Should We Buy a Home or Rent a Home in the Bay Area?

East Bay. North Bay. South Bay. Peninsula (Bay). So many–unaffordable–options where to live!

Sane people would take this pandemic situation and pack their bags and head to any reasonably blue part of the country that doesn’t cost $1000 per square foot.

But we’re crazy and want to stay. And there is no reasonable way to calculate how much house we can afford because our income is SO variable. This year we might make $700k (yes that’s crazy and like double our best year ever)! Two years from now, we might be lucky if we make $200k. How on earth do we figure out what we can afford?

28% of Lowest Income Earner After Tax
The safest way to figure out how much you can afford is to plan on spending 28% of the lowest income earner’s income after tax. My husband makes $90,000 but since that doesn’t include benefits I’m going to say that’s $75,000. If we as a family made $90,000, our taxes would be lower. That would be $7500 a month pre tax or maybe $6000 after tax. We could afford $1680 on rent or mortgage per month.

Well, that’s not going to work… we’re already spending too much at $2600 per month on renting our one bedroom. I guess we can’t plan based on this conservative model.

28% of dual income assuming minimum earning potential
If I assume my husband can keep his $90k a year job even and I can manage to make $150k on average, that gets us to $240k a year. I think I can probably make more than $150k but I don’t feel comfortable committing to more than that (my base is now $170k.) So At $240k a year that’s $20k a month pre-tax, or $10k after tax. So we should spend $2800 on housing a month.

That’s about what we spend now. :/

36% pre-tax dual income minimum earning potential
Same numbers as above, but I’ve read some more risky plans suggest 36% of pre-tax income. That gets us to $3600–still not going to buy us a house in the Bay Area!

Ok, so none of these models work. So how do we figure out what we can really afford?

  • Downpayment & Emergency Fund: $380k
  • Pre-Tax Taxable: $197k ($98k after tax)
  • Taxable Accounts: $294k ($205k after tax)
  • Retirement Accounts Pre Tax: $346.5k ($242k after tax)
  • Retirement Accounts Post Tax: $70k
  • 529 College Fund: $52k
  • TOTAL NETWORTH AFTER TAX = $1M
  • Potential earnings next 1.5 years = $710k pre-tax ($355 post tax) + ~$100k savings from bonus and income (if we stay in our current apartment)
  • TOTAL NETWORTH AFTER TAX IN 1.5 years = ~$1.45M

So if I can maintain employment until January 2022, and my husband keeps his job, and the stock market doesn’t totally tank (which it could) we will have about $1.45M after tax, with $1M of that being in non-retirement and non-529 accounts (or maybe little less if we put more into 529 which we probably will.)

So let’s say in 1.5 years we have $1M in cash and after-tax taxable funds. But our income ratios say we cannot afford a home that costs more than $2800 a month.

Do we put down a large downpayment?

One way to reduce the monthly cost of a home is to put down a giant downpayment. Do we wait until we put down 50% or more on a $1.7M home? Does that work…

$1.7M home
55% downpayment = $935k!
$3875 monthly payment

Ok, so we put down almost $1M and we still have a $3875 monthly payment, which according to above calculations is still more than we should be spending on a mortgage based on our income!!!

And I don’t think we should $1M into a house probably, but it seems to be the only way to get our monthly costs down to something within a reasonable range.

How does anyone afford a house here?

Even though my income is good now, I cannot assume this will go on forever. I already know I need to change jobs in two years to get another stock grant, and it’s highly unlikely my next job will see growth at the same rate my current company has over my tenure here. I’ve been very fortunate to be part of this growth, but that’s not the reality of my future jobs. I already want to take on less stressful roles so I can actually see my children grow up. This shelter in place situation has made me realize just how important that is.

Before you say WHY DON’T YOU LEAVE THE BAY AREA just know that my husband refuses to. I don’t WANT to but every time I run these numbers I think what we need to do is rent here for another 1.5 years so I can vest my stock and then we need to GTFO of this HCOL area and live a slower, better life somewhere else. We’ve talked about moving to maybe Seattle, but I’m not a fan of the Pacific Northwest. I’m not sure where we’d move. He likes rain and grey skies, I like sun and heat. I like oceans. He likes being close to the Bay Area because his family is here. My family is in PA and FL. I feel comfortable with the job situation here–I don’t know if I could get a job or have job stability elsewhere. Maybe New York. I’d move to New York, not sure he would.

So we’re kind of stuck in this dilemma. I want to buy a house because to me that feels like I’ve made it. I want to settle down and meet the neighbors and really feel like we have a place for our kids to grow up. It also feels so not worth being in a career I don’t love and being so stressed (though less so not having to go into the office) and making $600k a year right now to not be able to afford a house because that $600k is meaningless in the grand scheme of things. And I know I sound like I should be thrown in the looney bin because $600k is a fucking lot of money–especially when a huge chunk of the country isn’t even getting a paycheck right now. I know it. It doesn’t change the math. We can’t afford a house. Not here. Not if we’re being remotely risk averse about it.

It is more challenging in that my husband is requiring us to live with his father-in-law. His father-in-law does provide part-time childcare, so I am supportive of this–and he can contribute to the monthly mortgage–but it makes it even harder to find a house that  is within the ballpark of reasonable for our projected income levels. I can’t expect my husband to get raises as he never asks for them. I got a shitty 1.7% raise last year so I’m just estimating I’ll stay flat for the foreseeable future, esp given the state the world is in today. We really need to find a $1.5M house with an ADU and put 50% down ($750,000) and then his father can contribute $2k a month and we’d be ok.

I don’t know what to do. I feel like until I have $5M in networth, I won’t feel like we’re in a good place to buy a house. But with one toddler and a kid on the way, I feel like it’s the right time to buy. What do we do?

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6 comments

  1. Mr A says:

    I’d keep renting until you can’t. You’re in a great situation. Stick it out another couple of years – and then decide at that time. You could also upgrade to a larger size rented apartment.

    I still think your best option is to get ouf of SF after you’ve saved up enough money. You could literally buy the house of your dreams for $600-$800k in many other big cities.
    Including cities with an ocean if that’s a must have. Or you could get an additional condo on the ocean.
    You can find rain and sunshine/heat at different times of the year in many places 🙂
    You could purchase it entirely cash, make less money ($90-130k) but be in a much easier low stress job.

    Many banks and mortgages let you loan up to 44.49% of combined pre tax income. I wouldn’t advise this for many folks, but with your savings it’s do-able. With your savings, you could afford a higher ratio like this as you have many years of a rainy day fund to back it up and overspend all expenses above net income. Even if you got in trouble you first could tap into your savings, and also the equity in the house overtime. You have many years of house payments and all monthly expenses saved up. I would use your consistent income and not the possibly temporary boosted income.

    It looks like you are in a fantastic situation. You’ve earned it. You’ve already earned years of freedom and choosing what you want to do. If you can get the vesting, that’s another huge boost. Almost there! Happy for you!

  2. Steveark says:

    I’d just keep renting. Having most of your net worth tied up in a slowly appreciating and non-liquid asset is a recipe for disaster. Houses appreciate at only slightly more than inflation rates and while SF is hotter than most markets, Detroit was also the hottest place around at one point in history. Those houses have no intrinsic value, only what people are willing to pay. If you have a net worth of ten million then a two million dollar house is no stretch, you can give it away and be fine. But you aren’t there yet.

  3. Vip says:

    Middle of the road (between totally leaving bay area and staying in SF city) is to buy house in bay area suburbs, say dublin/san ramon. I am pretty sure you can buy decent house in 1.1-1.2M range in easy bay.

    1. Joy ( User Karma: 0 ) says:

      Yes – we actually drove out to that area to look at the neighborhoods this weekend. I didn’t like San Ramon (felt too Disneyland to me) but did like Danville. It just seems like a bad commute to my work on the Peninsula–if I ever have to go back to the office. I don’t love the idea of dealing with bridge traffic. What is the point of living if I’m going to be stuck commuting so far each day? I know lots of people do it, but that’s not how I want to live my life. I want to live close enough so I can attend my kid’s school functions during the day and head back into the office. But it’s definitely a thought. San Jose doesn’t seem that much more expensive though, and it at least has Caltrain to various offices on the Peninsula.

  4. “ Potential earnings next 1.5 years = $710k pre-tax ($355 post tax) + ~$100k savings from bonus and income (if we stay in our current apartment)”

    Doesn’t that mean you guys are earning about $480,000 a year or $40,000 a month? If so, how come you say you can only afford less than $3,000/month?

    I think 20% down is enough!

    Sam

    1. Joy ( User Karma: 0 ) says:

      The issue is that the $700k could easily be not that, and it’s only for 2 years. It’s basically because my company stock value went up a lot. It’s not that until I vest (which happens quarterly for the next 7 months), but I could get laid off before I see all or any of it. I’m hoping that doesn’t happen and if it doesn’t yes that will be a lot of money after tax per month! BUT – that’s only for the next two years. After that my stock has mostly vested and I’ll be making under $250k a year. If I change jobs or get laid off and need to find a new one, I know I can find one making $150k a year. I might be able to make more, but I don’t feel comfortable committing to that yet as I have not proven I can get jobs that earn more than that consistently (past income has been 160k, 170k, 190k but I only stayed at those jobs for a year as they were startups and they weren’t good fits. Before I took this job I had other offers in the $150k range.) So I’m doing the math based on me delivering $150k in income and my husband delivering $90k in income. BUT if I keep this job for 2 more years I’ll have a good chunk of change in the bank. All of the home buy calculators are based on monthly income but we will have $1M in post-tax cash or stocks we can sell available, but likely won’t have enough to afford what we want to buy based on those calculators of income-to-debt ratios since I may not earn as much going forward. I also want to take some time off and consult part time, so I plan to reduce my income a bit at some point in the future.

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