What would you do if you live in a very expensive neighborhood ?

Question

I have been waiting on the sidelines to buy a home since 2006. I live in Santa Barbara and after 5 years of renting a one bedroom apartment frankly my patience is running out. We are planning to have a kid and need to move into a bigger place. I am paying 1500$/month right now and would be paying over 1800$ to rent a decent two bedroom.

Median price of a home in Santa Barbara is 550k.

So here are our options

1) Pay around 430k to buy a SFH(3bed) in a very poor condition but in a good school district in Santa Barbara.This home will probably need another 50k over time to make it a home.

2) Move to Ventura(40 miles away) and pay around 330k for a decent home (3 bed). Commuting would be 1 hour one way.

3) Buy a condo for around 300-320k and pay 400$ HOA :(. I am totally against condo's based on what I have heard on biggerpockets.

4) Keep renting

5) Move away by changing jobs. I have a very stable job,like the town and people and earn more than I would earn elsewhere for a similar position.

Someone who has lived/worked in an expensive neighborhood please let me know what you did in this situation.

Jon Holdman · Answer

Let me try to express again what I was trying to say.  A house is just a place to live.  Renting vs. buying is just the math part of the equation.  You pay what you can afford to live in something that meets your needs.  If it costs you $2000 a month to rent something that would cost you $4000 a month to buy (after factoring in all costs), then RENT and don't worry that you're "throwing away money on rent".

If you're worried about what you would do if you lose your job, I have two pieces of advice.  First, get a proper emergency fund.  Cash or readily available credit to cover six months of expenses.  If you do lose your job, you may get some severance.  You won't be paying taxes, either.  And some expenses, like dry cleaning or gas for commuting will go away.  Some, like cable, internet, and eating out, can go away.  So, figure out what would be left and accumulate that much cash.  Or, if it has to be, credit that you can convert to cash quickly if you do get laid off.  If you do get laid off, grab the cash right away.

But second, and actually more importantly, don't worry about it.  Jobs come and go.  Tell yourself "I was looking for a job when I found this one".  SB is a beautiful place, but one of the downsides is that's it not very big.  By renting, you have more options.  Even if you have to break the lease, its a LOT less painful than selling at a loss or a foreclosure.  If you buy and sell a house, the "round trip costs" are, at best, about 10%.  A little of that when you buy, a lot when you sell.  These days, add another 3% for seller concessions.  So, if you buy a $500K house now and sell a year from now, the costs will be about $65,000.  You would need 13% appreciation to cover that, and even in SB, its not going to happen.  If you have to pay a full years rent to escape a lease, its almost certainly less than that.

But owning a house has a whole set of intangible benefits.  Its YOURS.  Even with a foreclosure, it takes a long time and a lot of effort to get you out.  In CA, loans are non-recourse, which means taking the house is all they can do (well, along with wrecking your credit).  You can pound all the nails into the wall that you want.  You can plant trees and install water features in the back yard.  If you want that, and can afford it, BUY A HOUSE.  Then start pounding nails and planting trees and work hard at your job and don't worry about the money part of it.

Jon Holdman · Answer

This is in part just a math problem.  What would a house that you would like to have cost you?  Can you rent a similar house?  If so, how much?  There are lots of places where renting is cheaper than buying.  I suspect Santa Barbara is one of those places.

A residence (i.e., a house you live in that doesn't generate any income) is nothing but an expensive doo-dad. But you have to live someone (though a co-worker of mine when I lived in Bakersfield always said he was going to go live on the beach in Santa Barbara.)  You can either rent a place to live, rent money to "buy" a place to live (i.e., get a mortgage) or you can pay cash and forgo the potential returns from the cash.

I've done the one hour commute thing and don't recommend it.  When we lived in Bakersfield, we were only about 10 minutes from work, which was great.  Sometimes circumstances put you in that position, but given a choice, I'd avoid it.

Also consider that when you own you have a number of expense you don't when you're a tenant.  The landlord is responsible for the property.

On the other hand, you can decorate and modify a house you own to your hearts content.  And the lease never gets terminated.  If you buy with the attitude you will pay of the mortgage and die in the house, then at some point it will be free and clear and you'll have that place to live forever, provided you can handle the other expenses.

If you rent you also forgo the possibility of appreciation.  Since its impossible to predict what we could see in the future, I'd back into this.  Do the math for renting vs. buying.  Include realistic assesments for the other expense like maintenance and major improvements.  Compare the two costs.  My guess is renting will be cheaper.  Then compute how much annual appreciation you would need to get to make buying equivalent to renting.  If that's some reasonable figure, like 2-3%, then you're probably OK money wise.  If its 15%, you won't get there.

If renting is cheaper, consider what you would do with the difference.  Will you be disciplined and invest that money?  Do you need it for day-to-day expenses?  Or will you blow it having fun?

I don't buy the "a home is your biggest investment" idea.  People say "I only paid $100K for my house 30 years ago and now its worth $500."  That's the same kind of skewed math scam artists use to promote their scams.  You may have paid $100K, but you paid $200K in interest on your mortgage.  You paid $50K in taxes and $50K in insuance.  You paid $30K in routine maintenance (how many toilet valves does it take for 30 years.)  You did a major kitchen remodel for another $50K.  Etc, etc.  And if you sell you'll pay $50K in commissions and costs.  So, as an investment, that's a loser.  Its just a place to live.

Joe Bertolino · Answer

I look at my home differently than I do investments... you cannot just "run the numbers" when you are talking about a home for your wife and kid(s).  You are established in the best place in the world to live IMO... buy a fixer with good bones in a good neighborhood/school district and fix it up as you can afford to do so.   You are in an area where home prices will never take a huge drop and will likely continue to increase.

Michael Lauther · Answer

Guarav: as usual our members have crunched the numbers and analyzed the financials quite well.

I may be the lone voice here but your decision here is only part financial. Don't lose site of the quality of life issues. Living 1 hour from work turns into much more time away from home.

Missing dinner with the kids, having breakfast with them in the morning, coming home for lunch if you want wont happen if you are stuck in traffic or on a train.

Living in a Duplex is giving up some of your privacy even if you live substantially rent free.

These are the things we overlook in our haste to make or save money. You will work a lot of years so consider your comfort and your families enjoyment along with the financials.

If you were ever going to buy a fixer upper in a good neighborhood this would be the time.

If both you and your wife are working you will qualify for a good mortgage and have the money to put into the property.

Once you have children your income may go down at least until your wife can go back to work and after your children are born. Do It now while you are young and have the energy and the flexibility to use your earnings towards upgrading your home.

Don Hines · Answer

Could you live with owning a duplex and renting the other side out? Sounds like it could be the best of both worlds.
Don

James H. · Answer

This is partly math and partly other stuff. First ask yourself why invest in real estate in the first place? There are many reasons, but I think it's save to say making money is the biggest motivator (whether short term or long term). Why do you want to make money? To afford the lifestyle you want. Personally, I am not the type to live under a rock my whole life so I can be a millionare when I'm an old man. Therefore, unlike many investors, I'm willing to spend a little money to enjoy some of life today.

That being said, I enjoy working with my hands, hate long commutes and like the idea of having one house to live in for a long time and not have to worry about moving in 6 or 7 years. Therefore, I would go with option 1. Just my opinion based on many factors that have nothing to do with investing. However, you will be better off long term financially by going with option 1 over renting anything,

Jonathan Sher · Answer

Gaurav, I can see your point in getting in a good school district. But here's one thing. From my understanding, you don't have kids yet but plan on having them soon. So would the school district really come into play even in the next 5-6 years? Could you buy the house that's in a reasonable school district and cheaper or just continue to rent and then in 5-6 years when school district starts to matter, you could move then?

Brian P. · Answer

GS

First things first, stay in town, rent the 2BR, adopt an investor mentality and start looking for the opportunities an investor looks for. I know Santa Barbara is not a paradise for bargain hunting but chances to invest and do things to gain income do exist.

I read J Paul Getty's book on how to get get rich when it was just out and in there he said live in the best neighborhood even if you have to live in an attic. And I took his advice and bought a non-selling piece of crap in the highest price area in the community for $13k. It's price today to buy it even in this market is now a little under two million. We had our two sons born there, every couple of months we would plan some little project to inmprove the place and all those little projects over time finally added up to a nice house.

The second part of Getty's idea was to live among the people like you want to be, rich and getting richer. Contacts I met there were early investors in my early projects. I had been an executive with a fortune 500 company and I quit it to work driving a truck at half the pay in the middle of the night. So I could work the real estate game, investing and brokerage in the day. I did that so I could live where I wanted to live and how, not what some corporation demanded of me daily. So as others have said go for quality of life, those are the choices I don't regret and seeing my bride of 52 years when I wake up in the morning is better then anything else in the world.

Gaurav S. · Answer

@Michael Lauther : I am the sole earner in the family. Hence, I am motivated to buy something that does not loose money over time. Also, if I loose my job we won't have a fallback income to support payments.

Gaurav S. · Answer

@Brian Hoyt: Yes, buying a home is definitely more than just a investment. But as Jon said there is a price for everything. At one price its worth it and at another its not.

@Michelle Marty: At present I live only 1 mile away and come home for lunch. In my opinion buying 1 hour away to buy a home for 150k less is not a good tradeoff.If it was 50% less than it would make more sense. There is a bus from Ventura to Santa Barbara which is why I am looking at Ventura in the first place.My guess is that Santa Barbara will have a higher appreciation in the long term than Ventura but I could be wrong.

@ Zachary Dosch: I prefer going South of Santa Barbara vs North since I would be closer to the city life, can go to LA in half an hour and closer to the shopping malls. North of SB is very nice and peaceful but not a life style I want when I am young.

Can someone give me some tips from your experience of buying a fixer upper. I wouldn't call myself a handy man but being an engineer I feel I have the patience needed to understand and fix things.

Specifically,

1) What characteristics do you look for in a fixer home ? 
2) How do I estimate the cost of fixing a home ? 
3) What strategy do you follow to buy these kinds of home if they are listed at a similar price to good condition homes in the neighborhood ?

Maybe I should find an agent who has experience in fixing and flipping homes.This way I will get a reliable initial estimate of the cost.

Thanks

What would you do if you live in a very expensive neighborhood ?

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