Does it make sense to buy my own house?

Question

Hi,

My wife and I have been living in the bay area for 5 years and till now we have mostly invested in stocks and lived on rent. We are tired of having the rents increase on us so we wanted to buy our own house.

Given how extreme the ratio of price to rent ratio is in the bay area, does it even make sense to buy our own house? If yes, which areas are good and how do we understand how much we can afford comfortably? We have visibility that we will be staying in this area for at least the next 7 years.

Background:
We both work in tech
We have about 500k invested in stock (not including 401k)
We have about 100k in cash equivalents
We earn a combined income of 550k annually include cash and RSUs
We have no kids and don't have plans for any for the next three years at least. We can work from home.

Brennen Thompson · Answer

Hi!

I can't speak to SF, but I formerly lived and LA and had a very similar issue. A few things that helped me make a decision:

1. If I continue to pay rent, I'll never get that money back. If I own a property, I can essentially use it as a savings account... You pay down your mortgage every month and some day you've got all of your capital back
2. A home appreciates (usually at greater/equal rates to other investments). While renting, I couldn't take advantage of the appreciation
3. Owning a property gives me options. I.E. If needed, I can always sell, refi, or rent the property down the road

At the end of the day, I like to think of purchasing a primary residence like I would a high interest savings account - after a few years all of your money will be accessible, the value will increase somewhere between 8%-10%, and you're not locked in for life.

Dave Skow · Answer

@Siddhanth Maheshwari- get  pre approved so you  decome familair with the  process and the  current #s ...find out what loan amt  corelates  to your maximum comfort loan monthly payment ....if it appears your  max payment  would allow you to find some  properties in the area - proceed ....if not -  wait  to  save more  funds to  put down / re  evalauate the  area  to buy  or  wait for  rates / payments to  drop

Siddhanth Maheshwari · Answer

Thanks everyone. Looking at the monthly expense makes a lot of sense. Buying a 4plex with 2 million dollars seems tough in my area but I can start thinking on how to house hack. I don't want to share the same house with someone. But different houses seem like a good idea.

How much would the tax write-off help?

Eliott Elias · Answer

Even if rates suck, it's all a tax write off. Put the cash down on a down payment and buy a house, it will be the best investment you every make. You know you can afford by plugging in your number on a mortgage calculator, see what down payment/interest rate/taxes will bring you to monthly

Dave Skow · Answer

@Siddhanth Maheshwari  Work out a  budget and  decide what the  maximum monthly payment would be .....meet with a loan  person and  begin the  pre approval process   and provide them  with the max  payment amount  - the loan person should be able to  tell you  what loan amount this payment  corelates to .....once you know this ..add  your down payment funds to this max loan amt to get a  purchase price  ......once you have this - you can  then  look at the  properties that  fit into this  price  ...if there are  zero properties  -  continue to  rent or   revise the  budget  or   wait for  a  lower priced property to hit the market

Tyler Fontaine · Answer

I assume you mean buy the house you live in? You could ask your landlord if they would do a lease option to buy. (Eliminates the mortgage option)

That said, step one is to contact a reputable mortgage broker. They will underwrite you and let you know what you're approved for. The most important conversation they should have with you should be based around, "What are you comfortable with for a monthly payment?"

Just because you get approved for $800,000 doesn't mean you want to pay a monthly payment for that at 7% interest. Doing this will give you your budget that you are cool shopping with. So whether it's your house or another one in the area you at least have a price point to work with.

I'm actually a fan of renting if you're making good monies elsewhere. Renters don't deal with CapEx, repairs, etc... Another option could be to figure out how to invest in real estate in other ways. If you buy a rental instead of a house you will then attain cashflow to offset your increasing rents. You could become a hard money lender. You could get into syndications as a limited partner (lp) that will provide returns to you. Our team even has a number of clients that turned private lenders - they help us fund our flips and other acquisitions while they just deploy capital and collect checks after.

Marshall Leipprandt · Answer

@Siddhanth Maheshwari If I were in your situation, I would try and buy a nice 4 unit building. As long as you don't have crazy high debts from school loans, car loans, credit cards, etc., you would probably be approved for a pretty sizable loan given your strong financial position and high stable income.

You really have to run the numbers on what your current housing expense is (rent, utilities, rental insurance, internet, etc.) and compare that to if you spent maybe $2M on a solid 4 unit building where you could live in one unit and rent the other 3 for $4K/mo each. Of course, you'd likely need more cash equivalents on hand for a down payment depending on which type of loan product you use. Not sure if these numbers would work in your current area, but you probably want to own in an appealing area for other tech workers to ensure you're getting quality tenants as well as live in an area you like and enjoy yourself. Having $12K gross coming in from other tenants could be enough to cover a decent amount of your housing expenses and have your tenants pay off the majority of your PITI; therefore helping pay down your principal which builds your equity.

Something walkable to restaurants/bars and close to all of what the Bay Area has to offer will be your best chance of attracting strong tenants with stable incomes and rental history. Especially since you'll be there for 7+ years, that is a lot of time to live in the property and manage that asset accordingly. Plus, the longer-term outlook mitigates your risk on the downside at least in the near-term.

Does it make sense to buy my own house?

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