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Should I pull the plug and buy in a VHCOL area?

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  • #16
    I'm curious- what is keeping you from searching elsewhere to settle? Are you from this area? Do you have family in the area? I'm just asking because I feel like when we add kids to the equation, proximity to family becomes more important (if you happen to get along with family, that is).  If you're choosing to live in a VHCOL area because you're close to family/friends and you feel like you're really a part of that community, then I can see a reason to stay.  I can also justify it if you happen to have a job you love that pays above and beyond what you would earn elsewhere.  But if you're there because of nice weather and the cultural amenities, then it's up to you as to whether you think the finances make sense. I can just speak from personal experience that owning a home ends up being way more expensive than just the mortgage- I was naive as a first time homeowner, but I've learned my lesson and look forward to the day when we can downsize.

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    • #17
      ... "You have a net worth of $650k at 40.  This seems low to me."

      What would you recommend that his net worth be at his age?  What about at 50?  I guess a lot depends on income level, no?

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      • #18




        2 years ago I bought an 850k home and our income is about 700k in a MCOL. Property taxes are 7k and state income tax is 5%, so much cheaper than Cali. No way I’d spend what you are thinking about based on your income. Some days I think we overdid it. You will be a slave to your job, any, and I mean any issues at work and you will be spending nights awake worrying about things. No reason to place yourself and your family in that position. Walk away, you will be glad you did. I also agree that your retirement savings are low for your age and buying this home is only going to make them grow slower.
        Click to expand...


        Cmon.  You make 700K/year and you think you overdid it by buying a 850K house?  two years ago rates were probably in the 3.5 range, which means that with 20% down your P&I would have been around 3k a month.  Your monthly income is nearly 60K and a 3K P&I was overdoing it?  Hard to take that seriously.

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        • #19




          … “You have a net worth of $650k at 40.  This seems low to me.”

          What would you recommend that his net worth be at his age?  What about at 50?  I guess a lot depends on income level, no?
          Click to expand...


          It's a worthy question.  OP mentioned 430k income and 2 toddlers and a commitment for presumably the Bay Area and moving from tenderloin level SF to sounds like south bay or even parts of east bay/marin.

          Have to caution you---make doubly sure it's truly 30-45 min.  Commute Traffic can be quite variable over the bridges at times.

          OP - how about 529 for college and pension?  at 40, you're going to get into the SF bay dilema - house rich, savings poor and have to make sure you get the right house that's relatively recession and location resistant.  Not all Bay Area communities weathered the last recession evenly and some returned quite quicker than others.

          IMHO, Tri-Valley area remains a pretty sweet spot with great public schools and suburbia feeling.  while my BIL loved San Mateo for its walkability and access to SF and other surrounding suburbs readily.

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          • #20
            My concerns, in addition to the increased financial cost of housing, are the additional costs of travel related expenses ( gas, wear and tear from increased distance and slow moving commute) and the emotional toll of coming home exhausted every day after the drive and not being able to spend time with growing children. Forget about going to kid's school activities or games unless you have shift work.

            Some are willing to sacrifice things like this in life for the glory of living in the Bay area. The tech people get paid more for living there. The physicians, on the other hand don't see an increased pay to keep up with the costs.

            Thank goodness I live in a MCOL area.

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            • #21







              2 years ago I bought an 850k home and our income is about 700k in a MCOL. Property taxes are 7k and state income tax is 5%, so much cheaper than Cali. No way I’d spend what you are thinking about based on your income. Some days I think we overdid it. You will be a slave to your job, any, and I mean any issues at work and you will be spending nights awake worrying about things. No reason to place yourself and your family in that position. Walk away, you will be glad you did. I also agree that your retirement savings are low for your age and buying this home is only going to make them grow slower.
              Click to expand…


              Cmon.  You make 700K/year and you think you overdid it by buying a 850K house?  two years ago rates were probably in the 3.5 range, which means that with 20% down your P&I would have been around 3k a month.  Your monthly income is nearly 60K and a 3K P&I was overdoing it?  Hard to take that seriously.
              Click to expand...


              Eh, I don't know. I'm with Dreamgiver for the most part here esp earlier in career.

              In most parts of the country if you can't be happy in an $850k home I don't think you're going to be happy in a $1.6M one. This calculation changes a lot when you make $100k, $110k home might barely get you something safe but $240k is probably pretty decent. Someone making $700k is hopefully saving $140k/year for retirement and then has well over $100k just in fed income taxes. You throw a little bit of med school loans onto that and a few kids in school and it isn't like you can just easily cash flow a $1M+ home.

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              • #22
                Would I do what you're about to do on your income?  NO WAY.  My wife and I make 350k/yr and I can't in my wildest dreams fathom having a mortgage 3X our income (1,050,000).  I would not be able to sleep at night.

                That being said, I don't love my job and I don't want to do it for 30 years.  I also live in a LCOL area where that kind of home would be stupid big.  I'd be embarrassed to live like that here.

                You live in a part of the country where someone with your income is considered middle class.  A $1.5 million dollar house is considered average.  So, it's hard for me to say that I wouldn't have the same temptations as you if I were in your shoes.  However, that's why I don't live where you live.  I love California, but the number one thing preventing me from living there is the insane cost of living.

                You have 2 choices IMO...1. You move somewhere else in the country or 2.  You stay and either rent or buy.  If I had to stay, I would rent.  I wouldn't buy UNLESS...you absolutely LOVE your job and you are a rock star at it.  If you can say with certainty that you can't imagine your life without your career because you are in love with it and it is your passion in life, then go for the house.  You also need to be in love with your city.  Because signing up for that kind of debt is indentured servitude.  Which is fine if you love your job and your city, but it's torture if either of those things aren't true.  30 years of REALLY big mortgage payments needs to be worth it.  Have you calculated the actual monthly payments principle, interest, taxes, and insurance?  P&I alone would be 6200, so I'm guessing you'd end up around 8-9,000 with taxes and insurance?  For 30 years.  Not sure what your take home pay is, but I'm guessing after taxes these payments come close to 1/2 of your take home pay?

                Really think that over carefully to decide if it's worth it to you

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                • #23
                  I live in a HCOL area, price/income ratio is 3 and price/rent is 25+, renting is certainly favorable.  However, I'm still looking to buy only because I plan to stay here for the long haul, my family is here and I plan to grow old here.  If you're committed to the area long term, I'd say buy, but if you could see yourself leaving the area for job or other reasons in say 5, 10, maybe even 15 years, then I'd consider renting, investing the difference and then possibly buying with cash wherever you move to.

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                  • #24
                    Again the old rent/buy issue -  I agree for short term, the costs of a sale keeps earnings down, hence the 3-5 year rule.   However, long term?   No way.

                    Like anything, if you're not in the market, you're not in the market.  Renting is a long term loss game.  You get NOTHING back.

                    The issue for OP and all those who choose to stay in a VHCOL area is buying the right size, right place for the right reason and time.   If the plans are long term stay, he should buy.  It's simply the size, location, and other factors that come into a significant play.

                    OP is in a typical average situation for Bay area families.  It's crazy, but true.

                    One thing to remember about these good school districts and needs to considered in OPs thinking of public schooling -- EVERYONE is smart, engaged family that pushes, and the top tier all compete for state and national level stuff.  It's a stressor on the child and family like no other at the most vulnerable time of their lives.   It starts EARLY in elementary school.  3rd grade science projects are college level thesis statements at times.  Kid you not.  Think soccer parents in on steroids in the classroom.  Tiger parents for those who read Joy Luck Club.

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                    • #25










                      2 years ago I bought an 850k home and our income is about 700k in a MCOL. Property taxes are 7k and state income tax is 5%, so much cheaper than Cali. No way I’d spend what you are thinking about based on your income. Some days I think we overdid it. You will be a slave to your job, any, and I mean any issues at work and you will be spending nights awake worrying about things. No reason to place yourself and your family in that position. Walk away, you will be glad you did. I also agree that your retirement savings are low for your age and buying this home is only going to make them grow slower.
                      Click to expand…


                      Cmon.  You make 700K/year and you think you overdid it by buying a 850K house?  two years ago rates were probably in the 3.5 range, which means that with 20% down your P&I would have been around 3k a month.  Your monthly income is nearly 60K and a 3K P&I was overdoing it?  Hard to take that seriously.
                      Click to expand…


                      Eh, I don’t know. I’m with Dreamgiver for the most part here esp earlier in career.

                      In most parts of the country if you can’t be happy in an $850k home I don’t think you’re going to be happy in a $1.6M one. This calculation changes a lot when you make $100k, $110k home might barely get you something safe but $240k is probably pretty decent. Someone making $700k is hopefully saving $140k/year for retirement and then has well over $100k just in fed income taxes. You throw a little bit of med school loans onto that and a few kids in school and it isn’t like you can just easily cash flow a $1M+ home.
                      Click to expand...


                      You also think that a 850K house is pushing it for a 700K income???  I find it hard to believe that anyone thinks a 680K mortgage note (after 20% down) is pushing it for a 700K income.

                      As a side note, although 850K in most of the country will get you a huge mansion, in places like SF (where the OP may be living) it will get you a 760 sq ft 1 bed 1 bath condo with crazy HOA's.

                      https://www.redfin.com/CA/San-Francisco/1905-Laguna-St-94115/unit-305/home/1312913

                      BTW I bet this one will sell for more than asking.

                       

                       

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                      • #26




                        Again the old rent/buy issue –  I agree for short term, the costs of a sale keeps earnings down, hence the 3-5 year rule.   However, long term?   No way.

                        Like anything, if you’re not in the market, you’re not in the market.  Renting is a long term loss game.  You get NOTHING back.

                        The issue for OP and all those who choose to stay in a VHCOL area is buying the right size, right place for the right reason and time.   If the plans are long term stay, he should buy.  It’s simply the size, location, and other factors that come into a significant play.
                        Click to expand...


                        I think the current west coast market is a little different from typical rent vs buy debates.  I generally agree with you, however I have a hard time believing that the housing market on the west coast is truly sustainable at these prices long term.  Of course no one can predict the future, but it is possible that buying at such a high point could be bad if things don't keep going up or at least stay stable.  Plus, with the price of taxes, insurance, interest on the loan, repairs/maintenance, and upgrades, he could end up losing less if he rented.  There's no guarantee either way.

                        If he is truly going to stay in one house the rest of his life, then it doesn't matter so much.  One gets into trouble when they need to move.  Just as it's hard to predict what will happen with the housing market, it can be hard to predict if he'll want or need to move in the next 10, 20, or 30 years.  So, it can be a bit of a gamble in deciding what to do.

                        The most important thing to do is consider cash flow, savings goals, and job security.

                        Comment


                        • #27
                          I don't think it's pushing it, I just think that this whole "what can you afford?" line of thinking has been set by the real estate industry and based on 30 year mortgages.

                          4-5X is what they've sold us as being "necessary in places like NorCal"

                          3X is what they want you to spend

                          2X is what most WCI people seem to consider a max

                          <2X is clearly more c/w things like FIRE.

                          We're quite frugal for our income and literally have never had a month where we spent more than we made, I just have a hard time seeing how 2X wouldn't be a stretch even for us. It wouldn't be if we dropped our savings rate or were committed to working full time until we were in our mid-60s. We are not going to do either of those things.

                          If you make $500k then say you pay $100k in taxes. You commit to a 20% savings rate ($100k/year) you're at $300k. So you're taking home around $15k/mo after all said and done. Mortgage on a $1.2M home you can "afford" b/c you put down 20% and it's only 2X is $7000/mo for P+I. That's half of what you are taking home. Figure $10k/year in property taxes and $10k/year in maint, that's more than a month's take home out of pocket. Again these are round numbers you can quibble with them slightly but I don't think majorly.

                          And then you get into the factor that most people in $1M homes are not driving Honda, buying furniture at the Discount Warehouse, or vacationing at the local campground.

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                          • #28
                            Wow, great responses (and debate) so far about this--thank you for insights. And yes, I should have said "pull the trigger" but in light of the responses "pull the plug" now seems more accurate for VHCOL locations.

                            To shed further light on our situation:
                            Moved to California for job opportunity and family
                            Monthly takehome: 21K
                            Monthly expenses: 8-10k (includes everything, rent, insurance, vehicles, groceries, travel)
                            Retirement: 18k yearly (max allowed), no pension
                            529: none
                            Wife: former accountant (approx 100k yearly) but now a SAHM and plans to remain that way for the foreseeable future until kids are a little older (probably 5 years).

                            I agree we're behind with regards to net worth, but we prioritized paying off student loans and have been truly "debt-free" for only about 1 year now. Not going to lie, it's a nice feeling to be unencumbered. BUT-- we have a huge sense of duty to our kids and making sure they are raised safely with a "normal" childhood. Even the simplest thing--like playing in a backyard or in the street with other neighborhood kids is not possible in our area unless we plop down upwards of 2.5 million. Which is why we're contemplating the alternative of a 30-45 minute commute to be in an area where that is possible.

                            Since we really can't leave the area yet due to job contract (1.5 years remaining) and the fact that we actually like the cultural pace and activities possible in California, I guess our options are 1) continue renting to save 10k/month for eventual home/retirement/out-of-state move 2) decrease spending dramatically (again hard in VHCOL--unleaded gas was $4.25/gallon today) or 3) buy a house now and decrease our savings rate to about 4k month (assuming the 6k extra we'll be paying for PITI and home-related expenses) AND a 1.3 million albatross around our neck. Our realtor/family/friends say the housing market is "safe" here, with returns of >3% YOY, but honestly I can foresee one really big earthquake to completely wipe out the housing market.

                            Seems like option 1 is our best bet.  But it's psychologically jarring that at age 40 we're still renting, and can't even begin to think about buying a house here despite being well- compensated (top 10% of all wage-earners I would estimate?).  I guess that "American Dream" thing only exists in the LCOL/MCOL states.  Even more amazing is that there are people able to buy houses here going for >2 million....how they do it is a mystery to us!

                             

                             

                             

                             

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                            • #29




                              I don’t think it’s pushing it, I just think that this whole “what can you afford?” line of thinking has been set by the real estate industry and based on 30 year mortgages.

                              4-5X is what they’ve sold us as being “necessary in places like NorCal”

                              3X is what they want you to spend

                              2X is what most WCI people seem to consider a max

                              <2X is clearly more c/w things like FIRE.

                              We’re quite frugal for our income and literally have never had a month where we spent more than we made, I just have a hard time seeing how 2X wouldn’t be a stretch even for us. It wouldn’t be if we dropped our savings rate or were committed to working full time until we were in our mid-60s. We are not going to do either of those things.

                              If you make $500k then say you pay $100k in taxes. You commit to a 20% savings rate ($100k/year) you’re at $300k. So you’re taking home around $15k/mo after all said and done. Mortgage on a $1.2M home you can “afford” b/c you put down 20% and it’s only 2X is $7000/mo for P+I. That’s half of what you are taking home. Figure $10k/year in property taxes and $10k/year in maint, that’s more than a month’s take home out of pocket. Again these are round numbers you can quibble with them slightly but I don’t think majorly.

                              And then you get into the factor that most people in $1M homes are not driving Honda, buying furniture at the Discount Warehouse, or vacationing at the local campground.
                              Click to expand...


                              How about less than 1X?  Because a 680K mortgage on a 700K income seems pretty ************************ easy to me.

                              BTW your number dont add up.  First, if you are saying you save 100K a year, then you save 100K a year.  It shouldnt be counted as an expense.  Second, if you are at 300K after paying 100K in taxes (BTW your taxes are low, but I will use the numbers you provided) and 100K in savings, then you are taking home 25K/month not 15K/month.  Third the P&I on a 1.2M home after 20% down should be about 4850 a month at 4.5%, not 7000/month.  Even the PITI on a 1.2M house is not 7000/month (it should be around 6200-6300 a month).  Thus even the PITI would be about 1/4 of your take home pay.  Lets say you live a lavish lifestyle and spend another 10K a month on other living expenses, you are still saving nearly 9000 a month, on top of the 100K you already took out.  You will literally be saving over 200K a year still.

                               

                               

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                              • #30
                                I'm not sure I can be of help that much. I'll offer some anecdotes and my similar question from last year.

                                The wife (MD) and I (currently a chemist, maybe a future stay a home dad) are in a pretty similar boat. I guess we've got a bit more cash on hand, since my company had a windfall event (not huge, but covered a down payment). We're currently renting, debating the pros and cons of buying almost daily. Against a lot of the advice on this forum, we put in a 1.95MM (~4x income) offer two weeks ago on a townhome in Los Altos (list 1.6MM), lost to an all cash offer of 1.95MM. It was a pretty perfect location for us, otherwise, we're trying to delay buying until Spring of next year. Maybe if another unit in this complex goes for sale, we'd move on that too.

                                Our current thinking is that renting really does come out ahead of buying in the areas we're looking at. Wife is really into renting (flexability, cost 5-6k/mo vs ~9-11k for a similar home) and I'm more on the buy side (lock in mortgage, taxes, stability). After much deliberation, I'm not convinced this should be a financial decision for us. We can afford to live here, we're pretty frugal, a Bay Area home could be our luxury. On the flipside, renting gives us the flexibility to GTFO any time we ************************ well please. Given that I'd rather live in the Foothills of the Sierras, maybe that's a good idea? We've got lots of friends in the area, and some extended family. Wife's brother lives in Sac.

                                If you're in the Bay Area (seems like it), I made this thread in Dec. 2017. Maybe you can glean some info from it? A bunch of people chimed in (6 pages of posts), its more oriented toward the Peninsula than the city. One of the things that's mentioned there, that's very real, is the FOMO you experience when you're friends buy in a raging house market, only to see the values of their homes almost double in ~4 years. Hindsight is 20/20, and we didn't even live here 4 years ago.

                                My rambling, not useful response. Good luck!

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