Buying a House in the Bay Area Even Though It’s Probably Going to Burn Down

Anyone on the west coast at the moment is dealing with some ill effects of the insane wildfires raging up and down the coast. Many of us woke up to apocalypitc orange skies earlier this week, and have been coughing through the impact of that atmospheric ash slowly raining on us all weekend. COVID is still raging as well, as is the occasional heat wave, and we’re all stuck in our various apartments and homes that do not come standard with air conditioning.

Yet, I’m still planning on buying an overpriced home here. That will likely set a wildfire to my own FIRE journey. All logical signs point to RENT but I can’t get the buying dream out of my head. At the very least–when times get tough–this will force us to find a way to earn more. This is good for me (I won’t be able to give up) and good for my husband, who hasn’t changed jobs (one part time job) in over 15 years. He has the same home ownership dream I have, so in a way it gets us on the same page regarding finances a bit. I think that will be good. It’s not like I’m just saying we need to save more for retirement (no matter how hard I try, he doesn’t get it and thinks he can live cheap and be fine on his minimal savings.) But a house — he gets that. So at least he will be on board to earn more if (when) shit hits the fan.

I see my own financial life going one of two ways:

  • I get somewhat wealthy. A few years ago, I would have said you’re bonkers if you proposed this idea to me. I had been saving for years and while I had “a lot” in my accounts, it was still no where near the amount that would allow me to ever achieve “wealth”–that is a minimum of $5M in networth. The I joined a company with actual stock (not stock options) and it went up in value a lot. And my other stocks also went up. It showed me how in 4 years, I could increase my networth by $1M. From ~$500k in 2017 to ~$1.5M at the end fo this year. Now, that was a winning lotto ticket. But there’s also no reason to think, if I were a normal person, that I couldn’t keep moving up in my career and getting similar grants for the next 30 years of my career. They may not go up as much as this one did, but at some point I would hit the $5M goal. It doesn’t seem completely impossible–and I don’t even need my husband’s money to make it happen.
  • I can’t afford the mortgage. This is the other option. I know, these are two extremes– but I really see this being how my financial life plays out going forward. If I can figure out a career where I can every 4-5 years or so go to a new job and keep moving up, I should be ok. If I can continue to obtain mid-level/senior-level roles in large companies then I should be fine. But the other–very realistic potential–is that I let my mental health issues get the best of me–I stay at this job for a while longer, then move to a different role (in order to maintain the level of stock grant you have to switch companies usually) and then I bomb, and I spend the next many years working at low-paid startups with crazy CEOs who hire me to do the impossible as a one-woman shop because I can’t get another role at a public company again. I’ll burn out on that too, because I’m no longer in my 20s. So then I don’t know what happens. My one ask to my husband is if we buy a house, after our kids are in school (and he is no longer a part time SAHD), can he get a FT job (esp if this scenario plays out.) He seems open to it, but it’s hard not knowing what that looks like. It’s hard to commit to a very expensive 30 year mortgage when who the hell knows what will happen.

So why not rent?

I know, I know. Renting is a fine idea. We’ve looked at a few rentals. I’m the type of person who is mentally impacted by her living space. And the actual SPACE. I grew up in not only a reasonably large house with a big backyard, but also a large room. I tend to feel claustrophobic in small spaces. I understand if financially it’s the best thing to do, I can deal with tiny rooms. I can deal with a lot if we just don’t have the money to have a nicer life.

Then I look at my bank account. Between my husband and I, by the end of this year, we should be just shy of $2M, or perhaps quite shy of $2M if the markets keep dropping. I also watch as my total wealth drops $100k-$200k in a day or two, and at this point I don’t bat an eye (outside to check if I should tax loss harvest any dumb investments I’ve made before they drop further and rebalance into a better diversified portfolio.) I’ve trained myself to be ok about losing $200k in the stock market (on paper) yet I’m completely terrified of buying a $1.6M house and it being worth $1.4M after we live in it for a few years (I mean, I’m terrified of it being worth $800k after we live in it for a few years — but the stock market could also drop 50% in a few years and I’m not selling. So why NOT buy a house?)

I’ve also run the numbers. It appears with the limited tax write-offs, at some point it still makes sense to own. That $500k capital gains tax exclusion on homes helps a lot when you’re a high earner (which is dumb as I hate how most of the tax law benefits not only rich people more but people who consistently have high incomes, as it assumes if you make a lot one year you always will.) But–as a current high earner (which in CA means something different than the rest of the country, mind you) I feel like I have to take advantage of what’s left in the tax law that benefits higher earners, as long as it still exists.

Home Ownership Tax Benefits are Slim, But Still Exist

There’s Prop 13. For those of you who don’t know Prop 13, it basically locks your tax amount into the value of your home when you purchased it, plus inflation. I’m torn on how I feel about this law. On one hand, I think it’s necessary because it makes sure that people who buy homes that are affordable (to them at the time) don’t get priced out because suddenly a tech company moves in down the street and their house is worth a bazillion dollars, and their forever tax bill goes up so much they have to sell and move.

On the other hand, Prop 13 keeps people from moving when they should, making the housing inventory low. Worse, it also significantly reduces property tax, which means despite being a high tax state, public schools are chronically underfunded. It’s all pretty messed up.

Nonetheless, it is what it is. So, buying in my 30s and staying in that home for years can be quite fruitful, as long as Prop 13 stays intact. I would imagine they would probably have to grandfather current owners and phase it out over time, even if they realize it’s not sustainable — but who knows. In any case, it is the law now, which means even though we will have to be paying taxes forever, in 30 years we’d be paying taxes on a home “worth” $1.6M, even if the going market rate is $3M or more—even if our neighbors who just moved in are paying taxes on a $3M and we’re paying half what they’re paying. That makes retiring here possible.

I’ve been thinking a lot about old age lately–not because I’m old quite yet–but because I’m helping my 66 year old mother plan HER life. And that situation is a total cluster due to poor money management by my parents. My goal is to be wealthy to be able to help her out a bit (at least pay her back for college and my wedding, especially if she lives long enough to really need the money, which I hope she does.) BUT — for me, I think I want the option to stay in my home and have a live-in aide. Who the hell knows what I will want when I am 65/70/80 etc, but why not plan for that now? The worst that happens is I end up with way too much money to split between my kids and charity when I die. At the very least, that buys me options. Especially since my husband seems on the “I don’t want to think about retirement bandwagon” (I did convince him to set up a Solo 401k so we’re putting about $35k collective to that a year while we can to make up for many years of no retirement savings–but buying a house will def make that saving harder to do.)

Let’s Be Stupid and Buy a House in the Bay Area

Anyway, here we are, ready to do something maybe stupid. Maybe making the worse financial decision of my life. After looking at hundreds of houses all over the Bay Area, we’re ready to put our second offer in — and first one that’s actually AT list. I don’t know if that will get us anywhere, but I have a good feeling about this one. It’s not perfect at all, but I feel (somewhat) good about the compromises.

The major compromise is that it’s a 3 bedroom, 2.5 bath that we will be sharing with my father-in-law for TBD years. FIL will pay $2k a month towards our mortgage and help with watching our son while we work. It isn’t full time childcare coverage, but it’s still a huge help. And my husband and I both feel strongly about keeping our kids out of daycare during the whole COVID mess for many reasons.

Our initial goal was to find a 3/2 with a separate living unit. We’ve looked at all sorts of places–homes with weird in-laws, detached ADUs were the ADU was modern and beautiful and the main house was decrepit, 5 bedroom houses with a downstairs master that was beautiful that could maybe work and 4 upstairs “bedrooms” that were barely bigger than my pinky, on lots with no real private outdoor space.

The conclusion I came to — in my semi logical state of thinking right now in a complete blur as a pregnant woman who has seen a thousand too many houses so far — is we must compromise to make it work here and not totally kill us financially.

I had to throw most of the “how much can you afford” rules at the window. Few people have $1M in taxable stocks at my age also. I can’t rely on the $1M in stocks because that could drop to half that or less, but it’s a different kind of cushion. I’m not selling right now because our capital gains tax in CA is so high — but if we hit a rough patch and need to sell stock, even if it’s gone down a bit, we’ll likely have a lower earning year and have lower cap gains tax. So it’s worth it to leave the stock and not put it into a larger down payment after losing 40% of it or so by selling it all, and let it ride and have it as a safety net.

Where I want to be is at 28% or less of our pre-tax income, before bonus and RSU. I wanted to do this after-tax, but if we did that the math shows we can afford to stay in our current 1br. I decided I need to be slightly less risk-averse here. The 2-3x salary rule doesn’t work. It tells use we can buy a $750k house. That doesn’t exist here. And that doesn’t take into account bonus or RSU which I prefer to ignore for planning purposes, but still doesn’t tell the whole story.

My banker said 32% is the DTI rule he prefers. I’m aiming for 28%.

I am assuming I can make $175k a year going forward, or my husband can eventually get a full time job and make up the difference (ie if I earn $150k, he can make $25k more, which is very realistic if he got a full time job.)

His income is a lot more consistent than mine is actually — so I’m locking him in at $90k a year. I feel good that even if he has to change jobs and get a FT entry level job in a tech company (which I think he could do), he could make at least $90k.

  • That gets us to $265k a year, or $22k a month, give or take.
  • 28% of that is about $6k a month.
  • I feel pretty good about $6k a month going to our housing costs.
  • I feel better about $5k a month going to housing costs.
  • If we do my banker’s 32%, that gets us to $7k a month. I don’t like $7k a month, but I’m ok with it knowing that we probably will earn MORE than the total comp I’m including in this plan (my last two startup jobs my base was in this range and that was years ago)

So $6k a month is our target, $7k is our stretch, $5k is our happy place.

Even though my FIL’s contribution won’t go on forever (esp if we buy a home with only 3 bedrooms), it will definitely help up front when our income is likely the lowest as inflation hasn’t kicked in to increase our income while our mortgage stays flat.

In terms of rentals, we can definitely do better short term. At the moment, WFH, we can move far into the south or east bay and get a house for $4500 – $5000 a month rent with more rooms and space. That is a thought as well.

But the tax savings on the interest for the first few years seems to equate to about $1k a month between federal and state taxes. Maybe less than that. But it’s significant enough that it makes up enough of the difference between a $5k rental and $6k home.

So $6k a month it is. That’s a scary number, since we’re paying $2500 a month in rent right now for our 1 bedroom. But if I’m ever going to feel ready for it, I feel ready for it now.

  • $1.6M home = $7000 PITI
  • $1.65M home = $7250 PITI
  • $1.7M home = $7500 PITI

Based on the above figures, $1.6M should be our absolute max, with my FIL. Unfortunately — anything worth buying here (that also works with my FIL) in the area we want to live is at least that.

Buying a Home and Compromises We’re Willing to Make

Here’s what I’ve decided are non compromises:

  • Under 1 hour drive to work: (I wanted 30 minutes, I gave up — hoping WFH is something I can maintain going forward, or eventually I get a job closer to the home we buy )
  • Larger lot (7500-10000 sq ft): Lot size is interesting here. You see $3M homes on 5000 sq ft lots. Some people don’t want large lots because they aren’t outside much in their own private spaces and don’t want to deal with maintaining a yard.  I get that — growing up on the east coast a yard was expensive to maintain, but it rained so the watering bit was usually covered, with the addition of occasional sprinklers. Still, a 5000-6000 sq ft lot seems limiting. We do (/would) spend a lot of time outside in our private space. A larger lot also means we have room to build onto the house should we ever have more money and want to make it bigger without going “up.”
  • A “vacation” in my house: Decent sized master bedroom suite with existing bath. This is definitely a luxury item. But my mental health is improved by privacy, space, and access to a soaking tub. If I’m going to be “house poor” I at least want to have a space at home that feels like the vacation I won’t be able to afford because I bought a house.
  • Nice street/neighborhood. We’re homebodies. On a good day, we make it to the neighborhood park, or a restaurant around the corner. There are a few neighborhoods I like, and I’ve decided it makes sense to focus our home search there.
  • Decent schools. School rankings don’t tell the whole story (they just tell you if non-native speakers go to the school), but I still find it concerning when non-native speakers are averaging a 2 on their state tests. So I’ve made the cutoff a 5 for school rankings in the area. My kids will be going to those schools. Not only do I not believe in private school, when we buy a house here we won’t be able to afford private school! Also, resale value is also impacted by the school ranking… so buying in an area with “better” schools helps later if we decide this house isn’t right for us and we want to move, or we want to move in retirement, or whenever we decide it is time to move on.
  • Enough Space Inside (1750+ sq ft): Can we live a perfectly happy live in a cozy 1300 sq ft house? Of course. But I don’t see the point in buying something so small– for us. We don’t need 2500 sq ft either. I’ve come the conclusion that 1750-2000 sq ft is perfect, especially with the plans to live with my father-in-law. It basically ends up being that we are living in about 1300-1500 square feet for a few years, and FIL gets 200-400 sq ft. But long term, FIL will move out, and we’ll have more space. That’s important to me as we’ll have at least 2 kids and possibly a third, if the stars align.
  • Family Room AND Living Room: having two main living areas is important to me. It’s a luxury, not a necessity. And it’s rather rare here. But with 2+ kids, having two living areas will be nice when my kids have friends over, and we want to be not all in the same space. Plus, having the extra room gives us flexibility long term (we can convert a family room to a bedroom if needed, instead of having to add on.)
  • Garage: we just need a place to store things (I’m tired of having my bike in the living room) and a spot to put a treadmill for my husband etc.
  • Nice to have — Laundry Room — this is a rarity here, but with 2+ kids, I want a laundry room (not laundry in the garage, or in the bathroom, etc)
  • Nice to have — 4+ bedrooms: This was a must have until I realized I really like big rooms and in a 1750-1900 square foot house with a good master bedroom, bigger master bath, and all of the above, a 4th bedroom is hard to find.
  • General good flow: some houses here… a lot of them… have very strange additions, poorly designed and unpermitted.

The house we are bidding on meets most of the requirement below.

  • $1.6M list
  • 1900 sq ft
  • 9000 sq ft lot
  • family room + living room
  • laundry room
  • giant master bedroom suite (they actually converted an existing bedroom into a bathroom, so you can imagine how giant it is. It’s a bit too big, but I can see long term changing the layout a bit and turning part of it into a home office
  • good neighborhood/street (close to restaurants and park)

What isn’t perfect about it?

  • It’s listed at $1.6M, they prob want $1.7M. I’m not sure they can get $1.7M — the neighborhood seems to go more $1.5-$1.6. A few houses are actually sitting for various reasons. That said, this house does have an oversized lot (for the area) so if anyone else has been waiting to snag a bigger lot in that general area, we may lose the house, or have to pay more for it. We are doing a preemptive offer before offers are due — which makes it hard to know if we’re over paying if they do accept the offer. What we have going for us is down the street there is a 2000 sq ft 5br/3ba listed at $1.7M that has been sitting. It’s a flip, and while it looks nice it was a poor flip job if you pay attention to the actual work done (they did it in a month — bought $1.25M and now it’s $1.7M!) But because that is sitting, I’m hoping a 3br/2ba house can go for $1.6M.
  • It has one giant master bedroom… and 2 teeny tiny bedrooms. That kind of sucks. It sucks most because our FIL will take the master bedroom for a few years, and we’ll be relegated to the two smaller bedrooms. BUT at least there’s the two living spaces. We’ve discussed putting our bed in the family room (it would be kind of like a studio apartment situation since it’s open to the kitchen and garage) and we’d put my son in one of the small rooms and my husband’s office (and possibly a guest bed–that I might occasionally sleep in) in the other small bedroom. Our baby would sleep in our room until s/he turns 1, and then baby either goes into my son’s room (they can share for a while) or my husband moves his office into the family room and we put baby in the other small bedroom. … … eventually, his dad moves out (it’s complicated but the plan is when my mother in law needs to move out of her house — which is owned by her 96 year old mother — she will buy a 3/2 near us, and my FIL will move in with her — they unmarried but friends) and we’ll get the master bedroom, my husband can probably put his office in the family room, or in the master bedroom (though I prefer he doesn’t have it in there, but there’s room if we need to make it work.)
  • While the lot is 9000 sq ft, it doesn’t actually look that large to me. I think that’s because it’s a wider yard and the houses next to it are 2 floors, so there isn’t a lot of privacy. I think we can add a little privacy, but we won’t be able to grow a tree big enough to block the neighbor from seeing into our yard. Which isn’t that big of a a deal, I just like having privacy and feeling like I’m in my own secluded little park. We can probably make it better, and at least there’s room for a swing set.

We probably won’t get this house. But we might. I’m trying to decide if it’s worth going up to $1.7M for it. If we can get it at $1.6M, I will feel good about the purchase. In the town we prefer to be in, we’ve decided not to bid on houses that have gone $1.7M. They weren’t as big or nice as this one, but if we have to pay $1.7M for a house 30 min further from my work, I start wondering if we should just go $1.8M to get something that works in the better area. But, no, I’ve run the numbers, and we really shouldn’t do more than $1.6. If we do $1.7 it’s over budget, but we can make it work.

So, what do you think we should do?

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2 thoughts on “Buying a House in the Bay Area Even Though It’s Probably Going to Burn Down”

  1. Your house shopping experience has really resonated with me, as I’m also about to buy a house (already locked in and in East Bay, so no competition hehe), and am going through the same rollercoaster of emotions worrying about paying at the top of an expensive housing market. All the while having similar job performance concerns.

    The house you’re looking at is easily identifiable based on your parameters, if that’s something that would concern you. But I think 1.6m for a 9k lot is fairly reasonable and better than paying 2m for a 6k lot somewhere else on the peninsula.

    Bad news, I think having a huge amount of your net worth in your company’s stock is a bad idea. I think you’re experiencing too much loss aversion because the 1m company stock, or whatever it is, will have like 800k capital gains and you’ll end up paying ~24.3% (~200k) in CA just to switch it into something safer. But by doing this, I think you’ll have a lot more stable passive income fund in stocks and bonds, which leads me to the good news…

    You have 2m in taxable. Put your 20% (400k) down, the rest (after taxes) in Boglehead-like VTI, VXUS, BND, and you’ll have ~1m in taxable with ~400k retirement. That ~1m taxable can safely cushion ~40k withdrawals a year in case you fall on hard times, which will pay more than half of your mortgage.

    Sure, you’re not FIRE’d or in your perfect dream house yet. But give it another ~7 years of your ~250k family income and a bit of home appreciation, you’ll be able to transfer into the home meeting everything you wanted, and have enough taxable assets to cash flow pay for your new mortgage then and be able to FIRE.

    1. Thanks! I think that data isn’t completely accurate. So we just our offer on that house accepted and I’m going to write a post about my strategy to get to FIRE with this house.

      I don’t have $1M in company stock. I have about $250k (which is still too much) in ESPP which I kept because stock went up a lot and there is some tax benefits to holding — especially if I wait until a lower income year (2022 should be a lower income year.)

      The rest of the stock I have in taxable accounts is mixed in different ETFs and single stocks. I still have too much in single stocks (about $100k in Apple and $100k in Amazon, for instance) and I want to slowly sell that off to diversify as well. My small cap and international funds are all boring index funds… my large caps have an issue as my “fun” account grew a bit too much over the last 15 years.

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