Buy first home in Bay area or invest and wait

[Naina Tara]

Hi,

We are a couple with no kids and single income in the Bay area. We moved here 4 years ago and still renting.

We have saved upto 260K in cash and have liquid stocks upto 500k. 

I was checking for some feedback on areas to buy our first home in the bay area - that's when I read alot here ,on why it is not a good time to buy here (market at its peak and will go down). 

Should we continue renting (4k per month) and invest our liquid cash elsewhere till the market turns? Any suggestions would be very helpful - we also got preapproved loan upto 1.5millon.

[Marcy Moyer]

Naina,

If I understand this correctly you qualify for a 1.5 mil loan, and have 750K for a down payment for a total purchase price of 2.25 million dollar property. At the moment the market is appreciating so homes are selling 20% or more over list. This happens frequently at this time of year. By the summer most of the yearly appreciation has happened and it is easy to determine what a home will actually sell for which make home buying far easier. Not cheaper, just easier to deal with.

There is nothing on the horizon which leads me to believe we are in for a market correction in the immediate future. The change in interest write off from 1 mil down to 750K and the lack of deductibility of more than 10K in State and property taxes did not put a damper on the demand and tick up in home prices this year. As long as the tech companies are hiring the home prices are going to expensive.

So waiting for a drop in prices is not a great idea in my opinion.

You have several choices:

1. You can buy a home for 2.2 million or less. In Sunnyvale or Mountain View that will get you a 3 bedroom nice town home but a single family home west of central expressway is no longer an option. I am sure you saw the press about the 800 sq foot home that sold for 2 mil in the Cherry Chase neighborhood. The average price in West San Jose is currently 2.2 million so that is an option. You could afford a nice home in the west part of Santa Clara, including in the Cupertino School Distract area.

2. You can continue to rent and buy an investment property in the bay area in a place where you may not want to live. With your down payment you should be able to be cash flow neutral at a purchase price of about 1.75 mil to 2 mil. The advantage to that is that you would be able to take advantage of the still available deduction of of the full interest on the mortgage and the property taxes and the appreciation can be added to your equity when you do buy a home to live in. You would not fall behind in down payment with the appreciation that we historically have here.

3. You can buy an out of state investment. You would have better cash flow but not likely to get anywhere near the same appreciation. You will have to pay taxes on the cash flow that you do get.

4. You could buy a multifamily home and live in one of the units. There are few places in Silicon Valley where multi family homes are in neighborhoods that are as well kept as in single family home neighborhoods. These duplexes are often above 2.2 million.

5. You can buy a single family home and reserve 100-150K of your capital. Then you can convert an existing structure or add a new Accessory dwelling unit on the property which can be rented for additional cash.

All the choices have their pros and cons. Nothing is simple, but in the long run owning property is a great way to expand your wealth.