:

$3500 rent
$2000 daycare
$1800 monthly expenses
$1200 529 contributions

We plan on sending our kid to public elementary, so that $2K in daycare costs will be going away in a couple years. We may save for private middle/high school, and then figure out if we actually need it when the time comes.

I know we can technically afford the monthly payments on a $1.25M home, especially with 20% down. But it just seems like SO. MUCH. MONEY. And then there's the maintenance. The possibility of fires and earthquakes. And the very real possibility that we might want to peace out after 15 years and go somewhere cheaper and more relaxed.

WWYD in our situation? Should we try to stretch for a 15 year mortgage? Should we take out a 30 year mortgage and pay it off like it's a 15? Should we take a 30 year mortgage and pay it off normally and see where we're at in 15 years? Are there mortgage scenarios we should consider that I don't know about? We recently found our that friends of ours are paying interest-only on their $1M mortgage, which seems insane and irresponsible to me, but hey, they have a $2K monthly payment and a nice place. Maybe I'm missing something?

Any advice appreciated. I didn't grow up in CA or with money and psychologically paying over $1M for a house still messes with my head. Some days I still can't believe we pay as much as we do in rent on an apartment.

Thegame14
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Re: Homebuying in Los Angeles - Advice Needed

Post by Thegame14 » Mon Nov 11, 2019 2:22 pm

If I told you I made $100K and was looking to buy a $250K house, would you say that I can afford it?

THat is the same ratio as your are, just larger numbers, you are saying I cant psychologically believe how much a house costs, I am saying I cant psychologically imagine making $500K a year and worrying about money.....

my son is almost 5 and we have a huge backyard that we never use. if I were you, Id sock away money and investments for another 10 years, and then move to a lower cost of living area and find work there but by then you would prob have 2-3M banked and can take a step back, but a nice house for $300K in let's say texas, work there, if possible, and life a lot less stressfully. Also I would think with that much income you would have another child or two.

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poppy42
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Re: Homebuying in Los Angeles - Advice Needed

Post by poppy42 » Mon Nov 11, 2019 2:29 pm

Thegame14 wrote:
Mon Nov 11, 2019 2:22 pm
If I told you I made $100K and was looking to buy a $250K house, would you say that I can afford it?

THat is the same ratio as your are, just larger numbers, you are saying I cant psychologically believe how much a house costs, I am saying I cant psychologically imagine making $500K a year and worrying about money.....

my son is almost 5 and we have a huge backyard that we never use. if I were you, Id sock away money and investments for another 10 years, and then move to a lower cost of living area and find work there but by then you would prob have 2-3M banked and can take a step back, but a nice house for $300K in let's say texas, work there, if possible, and life a lot less stressfully. Also I would think with that much income you would have another child or two.
Our line of work currently limits us to LA, NYC, or the Bay Area. LA is the cheapest of the three, and we have family here. We do not plan on having any more children - we are happy with one!

stan1
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Re: Homebuying in Los Angeles - Advice Needed

Post by stan1 » Mon Nov 11, 2019 2:46 pm

It's a personal preference and a lifestyle choice. If you can really rent a $1.25M home for $5000/month that's a pretty good deal (especially since property taxes alone at 1% would be $12,500/year).

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celia
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Re: Homebuying in Los Angeles - Advice Needed

Post by celia » Mon Nov 11, 2019 3:02 pm

Sure, you can afford the house and you will get all your money back when you sell. We bought in SoCal 40+ years ago and our house value is more than every dollar we ever put into it (mortgage, interest, adding on/remodeling, taxes, insurance, maintenance). That's not to say the future will give you the same rewards, but, historically, this is a good place to buy. Just be sure you are insured for fire, earthquake, liability, and (if you live in a low area or on the ocean) for floods.

To point out another thing you should think about is what happens to the rest of your yearly $500K besides the $100K in listed expenses and taxes?

Thegame14
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Re: Homebuying in Los Angeles - Advice Needed

Post by Thegame14 » Mon Nov 11, 2019 3:07 pm

poppy42 wrote:
Mon Nov 11, 2019 2:29 pm
Thegame14 wrote:
Mon Nov 11, 2019 2:22 pm
If I told you I made $100K and was looking to buy a $250K house, would you say that I can afford it?

THat is the same ratio as your are, just larger numbers, you are saying I cant psychologically believe how much a house costs, I am saying I cant psychologically imagine making $500K a year and worrying about money.....

my son is almost 5 and we have a huge backyard that we never use. if I were you, Id sock away money and investments for another 10 years, and then move to a lower cost of living area and find work there but by then you would prob have 2-3M banked and can take a step back, but a nice house for $300K in let's say texas, work there, if possible, and life a lot less stressfully. Also I would think with that much income you would have another child or two.
Our line of work currently limits us to LA, NYC, or the Bay Area. LA is the cheapest of the three, and we have family here. We do not plan on having any more children - we are happy with one!
you said you were thinking of staying 15 years then leaving to a cheaper place, but now you are staying in only the 3 most expensive places to live? so if you have family there and now instead of saying you are leaving in 15 years, now you are staying, then makes more sense to buy a house then to rent forever.

harrychan
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Re: Homebuying in Los Angeles - Advice Needed

Post by harrychan » Mon Nov 11, 2019 3:25 pm

I know LA market really well. The $1.25M is not an investment figure but a lifestyle. If you are tired of living under the rules of a landlord and having to move every year and want homeownership then go for it. 15 years will be enough to make it financially make sense to buy a home vs renting. 10 years ago we bought a house that was in a great elementary school public system but horrible middle and mediocre high school. We ended up going to a reasonably priced private school without paying hundreds of thousands more. If you PM me the city you are looking at, I can give you more insight.
This is not legal or certified financial advice but you know that already.

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gunn_show
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Re: Homebuying in Los Angeles - Advice Needed

Post by gunn_show » Mon Nov 11, 2019 3:30 pm

celia wrote:
Mon Nov 11, 2019 3:02 pm
Sure, you can afford the house and you will get all your money back when you sell. We bought in SoCal 40+ years ago and our house value is more than every dollar we ever put into it (mortgage, interest, adding on/remodeling, taxes, insurance, maintenance). That's not to say the future will give you the same rewards, but, historically, this is a good place to buy. Just be sure you are insured for fire, earthquake, liability, and (if you live in a low area or on the ocean) for floods.

To point out another thing you should think about is what happens to the rest of your yearly $500K besides the $100K in listed expenses and taxes?
Agree with both of celia's points, and also very curious about the income vs. expenses and where the rest goes? You prob net $300k and spend $100k, that means you can be socking away $100-200k per year into a house fund and other savings / retirement. You can easily afford renovations / maintenance fund for a SFH.

I make less than you and bought a house similar priced in "same region" but with far more down. You can easily make the entire transaction work, no question. The main reason I was able to move up into this price level house is appreciation, my last home appreciated significant six figures in the last 5 years (with help from extensive renovations). As Celia pointed out, nothing is guaranteed, but the Lord only created so many sunny beach regions, so unless Armageddon hits Socal, RE is going up as time goes on. You will recoup whenever you decide to peace out.

I would buy with a 30yr fixed, that lowers your payment, you can accelerate payments if you desire. I'd rather put my excess cash into VTSAX and 529, rather than put more money into paying down the mortgage (illiquid asset). I've read a few stories about folks that do a 10/1 arm to really get payments low, but that's a game and you really have to play it well to make it successful, which you can, if you want to. Frankly you don't need the arbitrage as you can easily afford any payment with your income, so no point.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

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poppy42
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Re: Homebuying in Los Angeles - Advice Needed

Post by poppy42 » Mon Nov 11, 2019 3:48 pm

Thank you all - I really appreciate the feedback. The $500K is relatively new as we have been fortunate to have growth in our jobs recently. It used to be more like $300K combined. We saved a lot of our down payment over a short period of time, so that is where a lot of the money went, in addition to taxes (California!) and after-tax retirement (backdoor Roth, mega backdoor Roth - we both have that option).

inbox788
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Re: Homebuying in Los Angeles - Advice Needed

Post by inbox788 » Mon Nov 11, 2019 4:08 pm

Best laid plans...

Anyway, if there's a fair to good chance you'll live there for 15 years, then buying is a good choice. People used to say it took 5-7 years to break even on the purchase cost (realtor fees, mortgage fees, moving costs, etc.), and I'd guess it hasn't changed that much. You can afford it, so the question is more why not buy now? Sounds like there's no hurry, so take your time to find something you like. Financially, time should only help. Come back when you buy a place to ask if you should choose 15 or 30 year mortgage. I'd pick 15 for 0.5% or more savings, but you'll have others telling you to invest instead [I had to come back to finish posting; I see someone already has commented above]. Either case, it's an even less significant decision.

123
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Re: Homebuying in Los Angeles - Advice Needed

Post by 123 » Mon Nov 11, 2019 4:17 pm

celia wrote:
Mon Nov 11, 2019 3:02 pm
... you will get all your money back when you sell...
This is never guaranteed.There have been numerous times in the past when housing prices in Los Angeles and Southern California have declined significantly, the mortgage crisis of 2007 comes to mind. Significant declines, sometimes lengthy, can happen in any market. There is nothing to guarantee that you will not have to sell in such a decline due to changes in personal circumstances. Retired people can often wait declines out but people who are working may need to move on to other career opportunities.
The closest helping hand is at the end of your own arm.

Big Dog
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Re: Homebuying in Los Angeles - Advice Needed

Post by Big Dog » Mon Nov 11, 2019 4:21 pm

Dunno why the 2020 election would make any difference in home prices. (Absent totally screwing up the economy, the occupant in the WH has almost no impact on California home prices, which are largely driven by demand and local zoning rules/regs.) Home prices recovered from the recession of '08/'09 awhile ago, and are continuing to climb.

You can purchase earthquake insurance. Wild fires are only an issue in a few areas.

I'd go with a 30year mortgage for flexibility but make extra principal payments so it'll go down much faster.

CheepSkate
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Re: Homebuying in Los Angeles - Advice Needed

Post by CheepSkate » Mon Nov 11, 2019 4:50 pm

Three thoughts.

1) My 3/2 house on a quarter-acre lot on a charming and quiet street in a safe neighborhood 10 minutes from my downtown cost me $155k just last year. My payment is under $1k for a 15 year loan. The whole middle class suburban lifestyle could be had for $40k/year for a family of 3, so if you had $1M-$1.5M invested you could retire. Hey, congratulations, I see you're a third to a half way there! If you became a millionaire first, then you would have options to move to all sorts of neat places and both have the housing you want and have time to spend with the family or doing anything you want as long as it's not living in LA. If you buy that house first, you will be tied down to LA, potentially for decades. How many years would it take you to become a millionaire if you don't buy? 2? 3? Would you rather have financial independence or a mortgaged house in LA?

2) Paying $5k rent for a $1.25M house is 0.4%/mo. The rule of thumb for landlords is 1% a month is a deal worth looking at because it's potentially cash flow positive. At 0.4% I'm reasonably sure LA landlords are cash flow negative. So basically, you are ripping off a landlord by renting, but that's OK because they are in it for property speculation anyway and will abandon the mortgage the moment another price correction comes along. Are you a property speculator or are you setting yourself up to lose at this game of musical chairs?

3) Given the logic of #1 and #2, how confident are you that LA house prices will continue to go up? #2 certainly says something about underlying affordability, because there's no way to speculate on rent. The financially optimal move is to use HCOL cities to earn a stash for a few years of minimalist living and then get out with a fat portfolio, so what would happen to home demand if more people started doing that instead of attempting to set down roots at great personal cost?

Obviously, if it was me I'd make the big bucks in LA for 2-3 more years and invest the savings until I hit about $1.5M. Then I'd roll out of town like a financially independent Bruce Willis from Pulp Fiction, indifferent to what housing prices or interest rates are doing.

LeftCoast
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Re: Homebuying in Los Angeles - Advice Needed

Post by LeftCoast » Mon Nov 11, 2019 5:36 pm

We were in your exact position, except 25 years ago. We bought the house in a nice part of L.A. for the anxiety-inducing price of $500K ($100K down with a $400K mortgage), which was a big stretch for us. However, it got us in a great school district, provided a yard for our young son, and gave us the ability to make alterations to our living space. It also gave us tax benefits, which have partially gone away.

Fast forward to today, and we're still in the house. We have avoided rent increases, having to move to different rentals, and private school tuition. The value of the house has quadrupled, and the mortgage is gone. Of course, there is no guarantee that house values will continue to increase, but if you plan to stay for 15 years, then your risk of a large loss is greatly reduced. House prices in L.A. are high for good reasons -- there are a lot of high-paying jobs in L.A., and the weather is better than most places on earth. Yes, you should carry earthquake insurance in addition to fire and liability insurance.

You might consider what your rent will be in 10 years if you don't buy a house. The bottom line is that it's not always wise to buy real property, but it can be really unwise to never buy real property. Good luck.

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Watty
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Re: Homebuying in Los Angeles - Advice Needed

Post by Watty » Mon Nov 11, 2019 5:45 pm

poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
We plan on sending our kid to public elementary, so that $2K in daycare costs will be going away in a couple years.
Don't count on that. Once they start school there will also be after school care, school holidays, summer day care, and activities to pay for like sports.

poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
The plan is to spend the next 15 years living here, working hard, enjoying our jobs, enjoying our kid, and socking away money. When our kid is grown up we'll figure out what comes next.
Moving to a less expensive area later on is likely financially a great plan but by then you will likely have strong ties to that area and there is a good chance that it will not happen.

My situation was a lot different but during a corporate merger I moved to Atlanta when I was in my late 40s. The plan was to live there until I retired them move somewhere else. We were even working on a list of possible places to retire to. It turns out that by the time I retired my son was married and settled down near us. We now have two grand-kids nearby so with the family ties moving to a different area in no longer something we would want to do.

All in all that still worked out very well for us and I was able to retire a bit early but it is not what we were planning on.

Since any possible move is a long time away I would plan as if you will be staying in that area for the long term.

If you want to move a more realistic option would be to work and save like crazy for around five more years and then move before your kid starts middle school.

In probably 80% of the country you could buy a passable modest house for cash right now for your $250K and if you save a lot you will likely have enough to buy a McMansion for cash in most of the country in a few years.

One huge problem with California houses is not only is it expensive but you often also don't get a lot for your money.
poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
The possibility of fires and earthquakes.
Don't underestimate the earthquake risk. It was years ago but I was living in the Bay Area when I was around 30 and thinking of buying my first house. I researched the earthquake risk and the best guess that I could come up with was that if I bought a house there then it might have significant earthquake damage around once in 200 years. (Do your own research and come up with your own numbers.) That does not sound too bad but it means that if you own the house for 20 years then there would be about a 10% chance of it having significant earthquake damage while you owned it.

You might be OK with the financial risk or even buy earthquake insurance but one thing to consider is how difficult it will be to find a contractor to fix the damage if there is a major earthquake. I know someone who has family in Florida where they had significant roof damage when Hurricane Andrew hit. It took them about three years to get a roofer to fix it and in the mean time they had blue tarps on their roof and had more water damage when there were heavy rains or tropical storms. They had insurance that covered the damage and they could have even afforded to have paid for the roof themselves but all of the roofing companies were so swamped that they were not even taking voice mails much less calling people back. They finally got a roof when there was a roofing company working down the street and they pretty much begged them to do their roof next.

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Re: Homebuying in Los Angeles - Advice Needed

Post by ajjulee » Mon Nov 11, 2019 6:12 pm

WWID?

If I feel confident that the field I’m in has longevity of at least 15 years and salaries will stay within my current number:
  • I’d buy a least expensive house that’s in a really good neighborhood - probably a fixer upper. My per sft cost of renovation has always been lower than price.
  • You have a child and probably don’t want the hassle of fixing it up at this time. I’d buy a house that has the potential for expansion. Larger lot but smaller house. Even if it means temporary inconvenience - 2B/2Bath on a typical 3B/2B house lot etc., I will expand the house at some point and take advantage of sft cost of renovation & price differential. I will also make the house per my requirement at that time. If you were to sell it at a later date, and RE market tanks, there is a bit of a buffer (per sft cost of renovation vs. price) to come out positive.
  • After making sure I have enough emergency fund is saved up, I will put down a large downpayment - minimize monthly expenses in RE.
  • We all have biases Some of us tend to round off $14.95 as $14. $1 M may seem inordinately large amount. Perhaps, if it helps, you may want to think of your income as Half a Million instead of 500K?
Get the usual insurances etc. Key is finding the right house in the right area… which will take time.


PS: Some landlords rent their houses below 1% of the market value. Perhaps their net cost is so small that all they are looking for are great tenants who will look after the house and pay rent on time. When you move out of CA, you can be those landlords if you choose to - specially if you have family there who can keep an eye on the house. With large down payment + 15 years of chipping away at the loan should result in a decent rental income for your new LCOL city/town/village. Just a thought.
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sperry8
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Re: Homebuying in Los Angeles - Advice Needed

Post by sperry8 » Mon Nov 11, 2019 6:18 pm

Don't buy, rent. $5k/mo and you'll get that same house without all the headaches of ownership and the worry that you bought high. Plus you can keep that 20% down invested and watch it grow instead of losing it to interest payments. In the long run it's a wiser investment move.
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lthenderson
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Re: Homebuying in Los Angeles - Advice Needed

Post by lthenderson » Mon Nov 11, 2019 6:24 pm

poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
Should we try to stretch for a 15 year mortgage? Should we take out a 30 year mortgage and pay it off like it's a 15? Should we take a 30 year mortgage and pay it off normally and see where we're at in 15 years? Are there mortgage scenarios we should consider that I don't know about? We recently found our that friends of ours are paying interest-only on their $1M mortgage, which seems insane and irresponsible to me, but hey, they have a $2K monthly payment and a nice place. Maybe I'm missing something?
I don't have any advice on whether or not you should buy a house, but if you do, I would mention a common problem I have seen other people put themselves in. They sink all their money into paying off their mortgage and then end up having to move suddenly. Now they have all their cash tied up in home equity and to buy another house they have to put clauses in contracts stating they need to sell their (paid or nearly paid for) house first before closing on their new house which limits their purchasing ability in hot markets/bidding wars. The alternative is to sell the old house first to get the money out of it, rent until they find another house they can purchase which means moving twice and moving from a house after any amount of time to a small apartment again is always painful. That is why I would go with a longer mortgage and just pay extra as you are able while keeping some cash liquid in case you have to move in the future on short notice.

Leemiller
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Re: Homebuying in Los Angeles - Advice Needed

Post by Leemiller » Mon Nov 11, 2019 6:53 pm

You can buy the house, but I’d recommend saving up more in cash/taxable. Perhaps stop the backdoor Roth for a bit. No reason to wait until the 2021 election that I can think of. It may take you a year to find a house anyways. It took us longer. We moved from an apartment to a house with a three year old, huge change in lifestyle. I’m very glad we did it. I do sometimes wish we would have stretched more as our incomes have continued to raise, and we were pretty conservative in purchase price vs income. I will say I’m surprised at how low your monthly expenses are, you should expect a material increase when you buy a home.

HEDGEFUNDIE
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Re: Homebuying in Los Angeles - Advice Needed

Post by HEDGEFUNDIE » Mon Nov 11, 2019 8:37 pm

My wife & I make $500k as well. And we pay $85k per year on a $1.2M mortgage.

Not only is it affordable, we are putting away $150k per year in savings.

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Re: Homebuying in Los Angeles - Advice Needed

Post by cowbman » Mon Nov 11, 2019 8:50 pm

HEDGEFUNDIE wrote:
Mon Nov 11, 2019 8:37 pm
My wife & I make $500k as well. And we pay $85k per year on a $1.2M mortgage.

Not only is it affordable, we are putting away $150k per year in savings.
This seems like the best advice here. :sharebeer

Plano
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Re: Homebuying in Los Angeles - Advice Needed

Post by Plano » Mon Nov 11, 2019 10:41 pm

I would figure out the net cost of owning (PITI minus mortgage interest deduction) to make an apples-to-apples comparison to renting in the same area. Given fed and CA state taxes, the itemized deduction may be the tie-breaker.

Personally, I would buy because 15 years is a long time and we hated moving — especially with small children. Owning provides more stability, even if you decide to move to another district when your child is ready for middle school (in 7-8 years). Plus, there are the non-financial, intangible, MasterCard “priceless” things like planting fruit trees and working on DIY home improvement projects with our son when he was growing up. Wouldn’t trade those experiences for the world.

tesuzuki2002
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Re: Homebuying in Los Angeles - Advice Needed

Post by tesuzuki2002 » Mon Nov 11, 2019 10:53 pm

reasonably priced house and with that income I would have purchased a home years ago in your shoes..

I live in the LA market area and make significantly less... would love to purchase a home but even the $400K homes seem out of reach to me...

it is all relative..

phxjcc
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Re: Homebuying in Los Angeles - Advice Needed

Post by phxjcc » Tue Nov 12, 2019 12:20 am

I moved from the west side to Thousand Oaks when the kids started school. Yes, the commute was hard but it was the correct choice. Plus TO is not burdened with LA city and county issues.

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unclescrooge
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Re: Homebuying in Los Angeles - Advice Needed

Post by unclescrooge » Tue Nov 12, 2019 2:27 am

inbox788 wrote:
Mon Nov 11, 2019 4:08 pm
Best laid plans...

Anyway, if there's a fair to good chance you'll live there for 15 years, then buying is a good choice. People used to say it took 5-7 years to break even on the purchase cost (realtor fees, mortgage fees, moving costs, etc.), and I'd guess it hasn't changed that much. You can afford it, so the question is more why not buy now? Sounds like there's no hurry, so take your time to find something you like. Financially, time should only help. Come back when you buy a place to ask if you should choose 15 or 30 year mortgage. I'd pick 15 for 0.5% or more savings, but you'll have others telling you to invest instead [I had to come back to finish posting; I see someone already has commented above]. Either case, it's an even less significant decision.
While this is theoretically true, I will take the opposite side of the argument.

If you are planning on moving in 15 years then just rent. If you can rent a $1.25M home for $5k then the landlord is subsidizing your rent.

That being said I bought a $1.3M home in Los Angeles that should've been torn down and spent over $400k renovating it. All schools are highly rated and I expect to live here another 30 years. But I got a 7/1 ARM because the interest rate is much lower than a 30 year fixed.

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Re: Homebuying in Los Angeles - Advice Needed

Post by Valuethinker » Tue Nov 12, 2019 5:28 am

poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
Hi all,

Long time lurker here - thank you all for your awesome retirement/investing advice over the years!

My husband and I live in Los Angeles with our one and only child, who is 3. We are in our late 30s. We both work, we both like our jobs, we have family here. We like living in LA but don't love it, but we're going to stick with it for now.

The plan is to spend the next 15 years living here, working hard, enjoying our jobs, enjoying our kid, and socking away money. When our kid is grown up we'll figure out what comes next.

We rent, and we're trying to figure out whether buying a house makes sense. We currently rent in a great area with good schools, but we want to move from our current small apartment to a house with a yard. We are going to wait until at least 2021 to move to see what happens with the election and the market. Housing prices in our area are insane.

The current minimum prices for a house we would want - school district and commute wise - are currently around $1.25M or $5K/month in rent. You could easily spend more than that for a "modest" 1500 sq ft 3 bedroom house. We are hoping this might come down, but it's SoCal, so no guarantees.

We currently make about $500K combined. We max out our retirement accounts (401K, backdoor Roth, mega backdoor Roth). We have excellent credit and no debt.

We have $250K of down payment money in a CD earning about 2%. We have emergency savings. Our current expenses are about $8500 a month:

$3500 rent
$2000 daycare
$1800 monthly expenses
$1200 529 contributions

We plan on sending our kid to public elementary, so that $2K in daycare costs will be going away in a couple years. We may save for private middle/high school, and then figure out if we actually need it when the time comes.

I know we can technically afford the monthly payments on a $1.25M home, especially with 20% down. But it just seems like SO. MUCH. MONEY. And then there's the maintenance. The possibility of fires and earthquakes. And the very real possibility that we might want to peace out after 15 years and go somewhere cheaper and more relaxed.

WWYD in our situation? Should we try to stretch for a 15 year mortgage? Should we take out a 30 year mortgage and pay it off like it's a 15? Should we take a 30 year mortgage and pay it off normally and see where we're at in 15 years? Are there mortgage scenarios we should consider that I don't know about? We recently found our that friends of ours are paying interest-only on their $1M mortgage, which seems insane and irresponsible to me, but hey, they have a $2K monthly payment and a nice place. Maybe I'm missing something?
What they are missing is what happens at the end? They have to sell the home, and even if has appreciated, they still have to trade down. They've enjoyed a better lifestyle on the way, but they have less resources available to them in the future.

Repaying your mortgage is investment in your home equity. That equity may go up or down with housing prices, but it is quite real - I now have several relatives in nursing home care (dementia etc.) paying for it with their home equity.

The reason not to repay a mortgage as fast as possible is you have an attractive rate (after tax, and after inflation - ie real rate) AND you are making other investments.

I would bet your friends are not putting that extra 2k-3k pcm cash flow (the amortisation payment) into an investment portfolio? And equities are *volatile* which makes them quite a tricky place to put savings you might need. (in the long run, equity investing pays the highest return; but we are really talking on a 10+ year horizon, in fact on a 30 year horizon).
Any advice appreciated. I didn't grow up in CA or with money and psychologically paying over $1M for a house still messes with my head. Some days I still can't believe we pay as much as we do in rent on an apartment.
If you find a house you like in the area you desire then buy. Remembering that houses can usually be improved/ expanded/ renovated, but the location cannot.

On a 10 year+ perspective you are unlikely to lose money (you might lose money in inflation-adjusted terms, once you throw in property taxes etc.).

It's not an investment, it's a lifestyle decision. There is a lot of solidity & comfort in owning your own home. US demographics are still quite positive, especially in the coastal areas (where NIMBY type measures have further restricted housing supply) and so there will be demand for those homes in the future. In an area with good schools/ good access to work/ not bad on the local pollution issues, there will almost always be demand for homes.

My bet is you will look back in 20 years and say "heh, we made 2-3% real pa on our housing equity, it wasn't our best investment decision but it wasn't our worst".

Houses in London cost similar amounts to what you are describing - say £1m (USD 1.25m) for a 1500 square foot 3 bed row house (or a somewhat more modern suburban semi detached, further out). One shrugs, and buys. I think they have probably dropped 10-15% since the peak but despite Brexit etc there's no sense there's a crash going on. SoCal went down badly when the defense industry was cut back in the early 1990s. It also went down in the financial crash in 2008. However good neighbourhoods never fall as much as mediocre or bad ones (which become unsaleable).

AFAIK the Southern California economy is now far more diversified - only a bad hit on the entertainment industry would really hurt it. I think other posters are right that who is US President has a limited impact. The biggest damage perhaps was the capping on the deduction for property taxes? Over time, the post tax burden on property taxes will increase as property taxes rise? But that damage is done - should be factored into prices.

Take out a 30 year mortgage so you have maximum flexibility and then make extra payments (once you have exhausted all tax protected routes of saving). That's probably better than a 15 year mortgage, although it takes extra discipline. The reason being it's the cheapest leverage you will ever get.

Some form of earthquake insurance (with a high deductible) would be good. Perhaps avoid areas obviously threatened by fire? I don't know if you can insure for wildfires? Looking at suburban Australia right now, wildfires really are a horror.

boomer_techie
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Re: Homebuying in Los Angeles - Advice Needed

Post by boomer_techie » Tue Nov 12, 2019 6:58 am

Valuethinker wrote:
Tue Nov 12, 2019 5:28 am
Some form of earthquake insurance (with a high deductible) would be good.
Single story wood framed homes do very well in earthquakes. In a good shaker there will be damage, but the house won't be wiped out.
Perhaps avoid areas obviously threatened by fire? I don't know if you can insure for wildfires? Looking at suburban Australia right now, wildfires really are a horror.
Standard house insurance covers wildfires in California. This is starting to cause problems for some people in high risk areas - their homeowner's insurance rates have massively increased.

Flashes1
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Re: Homebuying in Los Angeles - Advice Needed

Post by Flashes1 » Tue Nov 12, 2019 7:06 am

stan1 wrote:
Mon Nov 11, 2019 2:46 pm
It's a personal preference and a lifestyle choice. If you can really rent a $1.25M home for $5000/month that's a pretty good deal (especially since property taxes alone at 1% would be $12,500/year).
That's what I was thinking. I have a $417,000 MORTGAGE, and my monthly payment is $3,000 (includes Taxes and Insurance)----------so $5,000/month rent on a $1.25 million house seems like a STEAL.

I'd rent in perpetuity.

HEDGEFUNDIE
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Re: Homebuying in Los Angeles - Advice Needed

Post by HEDGEFUNDIE » Tue Nov 12, 2019 7:21 am

Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.

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Re: Homebuying in Los Angeles - Advice Needed

Post by supersharpie » Tue Nov 12, 2019 7:31 am

HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.

HEDGEFUNDIE
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Re: Homebuying in Los Angeles - Advice Needed

Post by HEDGEFUNDIE » Tue Nov 12, 2019 7:46 am

supersharpie wrote:
Tue Nov 12, 2019 7:31 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.
Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.

stoptothink
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Re: Homebuying in Los Angeles - Advice Needed

Post by stoptothink » Tue Nov 12, 2019 10:55 am

HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:46 am
supersharpie wrote:
Tue Nov 12, 2019 7:31 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.
Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.
Possibly, to you, but that's a terrible metric when making comparisons across the country. In most markets, renting will be significantly more expensive than PITI on a 30yr mortgage. In my area it is close to 2:1 at the moment. My PITI on a 15yr (4yrs in) is <$1200/month and I could easily rent out my place for $1900+/month.

Just another reason normal rules of thumb don't necessarily apply in California.

HEDGEFUNDIE
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Re: Homebuying in Los Angeles - Advice Needed

Post by HEDGEFUNDIE » Tue Nov 12, 2019 10:58 am

stoptothink wrote:
Tue Nov 12, 2019 10:55 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:46 am
supersharpie wrote:
Tue Nov 12, 2019 7:31 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.
Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.
Possibly, to you, but that's a terrible metric when making comparisons across the country. In most markets, renting will be significantly more expensive than PITI on a 30yr mortgage. In my area it is close to 2:1 at the moment. My PITI on a 15yr (4yrs in) is <$1200/month and I could easily rent out my place for $1900+/month.

Just another reason normal rules of thumb don't necessarily apply in California.
How does your example violate my rule of thumb? Clearly your “thrown away” money is lower with owning than with renting, so you should own.

stoptothink
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Re: Homebuying in Los Angeles - Advice Needed

Post by stoptothink » Tue Nov 12, 2019 11:43 am

HEDGEFUNDIE wrote:
Tue Nov 12, 2019 10:58 am
stoptothink wrote:
Tue Nov 12, 2019 10:55 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:46 am
supersharpie wrote:
Tue Nov 12, 2019 7:31 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.
Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.
Possibly, to you, but that's a terrible metric when making comparisons across the country. In most markets, renting will be significantly more expensive than PITI on a 30yr mortgage. In my area it is close to 2:1 at the moment. My PITI on a 15yr (4yrs in) is <$1200/month and I could easily rent out my place for $1900+/month.

Just another reason normal rules of thumb don't necessarily apply in California.
How does your example violate my rule of thumb? Clearly your “thrown away” money is lower with owning than with renting, so you should own.
Huh? You stated that "in your experience" rent is not generally higher than PITI. That is unequivocally wrong, in fact it isn't even close in most markets. Comparatively, being able to rent a home with a value of $1.25M for $5k/month is a complete steal. Maybe not in LA, right now, but historically and compared to most of the rest of the country it is. There is a reason the "1% rule" is so pervasive in evaluating real estate rental opportunities: rents are usually less than 1% of property value, but not that far (in this case .4%).

Whether it is worth it to you (as long as PITI is less than rent) is a totally different discussion, and I might agree with you on that one.
Last edited by stoptothink on Tue Nov 12, 2019 11:57 am, edited 1 time in total.

HEDGEFUNDIE
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Re: Homebuying in Los Angeles - Advice Needed

Post by HEDGEFUNDIE » Tue Nov 12, 2019 11:54 am

stoptothink wrote:
Tue Nov 12, 2019 11:43 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 10:58 am
stoptothink wrote:
Tue Nov 12, 2019 10:55 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:46 am
supersharpie wrote:
Tue Nov 12, 2019 7:31 am


Usually rent is higher than PITI, which is why 5k is a “steal” in relative terms.
Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.
Possibly, to you, but that's a terrible metric when making comparisons across the country. In most markets, renting will be significantly more expensive than PITI on a 30yr mortgage. In my area it is close to 2:1 at the moment. My PITI on a 15yr (4yrs in) is <$1200/month and I could easily rent out my place for $1900+/month.

Just another reason normal rules of thumb don't necessarily apply in California.
How does your example violate my rule of thumb? Clearly your “thrown away” money is lower with owning than with renting, so you should own.
Huh? You stated that "in your experience" rent is not generally higher than PITI. That is unequivocally wrong, in fact it isn't even remotely close in most markets. Comparatively, being able to rent a home with a value of $1.25M for $5k/month is a complete steal. Maybe not in LA, right now, but historically and compared to most of the rest of the country it is. There is a reason the "1% rule" is so pervasive in evaluating real estate rental opportunities.

Whether it is worth it to you (as long as PITI is less than rent) is a totally different discussion, and I might agree with you on that one.
You misread me.

The “in my experience” was associated with taxes+interest < rent being a good deal, not that rent < PITI is common.

Also, how does the fact that a $1.25M home in Texas renting at $5k being a steal help the OP? Steals and deals should only be relative to the area you are considering. He has said his income is only available in SF, LA and NY. $5k rent for $1.25M house is not a steal in any of those places.

stoptothink
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Re: Homebuying in Los Angeles - Advice Needed

Post by stoptothink » Tue Nov 12, 2019 12:07 pm

HEDGEFUNDIE wrote:
Tue Nov 12, 2019 11:54 am
stoptothink wrote:
Tue Nov 12, 2019 11:43 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 10:58 am
stoptothink wrote:
Tue Nov 12, 2019 10:55 am
HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:46 am


Not in my experience.

If I’m “throwing away” less money on mortgage interest and taxes than on rent, then buying is the better deal.
Possibly, to you, but that's a terrible metric when making comparisons across the country. In most markets, renting will be significantly more expensive than PITI on a 30yr mortgage. In my area it is close to 2:1 at the moment. My PITI on a 15yr (4yrs in) is <$1200/month and I could easily rent out my place for $1900+/month.

Just another reason normal rules of thumb don't necessarily apply in California.
How does your example violate my rule of thumb? Clearly your “thrown away” money is lower with owning than with renting, so you should own.
Huh? You stated that "in your experience" rent is not generally higher than PITI. That is unequivocally wrong, in fact it isn't even remotely close in most markets. Comparatively, being able to rent a home with a value of $1.25M for $5k/month is a complete steal. Maybe not in LA, right now, but historically and compared to most of the rest of the country it is. There is a reason the "1% rule" is so pervasive in evaluating real estate rental opportunities.

Whether it is worth it to you (as long as PITI is less than rent) is a totally different discussion, and I might agree with you on that one.
You misread me.

The “in my experience” was associated with taxes+interest < rent being a good deal, not that rent < PITI is common.

Also, how does that fact that a $1.25M home in Texas renting at $5k being a steal help the OP? Steals and deals should only be relative to the area you are considering.
If the OP is planning on staying in California for 15yrs, "and then figuring it out from there" as they stated, then it may be very relevant. As I clearly stated, California is a different animal. It's clear for those outside to say renting in this situation is a no-brainer; it all comes down to how married OP is to staying there (and whether the area will continue to be an outlier in regards to normal RE financial models).

OP can afford it, either way.

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djpeteski
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Re: Homebuying in Los Angeles - Advice Needed

Post by djpeteski » Tue Nov 12, 2019 12:12 pm

poppy42 wrote:
Mon Nov 11, 2019 1:11 pm
$3500 rent
$2000 daycare
$1800 monthly expenses
$1200 529 contributions
Are you sure that is your expenses? I don't feel we are terribly lavish, but we spend about 5K per month without the costs of rent/mortgage, daycare, and 529 contributions. Also we don't make anywhere near to 500K/year. We typically have $1200 for groceries, eating out, and other incidentals. We have our lawn done, have a massage subscription, and have house cleaners come in, but that only accounts for about $600 per month.

Even if you doubled your expenses per month, you two should be find doing a 15 year on a 1.5 mil property.

inbox788
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Re: Homebuying in Los Angeles - Advice Needed

Post by inbox788 » Tue Nov 12, 2019 12:22 pm

unclescrooge wrote:
Tue Nov 12, 2019 2:27 am
While this is theoretically true, I will take the opposite side of the argument.

If you are planning on moving in 15 years then just rent. If you can rent a $1.25M home for $5k then the landlord is subsidizing your rent.
Had to think about it a little, but figured out that just because the landlord is subsidizing rent doesn't mean he's losing money. He might have a better returning investment, but that's a different risk profile.

When you own, you are your own landlord, and there are some advantages, efficiencies and conveniences (credit risk, collecting rent, minor repairs, etc.). And if you're levering using a home as collateral, what better house-sitter than yourself? A random landlord in that marketplace isn't finding a better alternative investment (those that do have already fled), so how could you make better use of that down payment and cash stream (mortgage vs rent differential) if you stayed a renter? Making any past comparison is significantly impacted by what periods are chosen, but very long term, they seem to converge, so no clear winner, IMO. https://www.biggerpockets.com/blog/real ... erformance

If you do choose rent, may look into California vs Texas REIT.
Last edited by inbox788 on Tue Nov 12, 2019 12:30 pm, edited 1 time in total.

almostretired1965
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Re: Homebuying in Los Angeles - Advice Needed

Post by almostretired1965 » Tue Nov 12, 2019 12:30 pm

CheepSkate wrote:
Mon Nov 11, 2019 4:50 pm

2) Paying $5k rent for a $1.25M house is 0.4%/mo. The rule of thumb for landlords is 1% a month is a deal worth looking at because it's potentially cash flow positive. At 0.4% I'm reasonably sure LA landlords are cash flow negative. So basically, you are ripping off a landlord by renting, but that's OK because they are in it for property speculation anyway and will abandon the mortgage the moment another price correction comes along. Are you a property speculator or are you setting yourself up to lose at this game of musical chairs?
Interesting. I knew we had a good deal, but by that rule I'm making out even better than I thought. I'm renting a house just outside of Seattle for a bit over $3K. The house is valued at around $1M. I know that some of it is just a function of housing prices sky rocketing here in the past 5 or 6 years. Our landlord has owned the house for quite a while so it was acquired at less than half of the current market price so I doubt she is cash flow negative (as opposed to having financed the purchase at the current market price) but, still.

CoastalWinds
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Re: Homebuying in Los Angeles - Advice Needed

Post by CoastalWinds » Tue Nov 12, 2019 12:46 pm

How certain are you in the 15-year figure? I don’t think I could plan out further than 5 years. So many things can change in 5 years (job/career, kids, lifestyle preferences, health, etc), some of which may be beyond your control.
Last edited by CoastalWinds on Tue Nov 12, 2019 1:01 pm, edited 1 time in total.

investit
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Re: Homebuying in Los Angeles - Advice Needed

Post by investit » Tue Nov 12, 2019 12:48 pm

I'm not an expert in these things at all but I do live in LA in a very similar situation and can relate to the OP's dilemma.

We pay less than 5K rent on a home that would probably cost over 1.5MIL to buy. We got a great deal but I think that's often possible b/c the owners locked in their mortgage years ago, having paid a fraction of the home's current worth. They are just trying to cover their mortgage payment with a renter who they think will be reliable. I'd do the same think in their situation.

Also, living in the west side of Los Angeles it is hard to find a fixer-upper for 1.5MIL. We have trouble with the idea of buying a rundown house that we don't even particularly like for 1.5MIL and facing renovations to make it just acceptable rather than amazing.

So... given the dramatic increases in housing prices in the market since 2008 and over the last 20 years, and given the relatively low rent, and given the lack of perceived value in a purchase in our area, and given the percentage of income a mortgage and taxes would require (even though we also have a high income like the OP), should we buy? We will probably stay in the city at least another 15 years though jobs could move across town, which present a problem in traffic-heavy LA. We struggle with this question all the time.

In 20 years will the single family homes within a few miles of the beach in one the the US's top metropolitan areas naturally increase in value, or will LA figure out density in housing and home prices will stay relatively steady? Seem like their is a genuine pricing crisis, and their is room for development in a city that's not dense like LA.

In any case, we manage to put away close to 150K / year in retirement and investments. This number would probably be cut in half with a large mortgage. So what to do?

The no-brainer financially is to move to one of LA more up-and-coming areas and buy a house for closer to 1MIL (think View Park or University Park). This will almost certainly see great appreciation and there is better housing stock in these areas, but not good schools, walkable restaurants etc, and a longer commute for us.

All of it has us paralyzed. I figure we are happy with our quality of life where we are, saving money and if we see another 2008, we'll be ready to move.

anonenigma
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Re: Homebuying in Los Angeles - Advice Needed

Post by anonenigma » Tue Nov 12, 2019 12:55 pm

CheepSkate wrote:
Mon Nov 11, 2019 4:50 pm
Three thoughts.

1) My 3/2 house on a quarter-acre lot on a charming and quiet street in a safe neighborhood 10 minutes from my downtown cost me $155k just last year. My payment is under $1k for a 15 year loan.
Where? Can I have one of those? Or three?

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Re: Homebuying in Los Angeles - Advice Needed

Post by Flashes1 » Tue Nov 12, 2019 1:07 pm

HEDGEFUNDIE wrote:
Tue Nov 12, 2019 7:21 am
Not sure why people are saying $5k rent on $1.25M is a steal.

By my calculations, PITI on a $1M mortgage is only $6k.

Buying is the steal.
A couple big factors you're overlooking:

* The opportunity costs on the $125k down payment in your scenario - in 15 years that could cost you approx. $125k if you had it in equities.
* Significant maintenance fees with home ownership - some people estimate it at 1% of the home value per annum. New roof, appliances, decorating, etc.
* I'm a huge proponent of home ownership but I didn't know you could rent a $1.25 million home for $5k/month. That seems like a great deal to me.

stoptothink
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Re: Homebuying in Los Angeles - Advice Needed

Post by stoptothink » Tue Nov 12, 2019 1:08 pm

almostretired1965 wrote:
Tue Nov 12, 2019 12:30 pm
CheepSkate wrote:
Mon Nov 11, 2019 4:50 pm

2) Paying $5k rent for a $1.25M house is 0.4%/mo. The rule of thumb for landlords is 1% a month is a deal worth looking at because it's potentially cash flow positive. At 0.4% I'm reasonably sure LA landlords are cash flow negative. So basically, you are ripping off a landlord by renting, but that's OK because they are in it for property speculation anyway and will abandon the mortgage the moment another price correction comes along. Are you a property speculator or are you setting yourself up to lose at this game of musical chairs?
Interesting. I knew we had a good deal, but by that rule I'm making out even better than I thought. I'm renting a house just outside of Seattle for a bit over $3K. The house is valued at around $1M. I know that some of it is just a function of housing prices sky rocketing here in the past 5 or 6 years. Our landlord has owned the house for quite a while so it was acquired at less than half of the current market price so I doubt she is cash flow negative (as opposed to having financed the purchase at the current market price) but, still.
That is just insane. As you noted, a lot of this probably has to do with the fact that RE values have skyrocketed in these areas recently and mortgage/rent have not found their balancing point. In my area (Utah County, Utah, also a growing tech sector), $3k/month rent will not get you a $500k home.

stan1
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Re: Homebuying in Los Angeles - Advice Needed

Post by stan1 » Tue Nov 12, 2019 1:11 pm

almostretired1965 wrote:
Tue Nov 12, 2019 12:30 pm
CheepSkate wrote:
Mon Nov 11, 2019 4:50 pm

2) Paying $5k rent for a $1.25M house is 0.4%/mo. The rule of thumb for landlords is 1% a month is a deal worth looking at because it's potentially cash flow positive. At 0.4% I'm reasonably sure LA landlords are cash flow negative. So basically, you are ripping off a landlord by renting, but that's OK because they are in it for property speculation anyway and will abandon the mortgage the moment another price correction comes along. Are you a property speculator or are you setting yourself up to lose at this game of musical chairs?
Interesting. I knew we had a good deal, but by that rule I'm making out even better than I thought. I'm renting a house just outside of Seattle for a bit over $3K. The house is valued at around $1M. I know that some of it is just a function of housing prices sky rocketing here in the past 5 or 6 years. Our landlord has owned the house for quite a while so it was acquired at less than half of the current market price so I doubt she is cash flow negative (as opposed to having financed the purchase at the current market price) but, still.
Guessing there could be one or two things going on. Your landlord may have had bad experiences with bad tenants and is very appreciative of good tenants, or maybe she is simply not a good business person who understands what the property is really worth as a rental. Either way consider yourself fortunate to have found such a situation and enjoy it while you can.

surfstar
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Re: Homebuying in Los Angeles - Advice Needed

Post by surfstar » Tue Nov 12, 2019 1:16 pm

https://www.nytimes.com/interactive/201 ... lator.html

Can't believe no one mentioned this yet. Try to run some numbers for different scenarios. Don't forget about the hassle that comes with home ownership - maintenance DIY or p-a-y for it.

TallBoy29er
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Re: Homebuying in Los Angeles - Advice Needed

Post by TallBoy29er » Tue Nov 12, 2019 1:17 pm

Buying is definitely a realistic option for you. And not having upstairs/downstairs neighbors, and not sharing walls, is awesome.

That said, big yards are overrated. We have a 1/4 acre, and typically find ourselves in the smaller front yard, hanging out, meeting neighbors, etc. The large backyard goes mostly unnoticed.

stan1
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Re: Homebuying in Los Angeles - Advice Needed

Post by stan1 » Tue Nov 12, 2019 1:24 pm

Also a well located Los Angeles area home is likely to be 40-100+ years old. Upkeep comes at a cost even if you pay a premium for a house that has already been "modernized". You might enjoy making the home your own for your family to enjoy but maybe you'd rather not spend your time that way. That's back to the lifestyle choice. The costs of modernization and maintenance definitely can take a big chunk out of any market appreciation if you are paying contractors to do the labor.

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unclescrooge
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Re: Homebuying in Los Angeles - Advice Needed

Post by unclescrooge » Tue Nov 12, 2019 1:38 pm

investit wrote:
Tue Nov 12, 2019 12:48 pm
I'm not an expert in these things at all but I do live in LA in a very similar situation and can relate to the OP's dilemma.

We pay less than 5K rent on a home that would probably cost over 1.5MIL to buy. We got a great deal but I think that's often possible b/c the owners locked in their mortgage years ago, having paid a fraction of the home's current worth. They are just trying to cover their mortgage payment with a renter who they think will be reliable. I'd do the same think in their situation.

Also, living in the west side of Los Angeles it is hard to find a fixer-upper for 1.5MIL. We have trouble with the idea of buying a rundown house that we don't even particularly like for 1.5MIL and facing renovations to make it just acceptable rather than amazing.
As someone who lives on the other side of town (North East LA), I can attest to the fact that many homes rent for a lot less than I costs to buy.

There are several homes in my neighborhood that would sell for at least $1.25m, but rent for only $3500-3800.

If you are able to save $150k/year I would not rush to change anything.

If you must buy something, buy a small condo and rent it out. That's a hegde against rental increases.

majiaknight
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Re: Homebuying in Los Angeles - Advice Needed

Post by majiaknight » Tue Nov 12, 2019 3:40 pm

If your job and income are relatively stable, you should buy the house now as you already have 20% downpay and no need to wait until 2021. Below are my thoughts:

1) Assuming there will be a RE market crash around 2021 with worsen economic conditions, I'd think most people would either wait longer to see when it reaches the bottom or delay the purchase due to the fear of a long recession.

2) The target price range of the house <3x of your annual HHI is very reasonable and you should ignore the Y2Y price fluctuations once you buy the primary residence. I was lucky to buy the house in Bay Area around 2014 when people already said the RE market was crazy w/ bidding wars everywhere. The house value went up ~45% from 2014 to 2018, and then went down ~10% from the 2018 top. Remember now we actually have the all time highs in stock market but with a decline in house value YTD. So, there are just so many factors deciding the house price which is very hard to predict. Once you become the home owner, you may ignore most of these market news and have peace of mind.

3) For mortgage, I'd consider 15Y fixed in your situation. I'm also considering to refinance my 5/1 ARM to 15Y fixed now. The situation I'm facing now is actually I want to de-risk a little bit as over the years I have a portfolio (85% in stock) now much larger than the mortgage balance, and the current APR for 15Y fixed is very attractive. You could always try to refi to a longer term or open a HELOC as a backup emergency fund if you want to have more liquidity.

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