How Much House Can We Afford in HCOL Area?

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jarjarM
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Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

In the valley, plenty of folks stretch the income to mortgage ratio beyond the recommended 3X. I think if your OTE is stable at $250K between the dual income and you have $1M downpayment, then you can think about that $2M house. Otherwise, keep renting. Most of the people I know who recently purchased $2+M house generally have stable income in the $500-$700k range (so 1 E6/L6 FB/GOOG engineer with a secondary supplemental income or 2 E4/L4 income) with some good RSUs vested ~3-5 years ago and never sold. It's about luck too as many of them got too busy or just have too much blind faith in what they do to sell their RSUs. :twisted:
onourway
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Re: How Much House Can We Afford in HCOL Area?

Post by onourway »

I would re-evaluate your options as to what’s really available and what’s really acceptable to you in the 1-1.5m range. Maybe they aren’t your “forever” house right now, but I suspect there has to be quite a bit available that is considerably better than the apartment you are currently in for $2500. With your kind of income, the house doesn’t have to be perfect today. Try to find something that has potential, and update it to your liking over time. This keeps your mortgage relatively affordable, and if and when you continue to have big windfalls, you update it incrementally.

If you want to own, I think you certainly can and should do so, but in your market, it’s going to require flexibility on your end.
MostlyABogleHead
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Re: How Much House Can We Afford in HCOL Area?

Post by MostlyABogleHead »

Another way to think about your income is to remove stock appreciation and initial stock grant from the equation. This will put in perspective on how much you are actually making assuming zero growth in stocks and you not able to move every 4 years and get bump in salary due to initial stock grants. With kids it’s harder to move jobs and your priorities will shift away from being fully career focussed to include other more important things in life.

I live in the Bay Area. Based on the income information that you have given IMO renting is a better option for you at this time. You will eventually be able to make a better decision on buying a house once the constraints on child care goes away and higher savings numbers allow you to reduce your risk of becoming house poor. By renting you will reduce the pressure of the need to earn a lot of money just to pay the mortgage.
rich126
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Re: How Much House Can We Afford in HCOL Area?

Post by rich126 »

random_walker_77 wrote: Wed Sep 02, 2020 10:55 pm
mervinj7 wrote: Wed Sep 02, 2020 10:48 pm
random_walker_77 wrote: Wed Sep 02, 2020 10:43 pm I will say this, the leverage you get when you buy a house can cut both ways, but when it goes up, it can be fantastic. I actually once owned a house for 3 years in the bay area. It went up 40%, and so one way of looking at it is that we nearly doubled our (down payment) money in 3 years, plus got free rent. We were incredibly lucky, but I'm still really glad that we cashed out and moved to Texas.

When the '08 crash happened, I saw that my old house's zillow valuation dropped in half, meaning my buyer's equity was completely gone. Leverage cuts both ways...
Did you ever check the value more recently?
:moneybag
I just checked, and it's up 45% from when I sold it 13 years ago. I'm good with that -- 13 years of inflation makes that sort of gain look reasonable, and my stocks have done really well in the interim. Plus, my newer home is much much nicer, my kids are in superb public schools, and I don't have lead paint, asbestos, and the other drawbacks of an old bay area house.
Having a house in Scottsdale that I purchased in 2003 I saw its value nearly double by 2007 before falling under my original purchase price. Now things are crazy again and it is back to the peak price and I plan to cash out and run since I don't think I want to be here long term.

The OP wants to stay in a HCOL area for obvious reasons so she might just have to roll the dice and hope things work out. I recall buying my first place at a good 3X of my salary (maybe more) and not having anything much saved up in the event of an emergency and it worked out. I did have the advantage of a secure job (government at that time) and no responsibilities for others (no wife, kids) so I would have been the only one paying the price if it didn't work out. I do recall thinking that if I had any big expense I'd be in trouble since I didn't have thousands easily accessible for a new roof, etc.
delamer
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Re: How Much House Can We Afford in HCOL Area?

Post by delamer »

Have you actually talked to a mortgage broker to find out how much mortgage you can qualify for, based on a 20% downpayment?

Also, something to consider is the your childcare situation. Your in-laws are at an age when unexpected health issues crop up. If they were unavailable to help you, then what?

And if you really want to cut back your hours in a few years, that needs to fit into your plan.
Last edited by delamer on Thu Sep 03, 2020 11:50 am, edited 1 time in total.
Lee_WSP
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Re: How Much House Can We Afford in HCOL Area?

Post by Lee_WSP »

hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
'09 was at the bottom of the housing market cycle. Right now we're at or near the top. Check what it was worth in 2007 and then do a comparison.

All it's going to take is for another 2000 tech bubble burst and everyone who previously could stretch a 1 million mortgage are going to be very incentivized to offload it. The bay area housing market is very inflated because a lot of highly paid people need to live there right now. It may stay the same, or it can change. No one knows.
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ray.james
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Re: How Much House Can We Afford in HCOL Area?

Post by ray.james »

I presume this is Bay area?

Its possible it could all work out but why take that more risk when you are in happy place. You do not need 600k every year to buy but more wealth like 1-2M in investments after housing down payment will reduce the risk. I believe this is what folks mean to rent a few more years. With property taxes, you are looking at 7-8K in payments. Can you choose a different great town where 1.5M is enough for your dream house? Rents have been falling all over the place. The minute fed raises rates, house prices will fall. This happened in 2018. I am not talking about a housing recession but subtle 10% drops. It is always cheaper to get lower tax base on the house.

some other things to keep in mind.
Are you planning more kids? If so be aware of rising childcare costs.
You are the main earner. What happens if you choose to take a break due to something like ACL/carpal or for kids.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
DiMAn0684
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Re: How Much House Can We Afford in HCOL Area?

Post by DiMAn0684 »

Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:22 pm Why are you terrified if you are further along and only spending $825M on a home?
From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
I imagine people / businesses you have to hire to do the maintenance will ask for (a lot?) more money to do the same work on a 2M home in VHCOL area than on a comparable $500k home elsewhere. They can reasonably assume that one has the means to pay more for their work if they live in a $2M home.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

jarjarM wrote: Thu Sep 03, 2020 3:23 am In the valley, plenty of folks stretch the income to mortgage ratio beyond the recommended 3X. I think if your OTE is stable at $250K between the dual income and you have $1M downpayment, then you can think about that $2M house. Otherwise, keep renting. Most of the people I know who recently purchased $2+M house generally have stable income in the $500-$700k range (so 1 E6/L6 FB/GOOG engineer with a secondary supplemental income or 2 E4/L4 income) with some good RSUs vested ~3-5 years ago and never sold. It's about luck too as many of them got too busy or just have too much blind faith in what they do to sell their RSUs. :twisted:
I understand people stretch here beyond 3X. I'm trying to avoid that, largely due to being a "one tech income" and that one tech income being mine and knowing that I tend to change jobs often and that I'd like to take a few years when I work part time (/consult) to see my children grow up. I would go crazy if I was a SAHM though so hopefully I will always be earning some income.

We will never be stable income in 500-700k range. I have two family friends where the woman doesn't work and the husbands are engineers. Their homes were purchased for $800k (in 2009) and $1.2M (in 2018) so the fact that I'm considering $1.6M+ is probably insane.

My "luck" is that my stock is about $450k in semi diversified investments (though I have about $100k in Apple and $70k in Amazon now that their value has gone up so much!) and about $300k in my company stock (I sell my RSU on vest, which was unlucky, since I lost out on a lot of gains) and play Vegas on my ESPP, so most of that is ESPP. But I'm not getting RSU grants like an engineer would, my grant was worth $50k a year about to start, which isn't bad, but I also sold the RSU on vest. But my $900k in stock is about $700k too risky and I should prob sell off some of that anyway. I'm just waiting for a down year so I don't have to pay 40% on capital gains.

Does it make sense to do a $1M downpayment on a $1.6M-$2M house? My thought is it's better to do 20%, get a 2.7% 30 year fixed, and if I happen to have a bad year or two that's when I sell off some stock to cover the gap (my cap gains rate would go down a bit, maybe even to 25% from 40%.) It doesn't seem to make that much sense to sell a bunch of stock now when a chunk of it will lose 40% on sale? Then again, I'm not diversified enough and I should prob sell some of it anyway.

In the next year if I sell RSU on vest I should have another $500k-$700k after tax, and I *could* put this to down payment or I could put into index funds as I'm trying to get to a fairly simple portfolio my CFP recommended, and need to get more in international and bonds.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
jarjarM
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Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

hereverycentcounts wrote: Thu Sep 03, 2020 12:51 pm
jarjarM wrote: Thu Sep 03, 2020 3:23 am In the valley, plenty of folks stretch the income to mortgage ratio beyond the recommended 3X. I think if your OTE is stable at $250K between the dual income and you have $1M downpayment, then you can think about that $2M house. Otherwise, keep renting. Most of the people I know who recently purchased $2+M house generally have stable income in the $500-$700k range (so 1 E6/L6 FB/GOOG engineer with a secondary supplemental income or 2 E4/L4 income) with some good RSUs vested ~3-5 years ago and never sold. It's about luck too as many of them got too busy or just have too much blind faith in what they do to sell their RSUs. :twisted:
I understand people stretch here beyond 3X. I'm trying to avoid that, largely due to being a "one tech income" and that one tech income being mine and knowing that I tend to change jobs often and that I'd like to take a few years when I work part time (/consult) to see my children grow up. I would go crazy if I was a SAHM though so hopefully I will always be earning some income.

We will never be stable income in 500-700k range. I have two family friends where the woman doesn't work and the husbands are engineers. Their homes were purchased for $800k (in 2009) and $1.2M (in 2018) so the fact that I'm considering $1.6M+ is probably insane.

My "luck" is that my stock is about $450k in semi diversified investments (though I have about $100k in Apple and $70k in Amazon now that their value has gone up so much!) and about $300k in my company stock (I sell my RSU on vest, which was unlucky, since I lost out on a lot of gains) and play Vegas on my ESPP, so most of that is ESPP. But I'm not getting RSU grants like an engineer would, my grant was worth $50k a year about to start, which isn't bad, but I also sold the RSU on vest. But my $900k in stock is about $700k too risky and I should prob sell off some of that anyway. I'm just waiting for a down year so I don't have to pay 40% on capital gains.

Does it make sense to do a $1M downpayment on a $1.6M-$2M house? My thought is it's better to do 20%, get a 2.7% 30 year fixed, and if I happen to have a bad year or two that's when I sell off some stock to cover the gap (my cap gains rate would go down a bit, maybe even to 25% from 40%.) It doesn't seem to make that much sense to sell a bunch of stock now when a chunk of it will lose 40% on sale? Then again, I'm not diversified enough and I should prob sell some of it anyway.

In the next year if I sell RSU on vest I should have another $500k-$700k after tax, and I *could* put this to down payment or I could put into index funds as I'm trying to get to a fairly simple portfolio my CFP recommended, and need to get more in international and bonds.
Personally, given how low the interest rate is, I won't put $1M down payment but rather 20% ($400+K). But you should have enough in emergency fund and other investments for unforeseen event as other have mentioned, especially given the fact that your family only have 1 high income.

When we purchase our current home, we have enough on the investment to pay off the mortgage if necessary and also can get by (barely) with 1 income only (for a dual income family). But we're usually a bit conservative. In your situation, I think having that $1M in investment after 20% down payment will ease some stress and a very healthy emergency fund to account for single high income should help. So a few more years of renting should help. In my view, bay area SFH price will be plateau for a while after this wave of covid-19 induced craziness subside. Good luck.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

onourway wrote: Thu Sep 03, 2020 5:51 am I would re-evaluate your options as to what’s really available and what’s really acceptable to you in the 1-1.5m range. Maybe they aren’t your “forever” house right now, but I suspect there has to be quite a bit available that is considerably better than the apartment you are currently in for $2500. With your kind of income, the house doesn’t have to be perfect today. Try to find something that has potential, and update it to your liking over time. This keeps your mortgage relatively affordable, and if and when you continue to have big windfalls, you update it incrementally.

If you want to own, I think you certainly can and should do so, but in your market, it’s going to require flexibility on your end.
I feel like buying requires a good lot (flat so we can build more later and big enough, 7000-8000 sq ft) on a good street in a decent school district (our target area is like a 5-6/10 for the schools.)

If we decide we will settle for something not that great (our $2500 1br is actually really nice at 800 sq ft in a super awesome area, but we just need as second bedroom with both of us working from home with 2 kids) -- so let's say we buy something we dislike that won't grow with us, 1-1.5M now, get the 2.7% 30 year fixed, and in 5 years we sell it and upgrade. At that point, maybe the value has gone up... but value of everything else then has gone up too...

1.5M in 5 years, at 7% YoY = $2.1M, or $600k in additional equity for $300k down. That's not bad!!

But... the $2M house we want to buy is also going up at 7%, so it is worth $2.8M. We need $560,000 for a 20% down payment, vs $400k, plus our mortgage is higher because rates are prob higher than 2.7% (though who knows) and it's on a bigger amount.

Isn't it better to buy the $2M (or $1.8M) house now vs buy something smaller and buy the bigger house in 5 years?

I do get there is some value in investing the downpayment different $100k in the market, but if that goes up 7% a year for 5 years, that's worth only $140,000. But that is taxed at cap gains rate, so it's worth $124k. So with the $1.5M house, you put in $300k, and you've "made" $124k+$600k = $724k.

You have $724k in 5 years and want to buy a $2.8M house because that $2M house today is now $2.8M. So you put down $560k for a downpayment, and have $164 left over. Does that make up for the additional expense of a higher interest rate in 5 years on a $2.24M loan, vs 2.7% on a $1.6M loan?

Am I missing something?

The smart thing is to buy the $1.5M house and never upgrade, but if you say buy a "starter home" now and upgrade later, I don't get how the math works?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

MostlyABogleHead wrote: Thu Sep 03, 2020 7:10 am Another way to think about your income is to remove stock appreciation and initial stock grant from the equation. This will put in perspective on how much you are actually making assuming zero growth in stocks and you not able to move every 4 years and get bump in salary due to initial stock grants. With kids it’s harder to move jobs and your priorities will shift away from being fully career focussed to include other more important things in life.

I live in the Bay Area. Based on the income information that you have given IMO renting is a better option for you at this time. You will eventually be able to make a better decision on buying a house once the constraints on child care goes away and higher savings numbers allow you to reduce your risk of becoming house poor. By renting you will reduce the pressure of the need to earn a lot of money just to pay the mortgage.
This is also what I'm thinking, but at this point we also want a comfortable (nice-ish) home so that's going to be $6000 a month. The good news is that with that $6000 a month we can live near my in laws who provide free part time childcare (and my husband who works part time does the other half of it.)

I am worried about forever being priced out of buying. I don't see my income increasing substantially. I think I'm probably at the top of my earnings right now. My husband could at some point get a full time job and make more, but he doesn't seem super motivated to do that (he's really smart, way smarter than I am, and could get a well-paid job, but he just would need to try -- I'm not pushing him to do that until after all of our kids are in school.)

It's just interest rates are so low right now it's hard to not buy a 2.7% 30 year fixed. I feel like over time it will make sense.

I agree to think about my income as my initial grant. I seem to be getting refreshes that get me back to that more or less. I have no idea what I'm worth at a different company. I think if I stay in public tech with RSU I can prob maintain at this level, but I'm not 100% confident I can get hired elsewhere.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Tingting1013
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Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

DiMAn0684 wrote: Thu Sep 03, 2020 12:42 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm
hereverycentcounts wrote: Wed Sep 02, 2020 9:52 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:49 pm

From what I have seen on this forum people usually recommend buying a house that's 3x annual income tops. Based on the numbers you have presented your family is not at that level for $2 million home yet, hence that comment above.
I understand that, but I also am trying to get a sense for if my specific situation changes that equation at all. Maybe it doesn't. But I've saved a decent amount and my RSU is worth a lot right now. I am at about $250k OTE if you include my original grant value, it has gone up to about $600k-$800k for a year or two, but will be back in $250k range soon. This year our gross will be about $700k.

But it's just not possible to consistently make $600k a year. So I guess we can never buy a home?

I think we will prob end up doing a $6000 a month rental as that's what houses cost to rent where we want to live. Seems like a waste of money but maybe it isn't.
More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
I imagine people / businesses you have to hire to do the maintenance will ask for (a lot?) more money to do the same work on a 2M home in VHCOL area than on a comparable $500k home elsewhere. They can reasonably assume that one has the means to pay more for their work if they live in a $2M home.
This is not just a hypothetical for me. I live in a $2M house in the Bay Area.

I pay $2,500/yr for landscaping (including tree trimming) and $200/yr for plumbing maintenance (water heater, backflow prevention, etc.)

How does this compare to where you live?

I purchased the house newly renovated so no appliances or roof needed (and probably no replacements for extent of time that I will spend in the house).
Last edited by Tingting1013 on Thu Sep 03, 2020 1:12 pm, edited 1 time in total.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

delamer wrote: Thu Sep 03, 2020 11:34 am Have you actually talked to a mortgage broker to find out how much mortgage you can qualify for, based on a 20% downpayment?

Also, something to consider is the your childcare situation. Your in-laws are at an age when unexpected health issues crop up. If they were unavailable to help you, then what?

And if you really want to cut back your hours in a few years, that needs to fit into your plan.
We are qualified for $2M loan with major bank at 2.7% 30 year fixed (that includes a customer relationship discount.)

I don't actually want a $2M house, we are looking at $1.7M-$1.9M.

Cutting back my hours in a few years may or may not happen. I want it to be a possibility. I feel like no job is secure these days anyway, so everyone should plan for a few lower earning years.

Childcare situation -- totally agree. Though my husband doesn't -- but when I'm planning I mostly consider his income moot. He would become SAHD if needed, so we'd lose that $90k. If that happens I can probably pick up a second job. It would suck, but I'd do it. MIL is 66 and still working and in good health and will be retiring soon and wants to watch grandkids (I don't ask them to do this, they actually enjoy it. My mom wouldn't want to help with childcare so I'd never ask her!)
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

ray.james wrote: Thu Sep 03, 2020 12:14 pm I presume this is Bay area?

Its possible it could all work out but why take that more risk when you are in happy place. You do not need 600k every year to buy but more wealth like 1-2M in investments after housing down payment will reduce the risk. I believe this is what folks mean to rent a few more years. With property taxes, you are looking at 7-8K in payments. Can you choose a different great town where 1.5M is enough for your dream house? Rents have been falling all over the place. The minute fed raises rates, house prices will fall. This happened in 2018. I am not talking about a housing recession but subtle 10% drops. It is always cheaper to get lower tax base on the house.

some other things to keep in mind.
Are you planning more kids? If so be aware of rising childcare costs.
You are the main earner. What happens if you choose to take a break due to something like ACL/carpal or for kids.
Yes Bay Area.

The options are move to a house rental $6000 a month near our in laws for free child care, buy a $1.5M house that we don't like, or buy something we want to stay in 30+ years that is $1.9M. We can't stay in our 1br rental much longer, both because there will be a 2nd kid in January, and also because with COVID his parents can't get to us (they don't drive and can't take public transit) so we have to move closer to them. I think it's a good forcing function to get us out of the 1br. We are in a super great area and are sad to leave it though.

More kids? Maybe 1 more. I'm turning 37 this year. If in laws can no longer help with childcare, my husband will quit work for a few years and become a SAHD. We will lose that $90k in come for a few years. His job is quite flexible though so it's possible he could work something out to reduce hours/pay/responsibility and keep some of that. Or he becomes a SAHD and I pick up a second job. If I end up disabled, then we're f'd. I have disability insurance through work, but that wouldn't be enough. We'd have to sell, maybe at a loss, and move somewhere cheaper.

Does the $1M-$2M in investments have to be AFTER tax? With 40% cap gains rates, then I'd need a lot more...
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
onourway
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Re: How Much House Can We Afford in HCOL Area?

Post by onourway »

hereverycentcounts wrote: Thu Sep 03, 2020 1:01 pm
onourway wrote: Thu Sep 03, 2020 5:51 am I would re-evaluate your options as to what’s really available and what’s really acceptable to you in the 1-1.5m range. Maybe they aren’t your “forever” house right now, but I suspect there has to be quite a bit available that is considerably better than the apartment you are currently in for $2500. With your kind of income, the house doesn’t have to be perfect today. Try to find something that has potential, and update it to your liking over time. This keeps your mortgage relatively affordable, and if and when you continue to have big windfalls, you update it incrementally.

If you want to own, I think you certainly can and should do so, but in your market, it’s going to require flexibility on your end.
I feel like buying requires a good lot (flat so we can build more later and big enough, 7000-8000 sq ft) on a good street in a decent school district (our target area is like a 5-6/10 for the schools.)

If we decide we will settle for something not that great (our $2500 1br is actually really nice at 800 sq ft in a super awesome area, but we just need as second bedroom with both of us working from home with 2 kids) -- so let's say we buy something we dislike that won't grow with us, 1-1.5M now, get the 2.7% 30 year fixed, and in 5 years we sell it and upgrade. At that point, maybe the value has gone up... but value of everything else then has gone up too...

1.5M in 5 years, at 7% YoY = $2.1M, or $600k in additional equity for $300k down. That's not bad!!

But... the $2M house we want to buy is also going up at 7%, so it is worth $2.8M. We need $560,000 for a 20% down payment, vs $400k, plus our mortgage is higher because rates are prob higher than 2.7% (though who knows) and it's on a bigger amount.

Isn't it better to buy the $2M (or $1.8M) house now vs buy something smaller and buy the bigger house in 5 years?

I do get there is some value in investing the downpayment different $100k in the market, but if that goes up 7% a year for 5 years, that's worth only $140,000. But that is taxed at cap gains rate, so it's worth $124k. So with the $1.5M house, you put in $300k, and you've "made" $124k+$600k = $724k.

You have $724k in 5 years and want to buy a $2.8M house because that $2M house today is now $2.8M. So you put down $560k for a downpayment, and have $164 left over. Does that make up for the additional expense of a higher interest rate in 5 years on a $2.24M loan, vs 2.7% on a $1.6M loan?

Am I missing something?

The smart thing is to buy the $1.5M house and never upgrade, but if you say buy a "starter home" now and upgrade later, I don't get how the math works?
I think you are stretching to assume that the most recent appreciation will continue at a linear pace forever. It also really sounds like you are trying to justify a much nicer home or location than you can probably afford.

I have family who rented in the Bay area for nearly 20 years. Recently they finally purchased - and while they had to expand their search area beyond where they’d prefer, they ended up with a beautiful move-in ready home for well under $1M. They exist.
supalong52
Posts: 305
Joined: Tue Feb 09, 2010 1:51 pm

Re: How Much House Can We Afford in HCOL Area?

Post by supalong52 »

Are you planning on staying in the Bay Area permanently, i.e., you have immutable ties to the area or do you just work there? I just worked there for 12 years and always felt priced out even though we made high six figures at the peak. We fled in 2018 and could never ever see ourselves moving back. We still have some family there. We're enjoying much better weather in So Cal (cooler summer, warmer winter) and our 2800 sq ft house was under a million.
jarjarM
Posts: 276
Joined: Mon Jul 16, 2018 1:21 pm

Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

hereverycentcounts wrote: Thu Sep 03, 2020 1:14 pm
ray.james wrote: Thu Sep 03, 2020 12:14 pm I presume this is Bay area?

Its possible it could all work out but why take that more risk when you are in happy place. You do not need 600k every year to buy but more wealth like 1-2M in investments after housing down payment will reduce the risk. I believe this is what folks mean to rent a few more years. With property taxes, you are looking at 7-8K in payments. Can you choose a different great town where 1.5M is enough for your dream house? Rents have been falling all over the place. The minute fed raises rates, house prices will fall. This happened in 2018. I am not talking about a housing recession but subtle 10% drops. It is always cheaper to get lower tax base on the house.

some other things to keep in mind.
Are you planning more kids? If so be aware of rising childcare costs.
You are the main earner. What happens if you choose to take a break due to something like ACL/carpal or for kids.
Yes Bay Area.

The options are move to a house rental $6000 a month near our in laws for free child care, buy a $1.5M house that we don't like, or buy something we want to stay in 30+ years that is $1.9M. We can't stay in our 1br rental much longer, both because there will be a 2nd kid in January, and also because with COVID his parents can't get to us (they don't drive and can't take public transit) so we have to move closer to them. I think it's a good forcing function to get us out of the 1br. We are in a super great area and are sad to leave it though.

More kids? Maybe 1 more. I'm turning 37 this year. If in laws can no longer help with childcare, my husband will quit work for a few years and become a SAHD. We will lose that $90k in come for a few years. His job is quite flexible though so it's possible he could work something out to reduce hours/pay/responsibility and keep some of that. Or he becomes a SAHD and I pick up a second job. If I end up disabled, then we're f'd. I have disability insurance through work, but that wouldn't be enough. We'd have to sell, maybe at a loss, and move somewhere cheaper.

Does the $1M-$2M in investments have to be AFTER tax? With 40% cap gains rates, then I'd need a lot more...
It doesn't have to be after tax, since if you need to pull them in that emergency situation, your income will be lower (or will be lower after the initial year) so you won't be hit with 40% cap gain the whole time. Honestly, if you want to push for a $1.5-$1.7M house I think it's doable. Have you thought about moving slightly more inland or on the other side of the bay? For $1.5 - $1.7M, you can get a house with reasonable good school district and large lot (8000+). It just means longer commute after covid-19.

For example.
https://www.redfin.com/CA/Fremont/20-Ti ... me/2039363
Last edited by jarjarM on Thu Sep 03, 2020 1:24 pm, edited 1 time in total.
random_walker_77
Posts: 1179
Joined: Tue May 21, 2013 8:49 pm

Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

DiMAn0684 wrote: Thu Sep 03, 2020 12:42 pm I imagine people / businesses you have to hire to do the maintenance will ask for (a lot?) more money to do the same work on a 2M home in VHCOL area than on a comparable $500k home elsewhere. They can reasonably assume that one has the means to pay more for their work if they live in a $2M home.
Sure, that's how it works in your town, and in my town, and to a lesser extent in the bay area. If workers go to the part of town w/ the really plush homes, you can expect they're going to quote more. But here's the problem, you're thinking that a 2M home is a really nice house. In the bay area, that'd be the homes in Atherton or Los Altos. The 2M house here is really a 250K house that's been plopped down on a 1.75M lot. Consider the mental picture you might have of a 2M home, and then check out the pictures on these random listings in San Mateo, CA.

1.1M pre-foreclosure: 2bd/1ba 1100 ft^2 on a 4200 ft^2 lot, built in 1918
https://www.zillow.com/homedetails/509- ... 2194_zpid/

1.6M: 3bd/2ba 1700ft^2 on a 5000ft^2 lot. Built in 1940
https://www.zillow.com/homedetails/1506 ... 8696_zpid/

2M: 4bd/3ba 2500 ft^2 on a 4700 ft^2 lot. Built in 1941
https://www.zillow.com/homedetails/1011 ... 3493_zpid/

Yes, the labor is expensive because everyone has high costs to find a place to live in commuting distance. But I challenge you to look at these pictures and again state that service workers are likely to add a wealth surcharge when they drive up to these properties. Instead, they'll go by address. If your address is Palo Alto, Los Altos, etc, then you've clearly paid a lot to live there.

Here's a really nice property that emphasizes my point that it's all about the land. Here's a 2.4M listing in Los Altos that's just a 2bd/1ba 900 sq ft. Clearly, it's a nice little house, but the only reason it's 2.4M is because it's a Los Altos address, and 7000ft^2 of land there is just plain expensive.

https://www.zillow.com/homedetails/441- ... 2614_zpid/
onourway
Posts: 2663
Joined: Thu Dec 08, 2016 3:39 pm

Re: How Much House Can We Afford in HCOL Area?

Post by onourway »

hereverycentcounts wrote: Thu Sep 03, 2020 1:14 pm We can't stay in our 1br rental much longer, both because there will be a 2nd kid in January, and also because with COVID his parents can't get to us (they don't drive and can't take public transit) so we have to move closer to them.
This seems to be the crux of the issue that was not put so plainly before. You need his parents for child care, thus you need to live one of the very expensive areas.

Seems like you need to pick one or the other. Rent and be close. Own and be further out.
jarjarM
Posts: 276
Joined: Mon Jul 16, 2018 1:21 pm

Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

random_walker_77 wrote: Thu Sep 03, 2020 1:24 pm
DiMAn0684 wrote: Thu Sep 03, 2020 12:42 pm I imagine people / businesses you have to hire to do the maintenance will ask for (a lot?) more money to do the same work on a 2M home in VHCOL area than on a comparable $500k home elsewhere. They can reasonably assume that one has the means to pay more for their work if they live in a $2M home.
Sure, that's how it works in your town, and in my town, and to a lesser extent in the bay area. If workers go to the part of town w/ the really plush homes, you can expect they're going to quote more. But here's the problem, you're thinking that a 2M home is a really nice house. In the bay area, that'd be the homes in Atherton or Los Altos. The 2M house here is really a 250K house that's been plopped down on a 1.75M lot. Consider the mental picture you might have of a 2M home, and then check out the pictures on these random listings in San Mateo, CA.

1.1M pre-foreclosure: 2bd/1ba 1100 ft^2 on a 4200 ft^2 lot, built in 1918
https://www.zillow.com/homedetails/509- ... 2194_zpid/

1.6M: 3bd/2ba 1700ft^2 on a 5000ft^2 lot. Built in 1940
https://www.zillow.com/homedetails/1506 ... 8696_zpid/

2M: 4bd/3ba 2500 ft^2 on a 4700 ft^2 lot. Built in 1941
https://www.zillow.com/homedetails/1011 ... 3493_zpid/

Yes, the labor is expensive because everyone has high costs to find a place to live in commuting distance. But I challenge you to look at these pictures and again state that service workers are likely to add a wealth surcharge when they drive up to these properties. Instead, they'll go by address. If your address is Palo Alto, Los Altos, etc, then you've clearly paid a lot to live there.

Here's a really nice property that emphasizes my point that it's all about the land. Here's a 2.4M listing in Los Altos that's just a 2bd/1ba 900 sq ft. Clearly, it's a nice little house, but the only reason it's 2.4M is because it's a Los Altos address, and 7000ft^2 of land there is just plain expensive.

https://www.zillow.com/homedetails/441- ... 2614_zpid/
So very true, cost is really zip code dependent. A 4000 sq ft house in Livermore is cheaper than that Los Altos 900 sq ft house. I honestly don't know why so many people live here and pay insane $$$ for subpar standard of living :oops: Of course, I count myself and DW are those many people.
Tingting1013
Posts: 392
Joined: Mon Aug 24, 2020 5:44 pm

Re: How Much House Can We Afford in HCOL Area?

Post by Tingting1013 »

jarjarM wrote: Thu Sep 03, 2020 1:29 pm So very true, cost is really zip code dependent. A 4000 sq ft house in Livermore is cheaper than that Los Altos 900 sq ft house. I honestly don't know why so many people live here and pay insane $$$ for subpar standard of living :oops: Of course, I count myself and DW are those many people.
The most expensive areas are on the Peninsula, no coincidence as this is also the area with the highest job optionality with equal commute times into the city, South Bay, and East Bay.

Will COVID change all that? The $1000/sqft question.
Last edited by Tingting1013 on Thu Sep 03, 2020 1:32 pm, edited 1 time in total.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

jarjarM wrote: Thu Sep 03, 2020 1:22 pm
hereverycentcounts wrote: Thu Sep 03, 2020 1:14 pm
ray.james wrote: Thu Sep 03, 2020 12:14 pm I presume this is Bay area?

Its possible it could all work out but why take that more risk when you are in happy place. You do not need 600k every year to buy but more wealth like 1-2M in investments after housing down payment will reduce the risk. I believe this is what folks mean to rent a few more years. With property taxes, you are looking at 7-8K in payments. Can you choose a different great town where 1.5M is enough for your dream house? Rents have been falling all over the place. The minute fed raises rates, house prices will fall. This happened in 2018. I am not talking about a housing recession but subtle 10% drops. It is always cheaper to get lower tax base on the house.

some other things to keep in mind.
Are you planning more kids? If so be aware of rising childcare costs.
You are the main earner. What happens if you choose to take a break due to something like ACL/carpal or for kids.
Yes Bay Area.

The options are move to a house rental $6000 a month near our in laws for free child care, buy a $1.5M house that we don't like, or buy something we want to stay in 30+ years that is $1.9M. We can't stay in our 1br rental much longer, both because there will be a 2nd kid in January, and also because with COVID his parents can't get to us (they don't drive and can't take public transit) so we have to move closer to them. I think it's a good forcing function to get us out of the 1br. We are in a super great area and are sad to leave it though.

More kids? Maybe 1 more. I'm turning 37 this year. If in laws can no longer help with childcare, my husband will quit work for a few years and become a SAHD. We will lose that $90k in come for a few years. His job is quite flexible though so it's possible he could work something out to reduce hours/pay/responsibility and keep some of that. Or he becomes a SAHD and I pick up a second job. If I end up disabled, then we're f'd. I have disability insurance through work, but that wouldn't be enough. We'd have to sell, maybe at a loss, and move somewhere cheaper.

Does the $1M-$2M in investments have to be AFTER tax? With 40% cap gains rates, then I'd need a lot more...
It doesn't have to be after tax, since if you need to pull them in that emergency situation, your income will be lower (or will be lower after the initial year) so you won't be hit with 40% cap gain the whole time. Honestly, if you want to push for a $1.5-$1.7M house I think it's doable. Have you thought about moving slightly more inland or on the other side of the bay? For $1.5 - $1.7M, you can get a house with reasonable good school district and large lot (8000+). It just means longer commute after covid-19.

For example.
https://www.redfin.com/CA/Fremont/20-Ti ... me/2039363
We've talked about it. But then we'd have to pay like $4000 a month for childcare because his parents live on the west side of the bay. And we don't like the East Bay. And my commute (if I have to commute again) wouldn't be great. Would rather rent where we want to be than buy somewhere we don't want to be.

Some people are saying sell investments now to put down larger down payment. I'm more in the camp which I think you are too is that you sell if you have a bad year so your taxes are lower on the cap gains. I figured out that I'd have about $600k if I sold all my stock today after cap gains.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

Tingting1013 wrote: Thu Sep 03, 2020 1:32 pm
jarjarM wrote: Thu Sep 03, 2020 1:29 pm So very true, cost is really zip code dependent. A 4000 sq ft house in Livermore is cheaper than that Los Altos 900 sq ft house. I honestly don't know why so many people live here and pay insane $$$ for subpar standard of living :oops: Of course, I count myself and DW are those many people.
The most expensive areas are on the Peninsula, no coincidence as this is also the area with the highest job optionality with equal commute times into the city, South Bay, and East Bay.

Will COVID change all that? The $1000/sqft question.
Hah. Exactly. I hate commuting (who doesn't) but with kids it's a deal breaker to have a long commute. As of now my "prior to covid" commute in rush hour was 45 minutes. That's about the max I can handle. I need to be able to work anywhere from SF to SJ in next 30 years. Unless I can WF forever, in which case, it doesn't matter. But who knows.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

jarjarM wrote: Thu Sep 03, 2020 1:29 pm
random_walker_77 wrote: Thu Sep 03, 2020 1:24 pm
DiMAn0684 wrote: Thu Sep 03, 2020 12:42 pm I imagine people / businesses you have to hire to do the maintenance will ask for (a lot?) more money to do the same work on a 2M home in VHCOL area than on a comparable $500k home elsewhere. They can reasonably assume that one has the means to pay more for their work if they live in a $2M home.
Sure, that's how it works in your town, and in my town, and to a lesser extent in the bay area. If workers go to the part of town w/ the really plush homes, you can expect they're going to quote more. But here's the problem, you're thinking that a 2M home is a really nice house. In the bay area, that'd be the homes in Atherton or Los Altos. The 2M house here is really a 250K house that's been plopped down on a 1.75M lot. Consider the mental picture you might have of a 2M home, and then check out the pictures on these random listings in San Mateo, CA.

1.1M pre-foreclosure: 2bd/1ba 1100 ft^2 on a 4200 ft^2 lot, built in 1918
https://www.zillow.com/homedetails/509- ... 2194_zpid/

1.6M: 3bd/2ba 1700ft^2 on a 5000ft^2 lot. Built in 1940
https://www.zillow.com/homedetails/1506 ... 8696_zpid/

2M: 4bd/3ba 2500 ft^2 on a 4700 ft^2 lot. Built in 1941
https://www.zillow.com/homedetails/1011 ... 3493_zpid/

Yes, the labor is expensive because everyone has high costs to find a place to live in commuting distance. But I challenge you to look at these pictures and again state that service workers are likely to add a wealth surcharge when they drive up to these properties. Instead, they'll go by address. If your address is Palo Alto, Los Altos, etc, then you've clearly paid a lot to live there.

Here's a really nice property that emphasizes my point that it's all about the land. Here's a 2.4M listing in Los Altos that's just a 2bd/1ba 900 sq ft. Clearly, it's a nice little house, but the only reason it's 2.4M is because it's a Los Altos address, and 7000ft^2 of land there is just plain expensive.

https://www.zillow.com/homedetails/441- ... 2614_zpid/
So very true, cost is really zip code dependent. A 4000 sq ft house in Livermore is cheaper than that Los Altos 900 sq ft house. I honestly don't know why so many people live here and pay insane $$$ for subpar standard of living :oops: Of course, I count myself and DW are those many people.
We looked at a 1600 sq ft home in RWC on 6500 sq ft lot, not updated, on cute street, nothing fancy. Sold $1.7M.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

supalong52 wrote: Thu Sep 03, 2020 1:19 pm Are you planning on staying in the Bay Area permanently, i.e., you have immutable ties to the area or do you just work there? I just worked there for 12 years and always felt priced out even though we made high six figures at the peak. We fled in 2018 and could never ever see ourselves moving back. We still have some family there. We're enjoying much better weather in So Cal (cooler summer, warmer winter) and our 2800 sq ft house was under a million.
We want to stay here. It may be the worst thing we want ever, but that's what we want. Husband grew up here. I grew up on east coast, would never go back. Have been here 15 years living as cheaply as possible. We want to retire here. This is our home. (We've discussed Seattle, but I would be constantly depressed with no sun.)
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
shiftleft
Posts: 70
Joined: Thu Mar 02, 2017 6:24 pm

Re: How Much House Can We Afford in HCOL Area?

Post by shiftleft »

Sorry, I have not read the entire thread. I'm not sure if this has been mentioned, but maybe consider a 2 bedroom apartment right now? I've heard from multiple sources, that rents have fallen 20%. Sunnyvale and surrounding areas. I've heard you can get a very nice, but not luxurious, 2bed/2bath for $2400+- now.
random_walker_77
Posts: 1179
Joined: Tue May 21, 2013 8:49 pm

Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Thu Sep 03, 2020 1:37 pm
supalong52 wrote: Thu Sep 03, 2020 1:19 pm Are you planning on staying in the Bay Area permanently, i.e., you have immutable ties to the area or do you just work there? I just worked there for 12 years and always felt priced out even though we made high six figures at the peak. We fled in 2018 and could never ever see ourselves moving back. We still have some family there. We're enjoying much better weather in So Cal (cooler summer, warmer winter) and our 2800 sq ft house was under a million.
We want to stay here. It may be the worst thing we want ever, but that's what we want. Husband grew up here. I grew up on east coast, would never go back. Have been here 15 years living as cheaply as possible. We want to retire here. This is our home. (We've discussed Seattle, but I would be constantly depressed with no sun.)
Buying (either soon or in the future) is going to cost you those dreams of FIRE. If you buy now, not selling your stocks is an arbitrage bet that your returns on stocks will be better than the 2.7% on the mortgage. It also means you have more money to tap in case of trouble but, inconveniently, trouble tends to correlate with stocks going down. So you're more likely to encounter problems that might force you to liquidate some of this at the worst time when it's down. With a bigger mortgage, your monthly payment is higher so your cashflow needs are higher. I think this is the more risky move, but this option is compensated by potential wins from investment gains.

If you sell stocks now to buy the house, you're forgoing the potential benefit of stocks earning more, but also are avoiding the risk that they crash. By paying off more now, the monthly payment will be less, so your cashflow needs during a downturn won't be as high. I'd argue that this is the less risky move, but you are forgoing the chance at those investment gains.

I don't think the capital gains taxation fundamentally changes things much. I suppose it could if you can get into a much lower LTCG situation in the future (there is that 0% LTCG bracket, and assuming it doesn't go away). Maybe it's Murphy's Law, but every time I've tried to change timing to optimize for taxes, I've ended up losing.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

shiftleft wrote: Thu Sep 03, 2020 1:47 pm Sorry, I have not read the entire thread. I'm not sure if this has been mentioned, but maybe consider a 2 bedroom apartment right now? I've heard from multiple sources, that rents have fallen 20%. Sunnyvale and surrounding areas. I've heard you can get a very nice, but not luxurious, 2bed/2bath for $2400+- now.
Yes, this might make sense. Not Sunnyvale but a comparable town cost wise -- we could rent a 2br. With COVID and both of us WFH we really want a yard though.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Topic Author
hereverycentcounts
Posts: 97
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

random_walker_77 wrote: Thu Sep 03, 2020 2:03 pm
hereverycentcounts wrote: Thu Sep 03, 2020 1:37 pm
supalong52 wrote: Thu Sep 03, 2020 1:19 pm Are you planning on staying in the Bay Area permanently, i.e., you have immutable ties to the area or do you just work there? I just worked there for 12 years and always felt priced out even though we made high six figures at the peak. We fled in 2018 and could never ever see ourselves moving back. We still have some family there. We're enjoying much better weather in So Cal (cooler summer, warmer winter) and our 2800 sq ft house was under a million.
We want to stay here. It may be the worst thing we want ever, but that's what we want. Husband grew up here. I grew up on east coast, would never go back. Have been here 15 years living as cheaply as possible. We want to retire here. This is our home. (We've discussed Seattle, but I would be constantly depressed with no sun.)
Buying (either soon or in the future) is going to cost you those dreams of FIRE. If you buy now, not selling your stocks is an arbitrage bet that your returns on stocks will be better than the 2.7% on the mortgage. It also means you have more money to tap in case of trouble but, inconveniently, trouble tends to correlate with stocks going down. So you're more likely to encounter problems that might force you to liquidate some of this at the worst time when it's down. With a bigger mortgage, your monthly payment is higher so your cashflow needs are higher. I think this is the more risky move, but this option is compensated by potential wins from investment gains.

If you sell stocks now to buy the house, you're forgoing the potential benefit of stocks earning more, but also are avoiding the risk that they crash. By paying off more now, the monthly payment will be less, so your cashflow needs during a downturn won't be as high. I'd argue that this is the less risky move, but you are forgoing the chance at those investment gains.

I don't think the capital gains taxation fundamentally changes things much. I suppose it could if you can get into a much lower LTCG situation in the future (there is that 0% LTCG bracket, and assuming it doesn't go away). Maybe it's Murphy's Law, but every time I've tried to change timing to optimize for taxes, I've ended up losing.
Exactly. This is what I'm trying to figure out! Hit the nail on the head.

FIRE is not a real goal, I am just going to feel anxious about life until I save $5M and have enough to survive on without a job for a while. I prob will still work, I just want to feel financially safe so I don't have to worry about that at some point, like when I'm 45 or 50. It would be nice. It's a dream. Not a requirement. Though I would like to eventually start my own consulting business -- that can actually be quite lucrative over time but prob a few years when I'd have to build it up and make less.

I guess I'm trying to figure out what is the magic number of savings were I can buy a house and standard "how much can you afford" calculators no longer matter?
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
Lee_WSP
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Re: How Much House Can We Afford in HCOL Area?

Post by Lee_WSP »

hereverycentcounts wrote: Thu Sep 03, 2020 2:16 pm
I guess I'm trying to figure out what is the magic number of savings were I can buy a house and standard "how much can you afford" calculators no longer matter?
Buying a house on credit is a question of cash flow and job security as it's a thirty year bet in most cases.

The magic savings number is the house price plus e fund plus whatever else you want to have on hand (could be zero if you're not counting retirement accounts).
random_walker_77
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Re: How Much House Can We Afford in HCOL Area?

Post by random_walker_77 »

hereverycentcounts wrote: Thu Sep 03, 2020 2:16 pm
I guess I'm trying to figure out what is the magic number of savings were I can buy a house and standard "how much can you afford" calculators no longer matter?
I'm with Lee_WSP. It's all about cash flow. (And your tolerance for risk). Standard calculators figure that you put everything into the downpayment, with hopefully a emergency fund, but that you're basically meeting the necessary cash flow with your income. That's a shorthand rule of thumb, and you need to include your budget.

Counterexample -- let's say I've got 5M, make $30K/yr and get 100K/yr in dividends. Can I afford a 1M house? Based on price to income ratios, you can't, but in reality, of course you can. You just sell stock, get out your checkbook, and buy it outright.

You need to understand your budget, including future expenses like childcare, home repairs, car replacement etc and make sure that you can comfortably keep up with expenses, preferably with a safety margin in case there are unexpected problems (and aren't there always unexpected problems?).

If you want to buy a 1.9M house, can pay the property tax from income, and have 1.9M in the bank, then of course you _could_ buy the house, if that's what you really want to do. If you had 1.7M, given your income, I'm sure nearly anyone would agree you could get a 1.9M house. Borrowing .2M on your income -- no problem. Borrowing somewhere above 2x base income, you're going to want to look at things closer. Ultimately, it's based on your personal budget, and rules of thumb don't matter except as guideposts. I'd wager that borrowing under 2x income is no problem, and over 4x is a big 'ol caution flag.
Jags4186
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Re: How Much House Can We Afford in HCOL Area?

Post by Jags4186 »

hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
The prime question to consider is whether or not the insane real estate prices where you are are sustainable given the work from home paradigm shift we seem to be going through. That’s a question you need to determine based on your industry. If you’re in an area with a heavy manufacturing presence, it’s likely that demand for homes will remain strong as a physical presence is generally needed. If you’re in an area with a heavy tech presence, it’s currently unknown if real estate prices will be able to remain strong long term. I mean, look at NYC right now — nobody is buying and I think if people don’t need to physically return to the city...why would they?
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Watty
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Re: How Much House Can We Afford in HCOL Area?

Post by Watty »

hereverycentcounts wrote: Thu Sep 03, 2020 1:01 pm .....in a decent school district (our target area is like a 5-6/10 for the schools.)

.......
Am I missing something?
There are all sorts of problems with the 1 to 10 school ranking and there are lots of threads about picking schools that you can look up.

That said I don't think I would call a school that gets a 5 or 6 on some web site like Great Schools a "decent" school for a family that has high income and high standards. To me that would be more like "maybe acceptable" for a lower income neighborhood.

You don't need to get hung up on schools that score a 9 or 10 but to me a 7 or 8 might be more in the "decent" category.

When we have been house hunting we found that nothing beats actually visiting the schools and talking to people but that would be difficult or impossible to do during a pandemic. Online reviews are not all that useful since there will always be someone that had a problem that will give a bad review. If you know someone that lives in the area that has kids it would be good to ask them what they think of the schools. If you ask around you may be able to find a friend of a friend that has kids in those schools.
Last edited by Watty on Thu Sep 03, 2020 3:13 pm, edited 1 time in total.
hoffse
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Re: How Much House Can We Afford in HCOL Area?

Post by hoffse »

You can have anything, but you can't have everything.

With the amount you have saved up, you could buy a 4,000 sq ft house on an acre of land in the best school district in the state in the place where I live. But that would require a move outside of the Bay area. Your choice here is Bay area or a phenomenal house/lot. You can't have both.

You want to FIRE early but also want a $1.5-$2M house. Again, you can have one or the other, but probably not both.

You have also mentioned you/your husband taking your foot off the gas to watch your kids grow up... while also owning this ~$2M house or renting at $6,000/month (which is twice what I spend on my mortgage for a 5-bedroom house on an acre by the way). Again, here your choice is time with the kids or the house - you can't afford both.

I would encourage you to refocus on your real priorities here - Is it home ownership? You can afford that most any place in the country other than where you live. Is it staying in the Bay area? Then you probably need to rent. Early retirement or part time work in the Bay area? Then you probably need to keep renting a very small place. I just think you need to refocus your priorities here. Start with the things that matter most and then work your way down the list until you are priced out.
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Re: How Much House Can We Afford in HCOL Area?

Post by mak1277 »

oldfort wrote: Wed Sep 02, 2020 11:12 pm
soxfan10 wrote: Wed Sep 02, 2020 10:47 pm
oldfort wrote: Wed Sep 02, 2020 10:29 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:17 pm
oldfort wrote: Wed Sep 02, 2020 10:13 pm

$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.

Remodels are ideally capital improvements that pay for themselves.
If you want to make a semantic split between remodels and maintenance fine, but the OP should include both in the budget. Most people, especially women, aren't going to be happy with a 20 year old dated Formica kitchen in their $2M home.
I dont think thats a semantic split. Maintenance needs to be included in any discussion if a house is affordable, but that doesnt include improvements/remodels. Those are by their nature optional/life style inflation type expenses. Remodeling a kitchen is only relevant to the decision if they dont want to purchase the house without the remodel.
A useful budget needs realistic assumptions about what your future spending is likely to be. Pretending you're never going to remodel the house ever doesn't strike me as realistic for most people in the OP's financial situation.
I would never buy a house I felt obligated to remodel for at least 15-20 years. I moved into my current house in 2008, and it's kitchen is still the original from 1984 when it was built.
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Re: How Much House Can We Afford in HCOL Area?

Post by willthrill81 »

In most HCOL areas, owning doesn't make sense.

Rent until you're ready to FIRE. Then move somewhere with a lower COL. It's called geographic arbitrage, and it can work very well. The problem is that many living in HCOL areas grow accustomed to doing so and refuse to move later on. That's still possible, but it will probably cost you years of additional work if you go that route.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: How Much House Can We Afford in HCOL Area?

Post by cacophony »

random_walker_77 wrote: Thu Sep 03, 2020 1:24 pm Yes, the labor is expensive because everyone has high costs to find a place to live in commuting distance. But I challenge you to look at these pictures and again state that service workers are likely to add a wealth surcharge when they drive up to these properties. Instead, they'll go by address. If your address is Palo Alto, Los Altos, etc, then you've clearly paid a lot to live there.
If you mean that a Los Altos address house will be charged more than the exact same house relocated to Redwood City (assuming both are same distance from the repair place) then that's not the case, at least for anywhere reputable.

Also remember that people living in modest homes in expensive areas are not necessarily wealthy (well besides real estate value). Many of them just bought a long time ago and the property tax stays low due to prop 13.
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Re: How Much House Can We Afford in HCOL Area?

Post by JackoC »

Jags4186 wrote: Thu Sep 03, 2020 3:06 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
The prime question to consider is whether or not the insane real estate prices where you are are sustainable given the work from home paradigm shift we seem to be going through. That’s a question you need to determine based on your industry. If you’re in an area with a heavy manufacturing presence, it’s likely that demand for homes will remain strong as a physical presence is generally needed. If you’re in an area with a heavy tech presence, it’s currently unknown if real estate prices will be able to remain strong long term. I mean, look at NYC right now — nobody is buying and I think if people don’t need to physically return to the city...why would they?
It's highly unpredictable though. Referring to NY, expensive places have gone down in Manhattan and probably Brooklyn. It doesn't seem to be the case here less than a mile west of Manhattan in NJ. The 'paradigm shift' so far seems to be (upper income) people who specifically do not want to live in the City, not that they imagine that working from home in high paying City jobs is really sustainable. The NJ (true) suburbs, miles west of here but still easy commute to the City, are red hot real estate markets now.

Could be different in Bay Area where maybe the type or high paid work, of concepts of the industry leaders (like moving their firms out of California in some cases) could make what are already suburbs (the 'VCOL Bay Area' places so often discussed here are suburbs, anyway not city centers like SF itself let alone Manhattan) less attractive. The headlines about price drops in 'NY' are talking about high end properties in Manhattan, the polar opposite of a suburb.

I agree it's something to keep in mind though putting down massive amounts of money on a house. Another worry. :happy
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Re: How Much House Can We Afford in HCOL Area?

Post by Jags4186 »

JackoC wrote: Thu Sep 03, 2020 4:45 pm
Jags4186 wrote: Thu Sep 03, 2020 3:06 pm
hereverycentcounts wrote: Wed Sep 02, 2020 10:07 pm I don't know. I saw my good friend buy a house in 2009 -- they bought for $800k. It is now worth at least $1.7M. The house next to theirs is selling soon, will prob sell $1.9M. Will it be $4M in another 10 years? I can't imagine that, but I couldn't imagine their $800k home to be worth $1.7M, so what do I know?

Right now I have a chunk of my downpayment money in cash so that's doing nothing. If we rent, it will be scary to put that back in the market. But we kind of have to if we want to have a chance to keep up with housing prices.

Do you think $6000/month rent is reasonable?
The prime question to consider is whether or not the insane real estate prices where you are are sustainable given the work from home paradigm shift we seem to be going through. That’s a question you need to determine based on your industry. If you’re in an area with a heavy manufacturing presence, it’s likely that demand for homes will remain strong as a physical presence is generally needed. If you’re in an area with a heavy tech presence, it’s currently unknown if real estate prices will be able to remain strong long term. I mean, look at NYC right now — nobody is buying and I think if people don’t need to physically return to the city...why would they?
It's highly unpredictable though. Referring to NY, expensive places have gone down in Manhattan and probably Brooklyn. It doesn't seem to be the case here less than a mile west of Manhattan in NJ. The 'paradigm shift' so far seems to be (upper income) people who specifically do not want to live in the City, not that they imagine that working from home in high paying City jobs is really sustainable. The NJ (true) suburbs, miles west of here but still easy commute to the City, are red hot real estate markets now.

Could be different in Bay Area where maybe the type or high paid work, of concepts of the industry leaders (like moving their firms out of California in some cases) could make what are already suburbs, the 'VCOL Bay Area' places so often discussed here are suburbs. That's also different than headlines about price drops in 'NY' which are talking about high properties in Manhattan, the polar opposite of a suburb.

I agree it's something to keep in mind though putting down massive amounts of money on a house. Another worry. :happy
Of course. As someone who lives about 10 miles west of Manhattan I know all too well about the surge in prices. But I think NJ suburbs of NY are not the greatest example. While prices in NJ have certainly gone up, they still have atrociously low appreciation over the past 20 years. Of course there are a few individual towns which have had great appreciation (Hoboken, Edgewater, Montclair) but there are high class towns which really haven't seen much appreciation (Short Hills, Glen Ridge). A family friend sold their house in Short Hills in 2001 for $2 million. It just sold (with significant renovations) for $1.85 million.
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Re: How Much House Can We Afford in HCOL Area?

Post by JackoC »

oldfort wrote: Wed Sep 02, 2020 10:29 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:17 pm
oldfort wrote: Wed Sep 02, 2020 10:13 pm
Tingting1013 wrote: Wed Sep 02, 2020 10:02 pm
DiMAn0684 wrote: Wed Sep 02, 2020 9:59 pm

More experienced forum members will likely provide more details, but there're factors beyond house purchase you need to consider. For example, I've heard of 1% rule, which says that at least 1% of the home value goes towards maintenance projects. For $2 million home that's $20 thousand. If your combined income is $300-$350 thousand then $20 thousand for home maintenance alone is quite a lot.
I don’t think the 1% rule is appropriate for VHCOL. Most of the value in a $2M house in CA is in the land. The house may only be worth $500k. So I’d say annual maintenance on a $2M aka $500k house is probably $5-10k.
$5k seems low. In the Bay area, it's not hard to spend $80k on a midrange kitchen remodel.
I don’t consider a remodel “maintenance”. I am only talking about what it takes to maintain a house in its current condition. Roof, appliances, landscaping, etc.
Remodels are ideally capital improvements that pay for themselves.
If you want to make a semantic split between remodels and maintenance fine, but the OP should include both in the budget. Most people, especially women, aren't going to be happy with a 20 year old dated Formica kitchen in their $2M home.
I get that people tend to want further improve, eventually, places they already spend a lot of money on. But, in terms of a '1% rule' the distinction between maintenance and remodeling is not just semantic. 1% AIUI does not include remodeling, it's the plausible idea that median-ish $200-$300k houses require $2-$3k in repairs per year on average over time, including stuff like roof and painting. Not new kitchens or bathrooms, additions, pools etc.

The rule is plausible as generally stated for median price places. It's way too high for places which are very expensive because of land value. It also obviously depends on what condition the house is in when bought, and taste of people buying it, also the type of house. I'll give a real example for similar price but probably very different type of house than OP is looking at. Our house is worth around $2mil now, $350k 27 yrs ago when we bought it, now 120 yrs old. We've spent ~$47k on non-capital improvement (for tax purposes) in that time, the bulk of it on two exterior paintings, just after bought and just last month $15 and $18k (expensive because it requires erecting scaffolding and skilled stone repair work). I DIY'ed almost all other repairs so it would have somewhat more hiring people to do everything. Capital improvements (I record for tax basis per rules) totaled $111k, again relatively high DIY content outside the almost $60k on kitchen remodel which was all contractor. 1% per year of current value is far too high even including everything. But again I do not think this rule is intended to cover remodeling for the moderate priced houses it's intended to be applied to.

Also wood frame houses, some levels of construction particularly, will really depreciate to no value eventually. A new buyer will tear them down. That's also not in the 1%. The basic (stone/brick walls, massive wood floor construction) structure of our house will last unless/until destroyed, maybe centuries if it's lucky.
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Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

willthrill81 wrote: Thu Sep 03, 2020 4:00 pm In most HCOL areas, owning doesn't make sense.

Rent until you're ready to FIRE. Then move somewhere with a lower COL. It's called geographic arbitrage, and it can work very well. The problem is that many living in HCOL areas grow accustomed to doing so and refuse to move later on. That's still possible, but it will probably cost you years of additional work if you go that route.
It gets harder the more years one puts in for the HCOL area. Your friends, your kids' friends, social/support network are all here once that initial 10 years passes by. That's why while I seen many are renting and doing geo arbitrage, even more are throwing caution into the wind and put down $500k in down payment (LTV 75% generally gets a good deal for jumbo loan before the last 2 years of ultra low interest) for that elusive $2M SFH. Plenty of folks in the bay area are house poor and RSU poor :twisted: Even though many of them realize that once pass 45, it gets much harder to find jobs in the tech world, they plan on working 'til 60s to pay off mortgage (unless RSU goes 5-10X of course). It's a very weird dynamic :oops:

P.S. I find it interesting that every bay area real estate related thread always extends beyond 2 pages (sometimes a lot more).
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Re: How Much House Can We Afford in HCOL Area?

Post by oldfort »

hereverycentcounts wrote: Wed Sep 02, 2020 10:13 pm
oldfort wrote: Wed Sep 02, 2020 10:00 pm Forget rules about how much to spend on housing. Make a budget. It doesn't need to be exact. See what's the most you can spend on housing monthly while meeting your other goals for spending and saving.
That makes sense. I just am horrible at predicting future income. I have some mental health issues and have managed to get rehired after past job losses (always making more each time somehow) but I just don't ever feel confident in my future income -- all I can count on is what I've saved and then maybe what I'll earn in next 12 months if I am feeling mentally ok for the time being. :/

It's not like I've been out of work for extended periods of time... longest I've been out of work was 3 months after getting fired last and I went from 190k OTE to 250k OTE including RSU that is now worth 600k-800k a year... so not exactly the worst outcome there.

But now that I have a family -- and knowing my husband has no interested in a career or earning more than $90k a year (yet he also has very high house standards and won't buy anything that doesn't meet them I feel super hopeless. I don't know how to get from where I am now to where I can actually afford a house that we want to buy. Maybe it's just impossible. I keep hoping it's not...
Overall, I think rules about 3x gross income are dumb. They don't take into account how high or low your non-housing expenses are. They don't take into account whether interest rates are low or high.
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Re: How Much House Can We Afford in HCOL Area?

Post by willthrill81 »

jarjarM wrote: Thu Sep 03, 2020 6:14 pm
willthrill81 wrote: Thu Sep 03, 2020 4:00 pm In most HCOL areas, owning doesn't make sense.

Rent until you're ready to FIRE. Then move somewhere with a lower COL. It's called geographic arbitrage, and it can work very well. The problem is that many living in HCOL areas grow accustomed to doing so and refuse to move later on. That's still possible, but it will probably cost you years of additional work if you go that route.
It gets harder the more years one puts in for the HCOL area. Your friends, your kids' friends, social/support network are all here once that initial 10 years passes by. That's why while I seen many are renting and doing geo arbitrage, even more are throwing caution into the wind and put down $500k in down payment (LTV 75% generally gets a good deal for jumbo loan before the last 2 years of ultra low interest) for that elusive $2M SFH. Plenty of folks in the bay area are house poor and RSU poor :twisted: Even though many of them realize that once pass 45, it gets much harder to find jobs in the tech world, they plan on working 'til 60s to pay off mortgage (unless RSU goes 5-10X of course). It's a very weird dynamic :oops:

P.S. I find it interesting that every bay area real estate related thread always extends beyond 2 pages (sometimes a lot more).
I'm speaking as one who has visited the Bay area but never lived there that the last line of the movie War Games comes to mind.

"A strange game. The only winning move is not to play."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: How Much House Can We Afford in HCOL Area?

Post by cchrissyy »

onourway wrote: Thu Sep 03, 2020 1:24 pm
hereverycentcounts wrote: Thu Sep 03, 2020 1:14 pm We can't stay in our 1br rental much longer, both because there will be a 2nd kid in January, and also because with COVID his parents can't get to us (they don't drive and can't take public transit) so we have to move closer to them.
This seems to be the crux of the issue that was not put so plainly before. You need his parents for child care, thus you need to live one of the very expensive areas.

Seems like you need to pick one or the other. Rent and be close. Own and be further out.
Is there any chance your in laws would move?
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cchrissyy
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Re: How Much House Can We Afford in HCOL Area?

Post by cchrissyy »

hereverycentcounts wrote: Thu Sep 03, 2020 2:14 pm
shiftleft wrote: Thu Sep 03, 2020 1:47 pm Sorry, I have not read the entire thread. I'm not sure if this has been mentioned, but maybe consider a 2 bedroom apartment right now? I've heard from multiple sources, that rents have fallen 20%. Sunnyvale and surrounding areas. I've heard you can get a very nice, but not luxurious, 2bed/2bath for $2400+- now.
Yes, this might make sense. Not Sunnyvale but a comparable town cost wise -- we could rent a 2br. With COVID and both of us WFH we really want a yard though.
I think you should spring for a really good rental. get that yard. get a 3rd bedroom to be the home office. you can afford it.
revisit the buying decision in 2 years or so. i'm not just saying that for financial reasons but also because you don't know yet if you are having 2 kids or 3.
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hereverycentcounts
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Re: How Much House Can We Afford in HCOL Area?

Post by hereverycentcounts »

willthrill81 wrote: Thu Sep 03, 2020 4:00 pm In most HCOL areas, owning doesn't make sense.

Rent until you're ready to FIRE. Then move somewhere with a lower COL. It's called geographic arbitrage, and it can work very well. The problem is that many living in HCOL areas grow accustomed to doing so and refuse to move later on. That's still possible, but it will probably cost you years of additional work if you go that route.
What happens if we stay in the Bay Area when we retire? That is our plan. We want to stay here forever.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
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Re: How Much House Can We Afford in HCOL Area?

Post by joelly »

I’m still confused as to how much your take home income is?

You mentioned $260K income. If this is it, then not only you can’t afford a $2M house, but also the $6K/mo rental. Do I miss something?

You also mentioned $800K-$1M income. If this is true then why are we even talking about your affordability.
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Re: How Much House Can We Afford in HCOL Area?

Post by jarjarM »

willthrill81 wrote: Thu Sep 03, 2020 6:29 pm
I'm speaking as one who has visited the Bay area but never lived there that the last line of the movie War Games comes to mind.

"A strange game. The only winning move is not to play."
That was a good movie. I do agree that the best move is to not play. DW and I have ponder many times about moving away but we have families/friends' ties here that we aren't willing to leave just yet. Maybe a few more years of the grind and we'll change our mind.
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Watty
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Re: How Much House Can We Afford in HCOL Area?

Post by Watty »

hereverycentcounts wrote: Thu Sep 03, 2020 7:34 pm
willthrill81 wrote: Thu Sep 03, 2020 4:00 pm In most HCOL areas, owning doesn't make sense.

Rent until you're ready to FIRE. Then move somewhere with a lower COL. It's called geographic arbitrage, and it can work very well. The problem is that many living in HCOL areas grow accustomed to doing so and refuse to move later on. That's still possible, but it will probably cost you years of additional work if you go that route.
What happens if we stay in the Bay Area when we retire? That is our plan. We want to stay here forever.
You have high income so you can save a lot while you are renting. If things go well then somewhere along the way you can buy a house for cash.
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