help figuring out housing/life the bay area

[danesgod]

Hi all, happy Monday. I'm a first time poster, and I searched for assistance with this, but no one seems to be in exactly the same position (...obviously). My wife is finishing a surgical-ish fellowship in the Bay Area, and it looks like we'll be staying. We were exceptionally fortunate (and worked hard) to have no debt and even more fortunate that my company has produced a decent windfall event (and I'm not even in tech!). We have 1 child and are planning on a second in the next two years. We don't live in San Francisco proper, further south on the peninsula.

• 2018/2019 combined W2 income: 400-500k. Should increase in even more by wife's year 3 of "real job" (around 2020). It should peak in the 700-900k+ range eventually (10 years?)


• No debt


• As of today, I could find about 460k for a down payment, though I don't think we'd be comfortable doing so (note, this doesn't touch retirement accounts and includes the taxes in liquidating positions)

My questions for you all:

• Given that we're in the Bay Area, how much house can we currently afford? Mortgage calculators seem to put me at 2-3MM (using 450k salary and 450k down payment)


• We're naturally pretty frugal, and the though of buying a house that is 3MM+ is shocking to us. Part of us thinks that buying a "modest" 1-1.5MM home sooner would be better than waiting for a much more expensive home. Bay area housing prices seem to go up... up... up... and so does rent.


• At what net worth/salary do people think "upgrading" from starter home (or renting) to "doctor home" is normal/reasonable? I'm not sure starter homes exist in the Bay Area in the best school districts, it seems like we'd already be in the 2-3MM range in these areas for a modest house.


• I'd also love to hear from the perma-renters in the SF area. We really haven't ruled that out.


• Is there actually any way to predict renting/buying's impact on FI. I think that buying works out in the long run (maybe?) but rent here certainly seems crazy... maybe "predict" isn't the right question. Has anyone here thought (somewhat deeply) about renting/buying in the Bay Area as a high income person, and how that affects FI?


• I'd love to hear more from doctors in the area who have made a go of life and what they'd change / do differently in retrospect.

Finally, our current plan is to rent for 1-3 years longer, near my wife's job and make sure we're staying (this seems to be the most common advice). That will also give us time to see her salary after year 2. In that time, we can build the nest egg further to afford more house (or more neighborhood as is often the case). I think waiting (and continuing to live like a resident) would put us in the 1MM down payment area.

I think we're definitely still in monetary/lifestyle shock. Neither of us grew up wealthy and between ISOs paying out and my wife finishing fellowship, in the next year, we're suddenly going to have slightly more money than we're used to . Our spending habits haven't changed in years (except renting a slightly larger place for the child). I fully realize how fortunate we are, this is definitely 1% problems. We appreciate we are some of the few people that can truly afford the Bay Area. So with that, I'm also using you all as therapy, since I can't talk to anyone about this. The reddit forum /r/fatfire isn't particularly active.

Sorry to be kind of rambling, let me know if you need any more info.

Cheers!

 

[RosieQ]

You could probably afford a fairly expensive house in the 2 million plus range but I agree that you should wait 1-2 years. CA real estate may face a bit of a draw down with the new tax plan if state income taxes, property taxes have limited deductions, as does mortgage interest over 1 million. 2 years could give you the time to be sure that your job is secure and salary is stable before making a long term decision. I also may regret it but I have a feeling like there HAS to be a draw down in the next year or so (but people have been saying that for years). I was living in SF for 8 years and just moved away and was finding nice houses for 4k a month that would sell for 1.7-2 million. If that's still the case then I would favor renting at least for the next few years and possibly for longer.

[DMFA]

With that income and down payment, you should be able to put this together.  Obv from a purely monetary perspective, a lower cost of living would be preferable, and with the new tax bill resulting in more people taking standard instead of itemizing, a higher loan-to-value ratio may be less attractive (esp with mortgage interest deduction capped at a principal of $1M)...but based on that income, no other debt, and what you have to put down, that is a very reasonable and commendable place to start.

Generally it's advisable not to buy straight out of training and to ensure you like the job and community before committing to buying a home.  I get that the rental market may not be exactly what you want to to be, but people often change jobs within 2 years of finishing training, so bear that in mind.

Consider a non-conforming loan if you want to keep some of that down payment in the market.  The "all-time high" mentality might make you feel a bit more advantageous to liquidate some of it in order to put it in a down payment; I'm ambivalent toward that opinion.  Even so, were you to buy at $1.5M and put $300k down, that could leave some of that in the market and the remainder as your emergency fund (3-6 mo expenses).  If you want to finance more, be advised that you will end up with a higher interest rate using either a "doctor" loan and by virtue of its being a jumbo loan, so you might be looking at rates right around 4% (as per BankRate using 30-yr fixed, $200k down on a $2M house in Palo Alto with credit score >740).  That'd be $8,583/mo just in principal and interest, not including tax and insurance.

...anyway, you seem like you're on the right track with a decent grasp of the analysis of the situation.  If buying ends up being better for you, great.  But I would very strongly advise you to resist the nonsense of "home ownership being the American dream," "renting is throwing money away," and p much anything you see on HGTV.

[StarTrekDoc]

Congrats on getting this far already and just starting off

Being mid pennisula, you're in the middle of it all.  Sure East Palo Alto and Foster City maybe lucrative, but remember the location and FC is purely landfill -- a good shake and you won't be happy.

Take your time in looking where you really want to be near and long term for the kids and schooling. If private schools, less an issue.

The housing size is all up to you.  You have a lot of choices and $2M is doable without a stretch for you.

Have to look at her income/kids/work/nanny situation.  It stresses once the kids get older and may want more parental involvement (or not) -- depends and how you two roll with the family thing.

[CM]

danesgod wrote:

Is there actually any way to predict renting/buying’s impact on FI.

Click to expand...

You can use the New York Times buy-versus-rent calculator (or similar tools available online) to help you evaluate the difference in financial outcomes between buying and renting: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Without regard to that calculation, I second the suggestion to rent until your wife has worked in her post-training job for at least two years. The first job turns out to be a pit stop for many early-career physicians.

[CordMcNally]

I think you're on the right track and correct in your thinking. The biggest question between your wife and you is likely when do you want to be FI and how important is that to you. Depending on those answers, the Bay Area may or may not be the best place for your family.

[AlexxT]

I live in the heart of Silicon Valley and know the South Bay well.   My general advice would be to buy a house that is at least 3-4 million at your salary level.  That will get you the house that you want to stay in. ( 4-5 mill will get you what you want, with few compromises, best school district ) You should probably avoid upgrading later.  You didn't specify exactly where you wanted to live.

I agree with renting for a few years.  That will give you time to explore real estate.  Go to open houses.  Learn to recognize the value of the land vs the value of the home.  Learn how much time and money it might take to renovate a home.   That way you'll be able to judge the true value of a particular house.

Decide if you want to live in walking distance of a small downtown, or further up in the hills.

Without a doubt, buying an expensive home will leave you relatively "house poor".  In other words, you will have a high net worth, but a lower cash flow, since more of your money will be tied up in your home.  Your real estate taxes will be 1.5% of your purchase price (+ any renovations ) so  4 m home will cost you $60,000 a year in taxes. So not only have you tied up 4 mill in the house, but another 1.5 mill in investments to pay the taxes.  However, that will lock your tax increase to only inflation.  If you wait to buy, taxes will rise.

The net worth of my house has kept up with the S& P 500, including expenses.   I had no problem retiring relatively early.

Where are you considering buying?  Where will you be working?

Please PM me if you wish for a more detailed analysis.

[danesgod]

Thanks everyone for the advice. You all at least made me realize that we're not totally nuts for staying in the Bay Area, which is quite pricey. We love California and cliche as is sounds, spend many hours outside every single week (hiking, climbing, mountain biking, cycling, running, walking, crawling, etc.).

FWIW, I've fiddled with several of rent v. buy calculators. I was unimpressed, given that the outcome can go drastically one way or another depending on housing prices v. rent increases and these seem totally unpredictable. It seems more that you have to choose based on what you want. I think at this point if we stay at this practice we'll want to lock down a school district by the time my son is headed to K-1st. At that point, we're (probably) committed to staying. The timing is right for eventually "inheriting" the practice (excuse me if that's the wrong terminology), but I appreciate that things don't always work out like this due to personality, exact timing, and goals of other MDs at the practice.

It sounds like we've got a robust plan in waiting 2-3 years to make sure we're staying, then buy our perfect house somewhere between 2-4MM.

CordMcNally: One thing is for sure, I don't think I'd be comfortable staying in this area if my wife didn't have her profession. I make livable money if we're frugal, but it would be insanely tight if we both had my salary. I struggle to understand why people stay here making less than 150k/year. Money is tight even at our current 180k/year, particularly with kids and retirement savings factored in. I'd like to retire early; my wife at 32 seems pretty committed to working ~30 years, even though I've told her she probably wouldn't have to. Lets see what she says after shes been in the work force 10 years. As long as she works ~10+ years, with our current numbers I think FI should be achievable.

Long winded, south bay area neighborhood discussion to follow:

AlexxT: Thanks for pointing out the 4MM home + 1.5MM investments needed for passive income on taxes. I knew the property tax numbers, but for some reason didn't contextualize it in terms of the 4% rule. We haven't decided exactly where we want to live, if you don't mind I'm fine having this conversation so it remains open to others to search. We can DM if needed. I've looked at 20-25 homes from South San Francisco all the way to Los Altos Hills, and at this point from 700k - 3.4MM. My wife has probably been to 10 of those (given that she works weekends), so we'll use the next two years to keep looking.

My wife likes the walkable-neighborhood feel, and I want to be near the woods. I'd prefer to live in a shack in La Honda, but that's not happening. We looked at a home on Bear Gulch Rd. that my wife thought was too far from the highway/grocery/other people. I think the "lower hills" would be perfect: Woodside or Portola Valley maybe. I haven't explored too much further south because I work on Oyster Point though I'm not committed to this job long term. I suspect I can find something in my field in the south bay, but I have some interest in retiring early and doing something "fun." I'm willing to follow my wife as she's the breadwinner, and I like the peninsula further south, I've cycled there a ton.

I looked at a house in Ladera as well as "portola valley ranch," that both had the wooded neighborhood feel. The one place we saw in Los Altos Hills seemed a bit remote for my wife, I think she wants to be able to live in a neighborhood that's walkable, with other kids. I've cycled through Saratoga, and that seems to fit the bill well, but I'd almost certainly need to quit, I'm not commuting to Oyster Point from Saratoga. I'd love to hear your thoughts on these areas, or feel free to suggest others.

One thing I'm not well versed in (but have a few years to figure out) is school district analysis. I've been using redfin, which gives the areas mentioned above 10/10. I'm not sure what other reputable resources to check to evaluate schools. I've tried googling once or twice, but wasn't terribly impressed with the information available. Are all of these districts amazing? Should we plan to actually visit schools before we buy (in 2-3 years?). Part of buying a home in these areas would be to avoid private school.

Edit: Wife's job is in the vicinity of Mountain View.

[AlexxT]

I live exactly where you have been looking.

danesgod wrote:

One thing I’m not well versed in (but have a few years to figure out) is school district analysis. I’ve been using redfin, which gives the areas mentioned above 10/10. I’m not sure what other reputable resourc

Click to expand...

Portola Valley has great elementary schools, but not high school.

The best school district is considered to be  Palo Alto, but Palo Alto High has had a lot of suicides.  Los Altos schools have almost the same test scores, but less cachet for some reason.  Atherton is out of your price range ( and mine ) plus, it doesn't have good schools.  Everyone in Atherton sends their kids to private schools.  Woodside is very nice but more expensive than Portola Valley, and like Portola Valley is a bit isolated vs Los Altos.  Portola Valley is great if you want to have horses, but that will set your retirement back even further.  Cupertino has great schools, but intense competition at those schools, too much for many kids I hear, and lower home prices. ( school district of choice for Chinese families ).  Mountain View, schools a big step down for elementary and middle school, but share one high school with the Los Altos district.

I would consider Los Altos, Palo Alto, and Cupertino all equivalent in terms of schools.  That should be your target area.  NOTE: Be sure to check flood zones on a map.  Some expensive parts of Palo Alto can flood, usually if near creeks.   Including Mark Zuckerberg's neighborhood, but maybe not his street.

You could also live in Mountain View, Sunnyvale, Santa Clara.  Schools not as good, but less expensive and not as nice.  I wouldn't do it at your salary, but you could do it if you wanted to.  Some Mtn View houses are in the Los Altos school district, but the houses are priced like Los Altos homes. Similarly, some Los Altos homes are in the Cupertino school district, and are less expensive for that reason.  Always check.

You could also buy a tear down and build your own, but expect to pay a mortgage and rent for 2 years.  Often that ends up being the best option.

There are some really good private schools, too.   Tuition:  Typically, K starts at around $25,000, and rises a couple of thousand each grade.  High schools are typically $46,000 and rising annually.  ( Plus extras, and expected "donations".  Some religious schools can be much less. )  Some private schools have pre-schools that are also around 25k.

Off topic :  when you have kids, enroll them in Whistle Stop pre-school on the grounds of the Palo Alto VA.  It's wonderful, and they open at 6:45 am. ( They will take kids as early as 6am if you let them know in advance).  It's wonderful.  They accept kids at 4  weeks, and it was better than grandma and better than a nanny and probably better than being at home with mom, at least after a few months.  Check it out now, and put your name on the list a year in advance.  They take non-VA employees, but space is limited.  It's better by far than any other place we looked at.  I can't say enough good things about that place. ( was 2,000/month, probably more now)

Many people in good school districts still use private schools.  That's a whole other discussion.

A friend of mine sent 4 kids to private schools.   He told me he has spent over a million dollars so far on tuition, including college, and he isn't done yet.

 

 

danesgod wrote:

My wife likes the walkable-neighborhood feel, and I want to be near the woods. I’d prefer to live in a shack in La Honda, but that’s not happening. We looked at a home on Bear Gulch Rd. that my wife thought was too far from the highway/grocery/other people. I think the “lower hills” would be perfect: Woodside or Portola Valley maybe

Click to expand...

Your wife is right.  Bear Gulch is too far.  There are some who love Portola Valley, but it's too isolated for me.  I thought I would like that area at one time, but not with kids, and not if elderly and frail.

Walkable would be near downtown Los Altos, Palo Alto, Mtn View, Menlo Park.  Of course, downtown Palo Alto is not Manhattan, or even San Francisco, although Mtn View has lots of restaurants and bookstores,( but schools aren't as good ).  But we walk to our local downtown often.

Woodside is very pricey, but could work, but with a job in Mtn View, Los Altos or the lower hills would probably be best. (but Los Altos proper if you want to walk there ).

 

Sharon Heights : I saw a house there that was sloping all over the place.  Those houses sink.  Beware.

Saratoga:  Has very nice areas, some not that fancy or pricey, but the commute for you would be a bit too much.  Same for Los Gatos.

Belmont might be a place to look into, but I don't know what the traffic would be like for your wife.  We have friends with a nice house there with a spectacular view.  But I don't know that part of the peninsula all that well eg Hillsboro, etc.

Foster City , as noted, is ok, cheaper, but indeed built on landfill.  It might not survive a big earthquake, and is on the water, so may flood.  Again, I don't know about the commute south for your wife.

 

 

 

danesgod wrote:

I looked at a house in Ladera as well as “portola valley ranch,” that both had the wooded neighborhood feel. The one place we saw in Los Altos Hills seemed a bit remote for my wife, I think she wants to be able to live in a neighborhood that’s walkable, with other kids

Click to expand...

Ladera seemed like the worst of both worlds: far, but houses close together.  Your wife is right about Los Altos Hills.   Listen to her.   But depending on the house,  it might be nice.  You'll have a bigger yard, but more to take care of.

 

danesgod wrote:

Thanks for pointing out the 4MM home + 1.5MM investments needed for passive income on taxes. I knew the property tax numbers, but for some reason didn’t contextualize it in terms of the 4% rule.

Click to expand...

All houses will have expenses, of course.  But in terms of retirement planning, the real estate taxes are what will distinguish the costs of a bay area home from one in a low cost area.  Of course,  labor and maintenance are somewhat higher here too, I assume.

Add in about $1,000 for utilities and gardening, cleaning  ( lawn care, $250/m0.  Water: $150-250, Gas & electric, up to $500/mo (3000 sft house), and at least $1,000 / mo repairs and maintenance, $1500 annual insurance )  House cleaning costs around $200 each time. These expenses will be about the same for any house you buy around here, I think.  Just be prepared.

As general advice, I would suggest renting for a few years, but then, when you're ready to buy,  stretching for the house you want later.  Don't but a starter home.  ( that's not the advice on this website, but I think it's what you should do in this area )  If you can't afford the house you want, at least buy the location you want.   Then renovate or tear down and rebuild later.    And if you do tear down, put in a full basement, even if you don't think you want one.

[StarTrekDoc]

If you want best of both worlds of walkable neighborhood feel and readily vibrant community living, look between El Camino Real/Pulgas - nice communities along the whole peninsula.   Parks and creeks galore and nice combination of public and private schools to fit any need.

My sister lived in the Beresford Park area and we loved their local park and backyard creek that they had -- woodsy living in suburban SF with both mall shopping and small downtowns with farmer markets alike with good easy access to either 101/280.

[Scarftheverb]

Good god. I'm in Austin and thought the COL was getting out of hand. A million bucks will still buy a nice house in any part of town with good public schools. That California weather and the ocean/mountains does seem pretty enticing from way down here though...

Looks like OP is getting some great advice.

[Hank]

So long as someone keeps getting off the flight from San Jose to Austin and continues to think taxes and housing prices are lower than the South Bay and traffic on the Mopac isn’t as bad as the 101, then housing prices in Austin will continue to rise.

[startupdoc]

good god, and I thought cost of living was high where I lived...

[Dont_know_mind]

Someone once said to me buy what you can afford. I like to think of housing as a call option on the local population (or what they will be able to afford in the future)

Everyone is different. You have to figure out your risk preferences and priorities.

If your wife is not willing to rent long term, you are structurally short 1 house. That is, you will have to buy one in 2 or 3 years or whatever. If house prices stay the same or go down in real terms then you have made a profit by waiting. But if they go up then you could be in a bit of pain. House prices can go up rapidly in a boom, possibly much faster than you can save, given what you want.

I was about to close on a house for 1.4M and passed it up, only to have to buy a comparably worse place for 2.8M 3 years later because my wife really wanted to live there and was not happy renting long term. Luckily we were not short property overall but this still hurt,

If this is your first house, or you are low on equity, you may find it even harder to buy a place (pull the trigger) when the housing market is booming.

I would buy what I can afford. If I had your income and saving I would be comfortable with 1.5M-2M, but what you choose depends on your preferences. You may decide on nil, or more than that exposure. Perhaps it is a good idea to have buffer for having further children. Your hedge against housing going full on bubble mode again is to be market weighted. If you are pessimistic, maybe you could be underweighted and buy a 1M apartment.

I don't know why people have such an aversion to upgrading. There is a cost but it hedges your exposure. Having zero exposure to property when you are short 1 house appears to me to have a significant risk.

Waiting to be able to afford the dream house may work out or it may not. I like to fantasize about the ideal this or that but I also like to live in the real world now. Reality can certainly smack you in the face if you are on the wrong end of a housing boom. If you are in cash that 2 years, I would say that is a risk. But then if buying a 3M place would be going all in for you, that may be too much risk too. Is there not a balance that you can discuss with your wife ? You both have to live with the consequences. I think the choice of waiting for 2 years may seem safer, but it may not. Especially if you are assuming house prices stay static. Risks occur either way. I would suggest to control your risks as we cannot predict the future with accuracy.

Invert the situation: what is the worst thing that could happen : in 2 years, your wife is pregnant, you are still renting, the 1.5M house is now 3M. Suddenly, that 1.5M house is a bargain and the concerns you had are not really that important.

: you buy a place, in 2 years house are down with that 1.5M house is now worth 750k. You have stable jobs. Maybe you can upgrade or do some renovations.

Which is worse ? To me the first because it happened to me, but then then maybe that is my bias. The latter also happened to me to a lesser extent in that I have held when property has gone down (but only have been down 10-20% from buying price). But at least with the second you won't necessarily have to sell out at the bottom if your income is stable and you believe in a positive trajectory. Will you have to buy at the relative top though in the former situation ? All I can say is that it is hugely stressful being on the wrong side of a property boom and I had investment property that went up by roughly an equivalent amount. If I was just straight outright short a property I am not sure how I would have coped. I may well have done even more stupid things than I ended up doing under even greater pressure. Or maybe we would have separated. The other thing I found is that rationalizations such as "it really doesn't matter", "we can afford it" are not very helpful when you are on the wrong side of a property boom. It absolutely does matter when all your friends who bought a house are up and you feel you are falling behind and even people you thought were morons are doing incredibly well just for buying a house. Perhaps you can't afford it. The psychology of FOMO (fear of missing out) is interesting.

Good luck in your decision. Consider getting adequate income protection if you do buy.

 

[The White Coat Investor]

AlexxT wrote:

I live in the heart of Silicon Valley and know the South Bay well.   My general advice would be to buy a house that is at least 3-4 million at your salary level.  That will get you the house that you want to stay in. ( 4-5 mill will get you what you want, with few compromises, best school district ) You should probably avoid upgrading later.  You didn’t specify exactly where you wanted to live.

I agree with renting for a few years.  That will give you time to explore real estate.  Go to open houses.  Learn to recognize the value of the land vs the value of the home.  Learn how much time and money it might take to renovate a home.   That way you’ll be able to judge the true value of a particular house.

Decide if you want to live in walking distance of a small downtown, or further up in the hills.

Without a doubt, buying an expensive home will leave you relatively “house poor”.  In other words, you will have a high net worth, but a lower cash flow, since more of your money will be tied up in your home.  Your real estate taxes will be 1.5% of your purchase price (+ any renovations ) so  4 m home will cost you $60,000 a year in taxes. So not only have you tied up 4 mill in the house, but another 1.5 mill in investments to pay the taxes.  However, that will lock your tax increase to only inflation.  If you wait to buy, taxes will rise.

The net worth of my house has kept up with the S& P 500, including expenses.   I had no problem retiring relatively early.

Where are you considering buying?  Where will you be working?

Please PM me if you wish for a more detailed analysis.

Click to expand...

10X salary. Seriously?

Only if the future resembles the past with regards to housing appreciation can this possibly work out well for you. The financial sacrifices and risks that will be necessary to buy a house at that sort of multiple would be very unattractive to me. I would be very hesitant to go above a $2.5M house with a $500K down payment on your income, even in a very high cost of living area.

Trees don't grow to the sky. If your house continues to appreciate at the rate it has in the last 20 years, who will be able to buy it from you besides Mark Zuckerberg?