VHCOL area housing decision / lifecycle planning for single professional

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sphinx2020
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VHCOL area housing decision / lifecycle planning for single professional

Post by sphinx2020 »

Hi Bogleheads. I'm a long time lurker here finally posting for the first time, so please excuse me if I am posting in the wrong forum. My question touches on lifecycle investing issues, but I think this is the better forum for my question.

I wanted to get some opinions on the best mortgage/housing decision for a single person living in southern California.

My situation:
I'm in my mid-30s and have settled down into my career, and am giving serious thought to buy a home. I am ready to move out of my tiny 1-bedroom apartment. Putting a large chunk of my net worth into a house is somewhat daunting, and I'm mildly afraid of becoming cash-poor house-rich, but also would like to lock-in my housing expenses and have a hedge against inflation since I plan to stay here for the long term. I do not see a house as an investment, rather as a place to live with a few non-financial benefits.

My assets:
Cash (CDs + checking + savings): $220k
401K / Roth: $600k
$0 debt.
Salary: $145k, plus bonus of $65-$100k. I have consistently received my bonus for multiple years in a row and work in a highly profitable business unit at my company, with good job security and promotion opportunities within my division.

Assuming I buy a home for $962,000 with 20% down at 3.0% for 30 years, I estimate my monthly PITI would be a 36% of my base salary. This would require a downpayment of ~$192,000, which along with closing costs would leave me with a small cash cushion (but large reserves in my retirement accounts).

I see several ways to proceed:
1) buy a home today with 20% down and be house-rich cash-poor for 1-2 years until I rebuild my savings,
2) put less than 20% down with PMI or a HELOC, or
3) wait 12-24 months, save more cash, and buy with 20% down

For #2, I am finding that lenders will not finance a jumbo loan in this market with less than 20% down.

For #3, I predict housing prices will continue to rise due to limited supply and demographic trends, not to mention property tax basis benefits from Prop 13. With a 30-year FRM this is the most conservative option and eliminates all interest-rate and refinance risk. I suspect this is the option most bogleheads would recommend. However, I also I don't like the idea of paying principal into an illiquid asset that is difficult, if not impossible to withdraw from and would much rather invest in a diversified portfolio of stocks and bonds. The average mortgage duration is 7-10 years, so it's not likely I'm going to get the inflation protection from a fixed-rate mortgage for a full 30 years if I ever sold the property.

Would a 7 or 10 year interest-only mortgage be a good option for someone in my position?

In another year or two I could put $250k down on a $1mm property and hit the sweet spot in terms of interest deductibility. The benefit of low monthly payments would allow me to build a large portfolio in a taxable account while avoiding a concentration of risk in a property. If I lost my job or needed to move, I could rent out the house and be cash-flow positive. The downside to this approach would be that it would only provide inflation protection for 7-10 years; after the rate reset I would need to refinance or begin paying mandatory amortization. In the worst case, if there is a huge bout of inflation and rates rise to 8-9%, I could sell the house or use my taxable investments to repay principal.

Am I crazy to be thinking this way? Which lenders even offer interest-only mortgages to someone with my profile? All the offerings I have seen are tailored to HNW individuals huge deposit balances and relationship discounts.
DarkHelmetII
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by DarkHelmetII »

My opinion: rent a larger condo / apartment / townhome, or single family house. Whatever it is, just rent.

About hedge against inflation, for various reasons housing may not be exactly the hedge you are looking for. If you are truly concerned about hyper-inflation scenario consider some smallish allocation of gold. Inflation is a national / global phenomena that may or may not follow the price movements of housing in your specific selected neighborhood.
fortunefavored
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by fortunefavored »

It will be very hard to beat a 30 year conventional with the government subsidizing and underwriting them.

You don't mention if you have any potential family support/back up if necessary - this would affect your risk profile.

Also be cautious on the reliability of your bonus. Brief story time: During the 2009 recession I worked for a company that benefited from the recession. All time record high sales/profits every quarter. However the macro environment was so punishing that the stock price dropped 75% and all bonuses were suspended "just in case things get worse."

You also mention "upward trajectory" on your career - how upward? Double your salary in 5 years? 10x?

36% of your base salary is not too extreme in VHCOL areas especially if your salary will be increasing rapidly. Plus, given how hot the SFH market is right now, it might take you a year or two to even find a place you want to buy!

Also re: rent vs. buy, it's a lifestyle decision only you can calculate. How rooted are you in the area, if you have any plans of finding a spouse in the next 5 to 10 years, etc.
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Watty
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Watty »

sphinx2020 wrote: Tue Sep 29, 2020 12:39 am My assets:
Cash (CDs + checking + savings): $220k
401K / Roth: $600k
$0 debt.
Salary: $145k, plus bonus of $65-$100k. I have consistently received my bonus for multiple years in a row
Your net worth is not real high for having had that income for a while. If there is not anything else going on like you had huge student loans or an expensive divorce you might take a hard look at your budget and lifestyle to make sure that you are not spending too much.

sphinx2020 wrote: Tue Sep 29, 2020 12:39 am I'm in my mid-30s....
One problem is that if you get a 30 year mortgage then it will not be paid off until you are in your mid 60s. Even if you want to work that long the chances of you being able to keep your job and keep getting the bonuses are likely not all that good.

If you save up a few more years then that would also impact when a 30 year mortgage would be paid off so it might not be paid off until you are almost 70.

Buying the million dollar house you want is too much a stretch both with the downpayment and the monthly payment. It is not even close.

I think that the only choice you have is to either buy a much less expensive house or maybe a condo or townhouse instead. You could also rent and save for a very long time until you have a huge down payment so you could buy the million dollar house with a 15 year mortgage.

In the meantime I would suggest renting a nicer apartment or townhouse or house so that you would not feel so much pressure to buy a house.

If you keep saving for another five years or so then a lot could change with your career, the housing market, or your life.

I did not play with the numbers but I would think that buy the time you are around 50 you would also have the option of moving to a much lower cost of living area and retiring very early. That might not sound very appealing to you now when you have been working another 15 years that might sound pretty good.
sphinx2020 wrote: Tue Sep 29, 2020 12:39 am For #3, I predict housing prices will continue to rise due to limited supply and demographic trends, not to mention property tax basis benefits from Prop 13. With a 30-year FRM this is the most conservative option and eliminates all interest-rate and refinance risk. I suspect this is the option most bogleheads would recommend. However, I also I don't like the idea of paying principal into an illiquid asset that is difficult, if not impossible to withdraw from and would much rather invest in a diversified portfolio of stocks and bonds. The average mortgage duration is 7-10 years, so it's not likely I'm going to get the inflation protection from a fixed-rate mortgage for a full 30 years if I ever sold the property.
Housing prices do regularly go down too and a 20 to 30 percent drop is not exceptional. Part(most?) of the reason that housing prices are so high not is that people can get 30 year mortgages for less than 3% which is historically very unusual. It was not all that long ago that a 6% mortgage was pretty good. It would not be surprising if house prices are slammed if(when!) interest rates go up.
sphinx2020 wrote: Tue Sep 29, 2020 12:39 am Would a 7 or 10 year interest-only mortgage be a good option for someone in my position?
That is a terrible idea and likely a red flag that you would be overextending yourself.

When people start using interest only loans that can be sign that things are real bubbly.
Last edited by Watty on Tue Sep 29, 2020 11:36 am, edited 1 time in total.
bikesandbeers
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by bikesandbeers »

I live in a $1million plus SFH in VHCOL area. If I were in you position, I would look for a nice 2 bedroom condo in the 500-600k range. They are out there. We had a 2 bedroom condo before 2 kids and it was plenty of space. The equity we built there helped get us into SFH without over extending
carolinaman
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by carolinaman »

Another thought. If you wait and save more, housing prices may continue to rise and offset your additional savings.

The suggestion to either rent a larger apartment or buy a nice 2 BR condo instead are good but some people prefer SFHs. If you still feel strongly about a SFH, I think you are in a good enough position to do it. When we bought our 2nd and forever home, finances were really tight for a while but after 5 years or so, inflation and salary increases caught up and our finances were more comfortable.

Best wishes in your decision.
Tingting1013
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Tingting1013 »

Watty wrote: Tue Sep 29, 2020 9:20 am
sphinx2020 wrote: Tue Sep 29, 2020 12:39 am I'm in my mid-30s....
One problem is that if you get a 30 year mortgage then it will not be paid off until you are in your mid 60s. Even if you want to work that long the chances of you being able to keep your job and keep getting the bonuses are likely not all that good.

If you save up a few more years then that would also impact when a 30 year mortgage would be paid off so it might not be paid off until you are almost 70.
Your comment makes it seem like the house would be tying OP to their job for as long as they own it but that makes very little sense.

If OP stays in the house for 30 years (which I think is unlikely given their lifestage), by year 15-20 they would have enough accumulated in their outside accounts to pay off the mortgage if they wanted to.

Also the mortgage would be less than 30% of OP’s total compensation right now, and their income would presumably increase, if only through inflation, while their mortgage payments would stay the same.

Finally after 20 years the home value would likely double from where it is now (using a CAGR of 3.5%, conservative for Los Angeles where the Case-Shiller housing index has grown at 5% CAGR for the past 30+ years). This gives OP the ability to downsize into LCOL or a smaller house without any mortgage if they wanted to.
sphinx2020 wrote: Tue Sep 29, 2020 12:39 am Would a 7 or 10 year interest-only mortgage be a good option for someone in my position?
OP, have you read HEDGEFUNDIE’s manifesto on interest only mortgages?
boglerdude
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by boglerdude »

Start walking neighborhoods. Make sure you're ok with the commute and/or transit options
bugleheadd
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by bugleheadd »

Not sure how big of a home you are trying to buy with almost $1 million.

Can you buy a smaller place like a 1 bedroom condo for cheaper? As a single person, I would just go for as small a home as possible to minimize costs. Just upgrade later if your household starts growing bigger
stan1
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by stan1 »

Location matters, so if the $1M home means much more than a 30 minute commute to work or to see your family and friends I'd think very carefully about it. Even if you WFH now as at some point I think many jobs will in the future move to a hybrid model with some telework and some in office work.

So:
- I'd also think about a two bedroom condo in a good location with two parking spots (preferably an attached 2 car garage). Condos with garages are going to be more attractive to owner residents who care more about the complex. Some will be laid out more like a townhouse or patio home than a typical apartment. Those features will make it seem more home-like and also will appeal to buyers in the future.

- If it is a single family home think carefully about how much maintenance and upgrade work is needed. The housing stock in many parts of LA is now 50-100 years old and only distant suburbs have a lot of houses that are less than 30 years old. Newer infill houses are often very expensive. Many houses have been updated but sometimes only cosmetically so there still could be plumbing or foundation issues.

- Condos are also aging so even well managed complexes are going to need new roofs, new windows, restucco, major landscaping work etc. I don't think maintenance is a major reason not to buy if you want to do so, but just be aware there could be unplanned costs that aren't immediately obvious when you buy the property. If you buy a condo look at the HOA financials but be aware that many well managed associations have reserves funded at around 70% so that should not scare you off. I'd be very hesitant if the HOA board members are landlords who do not live on site. You have to walk the property and see if it is in being well maintained.

In your situation I would not do interest only. I'd do a 30 year mortgage and make one or two extra payments per year towards principal if your income increases in future years. I'd put 20% down.

You can do it if you want, but you could also rent a nicer condo or small house. The tax benefits of home ownership are often cited but the costs of homeownership are often diminished (upgrading, furnishing, insurance, maintenance). I think in many cases home ownership is much closer to being financially neutral than people want to admit. Spend some time getting to know the local market in the neighborhoods you want to live in. Become adept at using online listings, satellite imagery, and street view to help you quickly narrow down houses. There's no substitute though for driving and walking the streets and familiarizing yourself with the neighborhoods. When you are ready to buy a desirable property will move fast with multiple offers likely even if the market slows. You'll need to have the information you need quickly to make a decision.
ScubaHogg
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by ScubaHogg »

For 4x my income (or more) I’d default towards renting a larger place. That’s a lot of your income and net worth to tie up in your house. If you must, I’d look into a fixed interest only mortgage if you can find one.

Other notes:

- don’t make home purchases to chase tax deductions
- you don’t know that home prices will keep going up. San Fran has already seen large rent drops...it’s not unreasonable to think home prices will follow. Same could happen in SoCal.
- Along those lines, CA has net internal outflow of population (i.e., not counting immigration from other countries). It’s not slam dunk demographics will go in your favor, at least not enough to count on them. Additionally, zoning liberalization could increase supply faster than demand increases. Good for consumers, not great if you are counting on home appreciation.
“Unexpected Returns dominate the Expected Returns” - Ken French
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by willthrill81 »

DarkHelmetII wrote: Tue Sep 29, 2020 4:37 am My opinion: rent a larger condo / apartment / townhome, or single family house. Whatever it is, just rent.
I agree. Rent and invest the savings from owning in the market.
“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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sphinx2020
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by sphinx2020 »

OP here, thanks for all the comments and feedback thus far.
stan1 wrote: Thu Oct 01, 2020 8:29 am - If it is a single family home think carefully about how much maintenance and upgrade work is needed. The housing stock in many parts of LA is now 50-100 years old and only distant suburbs have a lot of houses that are less than 30 years old. Newer infill houses are often very expensive. Many houses have been updated but sometimes only cosmetically so there still could be plumbing or foundation issues.

- Condos are also aging so even well managed complexes are going to need new roofs, new windows, restucco, major landscaping work etc. I don't think maintenance is a major reason not to buy if you want to do so, but just be aware there could be unplanned costs that aren't immediately obvious when you buy the property. If you buy a condo look at the HOA financials but be aware that many well managed associations have reserves funded at around 70% so that should not scare you off. I'd be very hesitant if the HOA board members are landlords who do not live on site. You have to walk the property and see if it is in being well maintained.
This is a valid point, and with a SFH at least I would have my own private yard and the ability to select my own contractors for any work that needs to be performed. I'm skeptical about buying a condo and have heard plenty of horror stories about dealing with HOA boards, neighbors who don't follow the rules, etc. I'd rather rent an apartment than own a condo, and if there is ever zoning reform in California that allows more supply to enter the market, I think the zoning changes would favor high-density developments that would compete directly with old condominium complexes and pressure condo pricing. My view is that SFHs are more likely to retain their value over time.
carolinaman wrote: Wed Sep 30, 2020 7:59 am Another thought. If you wait and save more, housing prices may continue to rise and offset your additional savings
This is exactly my concern. Housing markets are like large ships--they take forever to turn. Staying the course and continuing to rent may mean that I have to rent for 10 years to wait for the perfect moment to buy. I'm not looking to time the market and delay consumption indefinitely. I feel secure enough now to lock in my housing expenses and match my consumption to my income.
Watty wrote: Tue Sep 29, 2020 9:20 am Your net worth is not real high for having had that income for a while. If there is not anything else going on like you had huge student loans or an expensive divorce you might take a hard look at your budget and lifestyle to make sure that you are not spending too much.
Frankly, my generation had to deal with the global financial crisis and now the COVID economy. Compared to my peers I would say my net worth is very high and this comment makes me want to say, "OK Boomer." The income and bonus didn't start until 4 years ago. I spent most of my 20s paying off student loans / traveling /changing jobs and figuring out what I wanted to do with my life. Had I overextended myself like my peers and put 5% down on a condo several years ago I would have more housing equity and a larger net worth today. I have no regrets about being overly cautious and saving cash instead.
Watty wrote: Tue Sep 29, 2020 9:20 am One problem is that if you get a 30 year mortgage then it will not be paid off until you are in your mid 60s. Even if you want to work that long the chances of you being able to keep your job and keep getting the bonuses are likely not all that good.

If you save up a few more years then that would also impact when a 30 year mortgage would be paid off so it might not be paid off until you are almost 70.
I'm not clear why this is a problem. Most people work until they are in their mid 60s. This would match my annual housing expense to my lifecycle consumption, and at retirement I would have a paid off home that I could sell and move to a low cost of living state, or take out a reverse mortgage. If my income continues to rise I can pay off the house early with excess savings.
ScubaHogg wrote: Thu Oct 01, 2020 8:39 am - you don’t know that home prices will keep going up. San Fran has already seen large rent drops...it’s not unreasonable to think home prices will follow. Same could happen in SoCal.
Many of the people leaving San Fran are moving to SoCal and are pushing up prices here. SoCal is (on a relative basis) much cheaper than NorCal and prices here aren't as inflated as NorCal. I don't disagree that there's definitely more risk in California real estate though.
DarkHelmetII wrote: Tue Sep 29, 2020 4:37 am My opinion: rent a larger condo / apartment / townhome, or single family house. Whatever it is, just rent.
Every time I run the NYTimes rent-vs-buy calculator, ownership comes out ahead. For the characteristics I'm seeking (private garage, yard, no shared walls), ownership comes out ahead. I'd rather pay $4k per month in PITI for a SFH than $3k per month to rent an apartment or condo close to the coast.
The_G_Fund
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by The_G_Fund »

Every time I run the NYTimes rent-vs-buy calculator, ownership comes out ahead. For the characteristics I'm seeking (private garage, yard, no shared walls), ownership comes out ahead. I'd rather pay $4k per month in PITI for a SFH than $3k per month to rent an apartment or condo close to the coast.
1) People rent SFHs all the time that fit the characteristics you’re seeking.

2) Home ownership cost is not just about monthly PITI. Need to factor in maintenance and repairs ($10k per year for $1M house), as well as the opportunity cost of not having $200k in the market because it’s tied up as a down payment. Your $200k could easily double in 10 years if invested in a stock index fund instead. Historically, real estate only appreciates at the same rate as inflation.

3) Do you really need all that SFH space as a single person? Home selection is more about personal consumption, than personal investment.

4) Although your career may seem predictable for the future, what about your personal life? You may meet a potential partner/spouse that will likely result in you moving again. Renting provides flexibility for moving without the expense of crazy high transaction costs when selling real estate ($60-$80k for a $1M house)
Last edited by The_G_Fund on Sun Oct 04, 2020 4:21 pm, edited 2 times in total.
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9mm
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by 9mm »

sphinx2020 wrote: Sat Oct 03, 2020 7:58 pm Every time I run the NYTimes rent-vs-buy calculator, ownership comes out ahead. For the characteristics I'm seeking (private garage, yard, no shared walls), ownership comes out ahead. I'd rather pay $4k per month in PITI for a SFH than $3k per month to rent an apartment or condo close to the coast.
Classic situation where OP will not listen. We see it all the time. They know what they want to do, and they don’t really care about our feedback. If you want the house, go for it. It’s just not a good financial decision in your market. Period. You’re not considering all the variables, including opportunity cost.

Mid 30s at your income level, no you do not have a high net worth. These are some awesome years for investing, don’t pass that up! You could be in a really good spot 10 years from now, and buying a house will only get in the way.

Rent and invest the rest. Put the cash into the market, and forget about buying a house. Keep an emergency fund, invest the rest.

This was an interesting recent thread that I think you would benefit from: viewtopic.php?p=5480265#p5480265
ThatsMyFamJam
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by ThatsMyFamJam »

I'm leery of condos because of all the potential problems - other owners/tenants, financial solvency of the HOA, litigation, etc.

If you really want to buy rather than rent, I'd say buy a fixer-upper in an up-and-coming area. I bought an old 1000SF SFR in CA, was cash-poor for a year and then spent savings on maintenance and basic rehabbing for a few years before selling at a tidy gain, which I rolled into a fixer-upper SFR on the coast. By fixing up property over the years while you are living in it, you minimize risk, do not over-extend and add value over and above the general area appreciation. Make sure the design/style will have broad appeal. You also have to contend with living in conditions that may really bug you.

One thing I wish I had done was get a roommate while I was single to defray some of the PITI. That first year of insecurity and boxed mac-and-cheese and ramen was hard.
quantAndHold
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by quantAndHold »

Do you expect to meet someone and settle down, or is that unlikely at this point? If you meet someone, you’ll probably end up selling this place and buying a place together.

How upward is the trajectory of your career? Can you get out of being house poor with the next promotion, or are the raises getting smaller and further between?

I think buying is sensible. You’re at that point in life, you have the money, and rent/buy calculators point towards owning. As a single person, though, I would consider whether I actually wanted to shoulder the burdens that come with a owning single family home by myself. Not just financial, but things like needing to do yard work and cleaning and honey do’s. If it were me, I would be looking for a 2-3 bedroom townhouse with a smaller patio yard. Get most of the advantages of a single family home for a lower price, but allow someone else do the exterior maintenance on the structure, and have a yard that’s big enough to entertain, but not a yard maintenance time sink.

The other thing is that first time homebuyers often buy more house than they need, then they’re stuck with paying for and taking care of it. Think about whether you, as a single person, really need a 3 or 4 bedroom house with multiple bathrooms and a big yard, or whether something else might be more appropriate.

And 30 year fixed rates are at historic lows. Usually people get those alternative type loans because they’re either not planning on staying long, or they’re planning on refinancing within a couple of years. I don’t think either of those things apply to you. Keep it simple. Get the 30.
Yes, I’m really that pedantic.
Naris
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Naris »

9mm wrote: Sun Oct 04, 2020 4:17 pm
sphinx2020 wrote: Sat Oct 03, 2020 7:58 pm Every time I run the NYTimes rent-vs-buy calculator, ownership comes out ahead. For the characteristics I'm seeking (private garage, yard, no shared walls), ownership comes out ahead. I'd rather pay $4k per month in PITI for a SFH than $3k per month to rent an apartment or condo close to the coast.
Classic situation where OP will not listen. We see it all the time. They know what they want to do, and they don’t really care about our feedback. If you want the house, go for it. It’s just not a good financial decision in your market. Period. You’re not considering all the variables, including opportunity cost.

Mid 30s at your income level, no you do not have a high net worth. These are some awesome years for investing, don’t pass that up! You could be in a really good spot 10 years from now, and buying a house will only get in the way.

Rent and invest the rest. Put the cash into the market, and forget about buying a house. Keep an emergency fund, invest the rest.

This was an interesting recent thread that I think you would benefit from: viewtopic.php?p=5480265#p5480265
OP, I agree that you should take a look at that thread, if nothing else for the humor value -- rarely have I seen a collection of such simplistic and downright bad advice. Had my spouse and I followed the advice in that thread, more than one rule would have said we should have rented instead of bought. If we had done that, then we would be literally tens of thousands of dollars poorer, and I think our overall risk profile would be much worse.

Whether to buy a house is a much more complicated decision than can be reduced to simple rules of thumb like "don't buy if you live on the coasts."

It sounds like the analysis you're doing is the right type. Do make sure that you're properly accounting for all the costs, but once you do that, you can figure out your breakeven time horizon (remember that buying/selling real estate has significant fixed costs, although you can mitigate them by using discount real estate agents). For us, I created a spreadsheet where I calculated all the costs -- taxes, insurance, interest, opportunity cost on the home equity, HOA fees, everything -- and then compared it to the cost of what we would have rented had we chosen not to buy (we knew the exact apartment complex we would have rented, so that was easy). Assuming zero appreciation, our breakeven period was something like 4-5 years. There has been a lot of appreciation, so we've already come out far ahead in just 2 years. House prices may or may not go up, but I think assuming zero inflation-adjusted appreciation is a reasonable metric; if the numbers work with that assumption and your timeline after factoring in all the costs, it's totally reasonable to buy . . . even if you do live "on the coasts."

Also, I have no idea what's with people saying your net worth isn't very impressive. You won't win a Best Saver Ever (tm) award at the Boglehead conference, but you're doing a phenomenal job and are far, far ahead of most people. I checked Google for what the silly rules about "you should have X many times your salary by Y age" say, and the first hit says people should aim for 2x by 35 and 3x by 40. You're at 4x+ by mid-30s. You should feel really good about how you're doing, in my opinion.
fortunefavored
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by fortunefavored »

Naris wrote: Sun Oct 04, 2020 9:00 pm Also, I have no idea what's with people saying your net worth isn't very impressive. You won't win a Best Saver Ever (tm) award at the Boglehead conference, but you're doing a phenomenal job and are far, far ahead of most people. I checked Google for what the silly rules about "you should have X many times your salary by Y age" say, and the first hit says people should aim for 2x by 35 and 3x by 40. You're at 4x+ by mid-30s. You should feel really good about how you're doing, in my opinion.
Agreed, the VHCOL housing threads are full of "oh you will die if you live on the coasts" - the reality is millions of people do just fine. There's definitely risk associated with it, but again, millions of people make it work. If you're anchored in the area by family or career (ie, you're in the movie biz - where else are you gonna go?) - buying the lifestyle you want is perfectly logical.
DS1986
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by DS1986 »

Umm, you’re net worth is very good for your age. I have no idea what reality people live in on here. Remember, most on these boards, and especially those who comment, are self-selected high savers/earners. Not the norm. But this is a Bogleheads forum so you get what you expect.
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9mm
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by 9mm »

Naris wrote: Sun Oct 04, 2020 9:00 pm
9mm wrote: Sun Oct 04, 2020 4:17 pm
sphinx2020 wrote: Sat Oct 03, 2020 7:58 pm Every time I run the NYTimes rent-vs-buy calculator, ownership comes out ahead. For the characteristics I'm seeking (private garage, yard, no shared walls), ownership comes out ahead. I'd rather pay $4k per month in PITI for a SFH than $3k per month to rent an apartment or condo close to the coast.
Classic situation where OP will not listen. We see it all the time. They know what they want to do, and they don’t really care about our feedback. If you want the house, go for it. It’s just not a good financial decision in your market. Period. You’re not considering all the variables, including opportunity cost.

Mid 30s at your income level, no you do not have a high net worth. These are some awesome years for investing, don’t pass that up! You could be in a really good spot 10 years from now, and buying a house will only get in the way.

Rent and invest the rest. Put the cash into the market, and forget about buying a house. Keep an emergency fund, invest the rest.

This was an interesting recent thread that I think you would benefit from: viewtopic.php?p=5480265#p5480265
OP, I agree that you should take a look at that thread, if nothing else for the humor value -- rarely have I seen a collection of such simplistic and downright bad advice. Had my spouse and I followed the advice in that thread, more than one rule would have said we should have rented instead of bought. If we had done that, then we would be literally tens of thousands of dollars poorer, and I think our overall risk profile would be much worse.

Whether to buy a house is a much more complicated decision than can be reduced to simple rules of thumb like "don't buy if you live on the coasts."

It sounds like the analysis you're doing is the right type. Do make sure that you're properly accounting for all the costs, but once you do that, you can figure out your breakeven time horizon (remember that buying/selling real estate has significant fixed costs, although you can mitigate them by using discount real estate agents). For us, I created a spreadsheet where I calculated all the costs -- taxes, insurance, interest, opportunity cost on the home equity, HOA fees, everything -- and then compared it to the cost of what we would have rented had we chosen not to buy (we knew the exact apartment complex we would have rented, so that was easy). Assuming zero appreciation, our breakeven period was something like 4-5 years. There has been a lot of appreciation, so we've already come out far ahead in just 2 years. House prices may or may not go up, but I think assuming zero inflation-adjusted appreciation is a reasonable metric; if the numbers work with that assumption and your timeline after factoring in all the costs, it's totally reasonable to buy . . . even if you do live "on the coasts."

Also, I have no idea what's with people saying your net worth isn't very impressive. You won't win a Best Saver Ever (tm) award at the Boglehead conference, but you're doing a phenomenal job and are far, far ahead of most people. I checked Google for what the silly rules about "you should have X many times your salary by Y age" say, and the first hit says people should aim for 2x by 35 and 3x by 40. You're at 4x+ by mid-30s. You should feel really good about how you're doing, in my opinion.
OP can do whatever they want to do. For long-term wealth generation, buying a house in this situation is not more optimal. In fact, with current valuations it’s vastly sub optimal in VHCOLA. If you compare side-by-side the next 10 years someone in this exact situation who purchased and someone who continues to rent, the renter will probably have a half a million more net worth if they were to invest the difference. Is that not significant? Not to mention that compounded overtime will be very significant. Why would a single professional want to upkeep a house anyways?
Last edited by 9mm on Mon Oct 05, 2020 12:27 am, edited 1 time in total.
Naris
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Naris »

9mm wrote: Sun Oct 04, 2020 10:01 pm OP can do whatever they want to do. For long-term wealth generation, buying a house in this situation is not more often. In fact, with current valuations it’s vastly sub optimal in VHCOLA. If you compare side-by-side the next 10 years someone in this exact situation who purchased and someone who continues to rent, the renter will probably have a half a million more net worth if they were to invest the difference. Is that not significant? Not to mention that compounded overtime will be very significant.
I'm sorry, but this is just too simplified to be helpful. The rules in the thread you linked to would have said the same thing for my situation, and (again) we would be literally tens of thousands of dollars poorer had we followed that advice. And the spread for buying instead of renting is only growing larger over time for us. People said the same thing about valuations then (and interest rates were surely about to rocket upward!).

Buying rather than renting is not without risks, but renting instead of buying also has risks. There's risk and opportunity on both sides.

You have to actually do the analysis to figure it out in a particular situation.

I see no basis for your claim that a renter in the OP's situation will probably end up with $500k higher net worth than someone who buys. What's the math on that claim? I don't think that would have been true over the last 10 years for someone in southern California, but hey, maybe "this time is different."

I think it's foolish to assume we'll continue to see massive appreciation in home values, but I also think it's foolish to assume that home prices are going to drop a double-digit percentage and stay there forever (I keep hearing that the drop will come any day now . . .). Worst case scenarios are unlikely, and trying to avoid them is usually expensive. I think it's much more useful to create a model of your actual alternatives, using reasonable inputs (e.g. assuming zero inflation-adjusted appreciation), and then go from there.

ETA: I think it's also critical to understand that mortgages offer extremely attractive financing. If I could get a bank to lend me several hundred thousand dollars at a sub-2% effective interest rate (after accounting for the mortgage tax deduction, which we do benefit from), on a non-callable note, with a 30-year term . . . I would take out as much of that debt as they'd offer. I think the people who dogmatically advocate renting frequently ignore this aspect.

And FWIW, I'm not dogmatically pro-buying. I was confident that we would rent when my spouse and I first entered the workforce after getting our postgraduate degrees. But then I ran the numbers, and buying was clearly the winner, so we did that instead. Actually checking the math can be eye-opening, which is why I advocate that people do that instead of relying on silly rules like "rent if you live on the coasts" (to reiterate, that's literally the first rule in the thread you linked).
Last edited by Naris on Sun Oct 04, 2020 10:23 pm, edited 1 time in total.
Tingting1013
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Tingting1013 »

9mm wrote: Sun Oct 04, 2020 10:01 pm OP can do whatever they want to do. For long-term wealth generation, buying a house in this situation is not more often. In fact, with current valuations it’s vastly sub optimal in VHCOLA. If you compare side-by-side the next 10 years someone in this exact situation who purchased and someone who continues to rent, the renter will probably have a half a million more net worth if they were to invest the difference. Is that not significant? Not to mention that compounded overtime will be very significant.
Let’s look at the math.

Los Angeles area Case Shiller index has grown at 5% CAGR for the last 30 years.

If we project out ten more years then a $1M house will be worth $1.63M.

The initial $200k equity from the down payment turns into $830k equity.

Now let’s calculate expenses. For ease of calculation let’s assume an interest only loan at 3%.
10 years of mortgage interest on $800k principal costs $240k.
10 years of 1.1% property tax costs $110k.
Let’s say maintenance costs $10k per year. That’s another $100k

So that’s -$450k in ownership expenses over ten years.

Then there’s the tax benefit. OP is in the 24% Federal tax bracket. The mortgage interest (incremental to the standard deduction) yields a $2.4k Fed tax benefit. CA state income tax rules are more generous and in the 9.3% bracket yields $3k per year in state tax benefit. Altogether that produces $54k in tax benefit over the next 10 years.

Add it all up and you get growth of net worth from $200k to $434k over 10 years.

That’s 8.1% CAGR. Very close to the 8.8% CAGR of a globally diversified equity portfolio over the last 30 years.
Naris
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Naris »

Tingting1013 wrote: Sun Oct 04, 2020 10:22 pm
9mm wrote: Sun Oct 04, 2020 10:01 pm OP can do whatever they want to do. For long-term wealth generation, buying a house in this situation is not more often. In fact, with current valuations it’s vastly sub optimal in VHCOLA. If you compare side-by-side the next 10 years someone in this exact situation who purchased and someone who continues to rent, the renter will probably have a half a million more net worth if they were to invest the difference. Is that not significant? Not to mention that compounded overtime will be very significant.
Let’s look at the math.

Los Angeles area Case Shiller index has grown at 5% CAGR for the last 30 years.

If we project out ten more years then a $1M house will be worth $1.63M.

The initial $200k equity from the down payment turns into $830k equity.

Now let’s calculate expenses. For ease of calculation let’s assume an interest only loan at 3%.
10 years of mortgage interest on $800k principal costs $240k.
10 years of 1.1% property tax costs $110k.
Let’s say maintenance costs $10k per year. That’s another $100k

So that’s -$450k in ownership expenses over ten years.

Then there’s the tax benefit. OP is in the 24% Federal tax bracket. The mortgage interest (incremental to the standard deduction) yields a $2.4k Fed tax benefit. CA state income tax rules are more generous and in the 9.3% bracket yields $3k per year in state tax benefit. Altogether that produces $54k in tax benefit over the next 10 years.

Add it all up and you get growth of net worth from $200k to $434k over 10 years.

That’s 8.1% CAGR. Very close to the 8.8% CAGR of a globally diversified equity portfolio over the last 30 years.
Note, of course, that the alternative isn't free. I don't live in California, but I hear that rent is expensive there.

(I think 5% CAGR for home appreciation is more aggressive than I would be comfortable assuming, even if that is accurate for historical appreciation in LA. And you'd need to factor in the opportunity cost on foregone investment returns on the downpayment. But it's still easy for buying to win over moderate time periods. It doesn't necessarily take 10 years, and the upside can be tremendous.)
Tingting1013
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by Tingting1013 »

Naris wrote: Sun Oct 04, 2020 10:29 pm
Tingting1013 wrote: Sun Oct 04, 2020 10:22 pm
9mm wrote: Sun Oct 04, 2020 10:01 pm OP can do whatever they want to do. For long-term wealth generation, buying a house in this situation is not more often. In fact, with current valuations it’s vastly sub optimal in VHCOLA. If you compare side-by-side the next 10 years someone in this exact situation who purchased and someone who continues to rent, the renter will probably have a half a million more net worth if they were to invest the difference. Is that not significant? Not to mention that compounded overtime will be very significant.
Let’s look at the math.

Los Angeles area Case Shiller index has grown at 5% CAGR for the last 30 years.

If we project out ten more years then a $1M house will be worth $1.63M.

The initial $200k equity from the down payment turns into $830k equity.

Now let’s calculate expenses. For ease of calculation let’s assume an interest only loan at 3%.
10 years of mortgage interest on $800k principal costs $240k.
10 years of 1.1% property tax costs $110k.
Let’s say maintenance costs $10k per year. That’s another $100k

So that’s -$450k in ownership expenses over ten years.

Then there’s the tax benefit. OP is in the 24% Federal tax bracket. The mortgage interest (incremental to the standard deduction) yields a $2.4k Fed tax benefit. CA state income tax rules are more generous and in the 9.3% bracket yields $3k per year in state tax benefit. Altogether that produces $54k in tax benefit over the next 10 years.

Add it all up and you get growth of net worth from $200k to $434k over 10 years.

That’s 8.1% CAGR. Very close to the 8.8% CAGR of a globally diversified equity portfolio over the last 30 years.
Note, of course, that the alternative isn't free. I don't live in California, but I hear that rent is expensive there.
Yup I totally missed that obvious fact, so you would need to deduct rent from the 8.8% annual stock portfolio return.

In which case even if you assume housing appreciation slows to 3%, owning still wins.
phxjcc
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Re: VHCOL area housing decision / lifecycle planning for single professional

Post by phxjcc »

sphinx2020 wrote: Tue Sep 29, 2020 12:39 am Hi Bogleheads. I'm a long time lurker here finally posting for the first time, so please excuse me if I am posting in the wrong forum. My question touches on lifecycle investing issues, but I think this is the better forum for my question.

I wanted to get some opinions on the best mortgage/housing decision for a single person living in southern California.

My situation:
I'm in my mid-30s and have settled down into my career, and am giving serious thought to buy a home. I am ready to move out of my tiny 1-bedroom apartment. Putting a large chunk of my net worth into a house is somewhat daunting, and I'm mildly afraid of becoming cash-poor house-rich, but also would like to lock-in my housing expenses and have a hedge against inflation since I plan to stay here for the long term. I do not see a house as an investment, rather as a place to live with a few non-financial benefits.

My assets:
Cash (CDs + checking + savings): $220k
401K / Roth: $600k
$0 debt.
Salary: $145k, plus bonus of $65-$100k. I have consistently received my bonus for multiple years in a row and work in a highly profitable business unit at my company, with good job security and promotion opportunities within my division.

Assuming I buy a home for $962,000 with 20% down at 3.0% for 30 years, I estimate my monthly PITI would be a 36% of my base salary. This would require a downpayment of ~$192,000, which along with closing costs would leave me with a small cash cushion (but large reserves in my retirement accounts).

I see several ways to proceed:
1) buy a home today with 20% down and be house-rich cash-poor for 1-2 years until I rebuild my savings,
2) put less than 20% down with PMI or a HELOC, or
3) wait 12-24 months, save more cash, and buy with 20% down

For #2, I am finding that lenders will not finance a jumbo loan in this market with less than 20% down.

For #3, I predict housing prices will continue to rise due to limited supply and demographic trends, not to mention property tax basis benefits from Prop 13. With a 30-year FRM this is the most conservative option and eliminates all interest-rate and refinance risk. I suspect this is the option most bogleheads would recommend. However, I also I don't like the idea of paying principal into an illiquid asset that is difficult, if not impossible to withdraw from and would much rather invest in a diversified portfolio of stocks and bonds. The average mortgage duration is 7-10 years, so it's not likely I'm going to get the inflation protection from a fixed-rate mortgage for a full 30 years if I ever sold the property.

Would a 7 or 10 year interest-only mortgage be a good option for someone in my position?

In another year or two I could put $250k down on a $1mm property and hit the sweet spot in terms of interest deductibility. The benefit of low monthly payments would allow me to build a large portfolio in a taxable account while avoiding a concentration of risk in a property. If I lost my job or needed to move, I could rent out the house and be cash-flow positive. The downside to this approach would be that it would only provide inflation protection for 7-10 years; after the rate reset I would need to refinance or begin paying mandatory amortization. In the worst case, if there is a huge bout of inflation and rates rise to 8-9%, I could sell the house or use my taxable investments to repay principal.

Am I crazy to be thinking this way? Which lenders even offer interest-only mortgages to someone with my profile? All the offerings I have seen are tailored to HNW individuals huge deposit balances and relationship discounts.
I feel that there should be full transparency demanded of all commenters to determine their bona fides , those Neurosugeons living in Topeka saying “not enough net worth” and “only buy 2x take home pay” need to understand other’s reality.

1. You are doing great.
2. Buy now. 20% down, 5% rise in value = 25% return.
3. Buy SFH, condos go up less and HOA’s in SOCAL are very high...$500/month HOA gets you $100,000 more house.
4. Do a 30 year conventional.
Lastly, if you are talking Silicon Beach, consider Westchester west of Sepulveda. Buy a little postwar house.

1984:
Take home: $1800
House payment: $900
Car payment: $300

House cost $90,000
Sold 1 year later $190,000

ZIP: 90045
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