Tag Archives: home buying

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?

Another Sunday, Another 20 $2M houses

They range in price from $1.4M to $2.2M — that is, houses that in any other part of the country would range in price from $200k-$600k, but in the Bay Area are priced beyond comprehension. I took a solo day of open house touring to check out a few on the “lower” end of the range that I thought might work for myself, my husband, my son, my future child(ren), my husband’s dad and my husband’s mom. You know — a 1500 square foot 3br/2ba on a lot at least 6000 square feet with an accessory dwelling unit (ADU) that we could all live in together as one big happy family…

I even started, in previous weekends, exploring further south (as in San Jose) – but prices aren’t much better there. You get a bit more for your money space wise, but you’re still spending $1.5M+. For a 2 hour commute to SF, you can possibly find something for $1.2M. It’s just extremely depressing and every day it weighs on me. I constantly text my husband “let’s move to NY” and I’m partially serious but he’s very serious he doesn’t want to leave. He’s right that with his mother and father we can afford something here. And I do want to stay but it’s just too much pressure if he’s going to continue to make $90k freelance income per year without asking for a raise or seeking additional projects –though his flexibility is helpful with childcare, but not so much with home buying.

I know, I know – we should keep renting. We’re fine in our 1 bedroom right now (which at 800 square feet and $2500 rent controlled to inflation is a STEAL!) When I have kid #2, we can move to a 2/2, which will likely be $4500/mo, but that is going to be in at least 21 more months. (hopefully) as I don’t plan to get pregnant again until May. That’s nearly two years of saving $$$ living in a one bedroom if we can survive it.

But I’m still just a train wreck over the whole “so this is it” mentality I have now… this is it… I’ve “made it” – heck, this year I may bring home over $350k in total income – and yet there is no way I can buy a house as my career won’t consistently deliver $350k / yr in income. I’ll be back to $150k in a few years probably and we can’t afford to buy on $240k income. I don’t know how anyone does it.

I’m trying to just let it go… to stop wanting so much because I know that’s what makes me unhappy, and outside of feeling a little distraught by the state of my bedroom (because it includes my husbands office and looks like a college dorm room in terms of furnishings), I’m pretty happy where we are now. I wish my son had an outdoor space to run around in,  because we don’t get to the park often enough and our balcony isn’t safe for him – but he has the entire living room floor as his toy room. There are no stairs (inside our home anyway) for him to hurt himself on. We have a pool in the apartment complex I’ll definitely be enjoying with my son this summer. So it’s not all that bad.

I just don’t see how I go from where I am now to that next step. Buying a home is probably the wrong move financially. So we wait. We wait and probably get more and more priced out of the area until we have to move. Maybe that’s the strategy now. I wish it didn’t have to be. But these $2M houses make me spit out my water and laugh so hard… $2M should buy you luxury and I don’t think I’ll get over that to buy a home in that price range, nor can I get over spending $1.5M to buy a fixer upper on a not-so-great street. So, yea, for now, for-ever?- we rent.