Reader Case Study - Best Plan For a City Where Homes Too Expensive to Buy?

[AMustachianMurse]

Background 26 y/o male.  No Student Loan Debt (yay state schools!), No Car Payment (yay 1993 Jeep still running strong, knock on wood).  No CC Debt.
Occupation: Operating Room Nurse
City: San Diego, CA

2013 Gross Income: $83,334
Federal Income Tax Withheld: -$14,153
Social Security Tax Witheld: -$5,166
Medicare tax Withheld: -$1208
State Income Tax (Thanks California): -$5202.

Total Take Home 2013: $57, 605.

2014 Financial Prospectus (is that the right word?)
Already Saved in Emergency Fund: $13,000
Already Maxed 2013 and 2014 Roth IRA with the Following Allocation

• Vanguard Emerging Markets Stock Index Fund: $3,058. (27%)
• Vanguard Target Retirement 2060 Fund:  $8,136.19. (73%). (Allocation within fund: 63% Total stock market index, 27% total international index, 8% Total bond market index, 2% total International Bond market index):

Automatic Deductions (never done before, starting this experiment this month):
30% of paycheck to 401a, 30% of paycheck to 403b = Total Contribution at End of 2014 = $31200
Current allocation (i've been getting a lot of facepunching about this on Boglehead forum, so I'd love your input here as well i'm a total investment noob)

• Fidelity Spartan S+P 500 Index 33%
• Fidelity Spartan Emerging Markets 33%
• Fidelity Spartan Global Excluding U.S. 25%
• Fidelity Spartan REIT Index 9% [\li]

Monthly Budget With ~$1600 Take Home Pay
Rent: $900 (my gf is moving in with me this month so this will be cut in half, but I am budgeting as if I didn't have her)
Phone: $101 (i'm working on switching from Verizon to T-Mobile, but haven't yet)
Internet: $80 ($40 with gf)
SDGE: $50 ($25 with gf)
Auto Insurance: $34
Massage Envy: $60 (my work is back breaking labor and this really helped with my post-shift /post workout pain, I am working on cancelling membership but I have 6 pre-paid massages already on the books that I can't convert to a gift card, and will lose if I cancel membership)
Food: $200
Gas: $80 (I live 1 mile from work)
Gym: $40 (I am very passionate about martial arts, and am very loyal to my mma gym, I wont give this one up)
Medical: $40
AAA Membership: $8

~Monthly expenditures: ~$1600.  Estimated Monthly expenditures when factoring in gf $1078.

First off, for those who have read this far, THANK YOU!  Thank you for your time, and I appreciate any guidance you may have for me.  To give you a sense of how absolutely bonkers the housing situation in San Diego is, I am renting a 1br 1ba apartment for $900.  An equal sized 1bedroom1bath condo in this area is going for $200k - 250k + whatever insane HOA you will pay (downtown SD has HOAs ranging from a LOW of $450/month to a HIGH of >$1k/month).  So much for the 10x or 20x rule.  Apartments are being sold for 200x the price of renting a place lol.  I love this city, and my gf and I have started to really get some deep roots in the city, plus for health reasons we have to stay in a warm climate year-round.  As I think there is a high probability she will be my future mrs.mustachianmurse, it would be extraordinarily selfish of me to push for a location change at the expense of our health. 

I know MMM has said in a blog post San Diego had a special place in his heart, so I'm wonder how you guys would handle a situation like this.  My plan is...well...I dont really have a plan.  Loosely it is to sock away $5,500 a year into my Roth IRA with the intent of using the principal after 4+years to put a down payment on a house, but only if there is a 2nd housing market dip (though my strategy might be flawed since a housing market crash would be synonymous with a stock market crash thus drying up my Down Payment Fund Right?)  What would you guys do in a housing market like San Diego's?

I dont know anything about investing or real estate, and it took me an hour to hang an ikea shelf by myself, so learning how to do home improvements myself is going to be a challenge, but a challenge I will accomplish in due time.  I hope to retire early as nursing has the amazing flexibility of offering 5+day workweeks, 3-day workweeks, 1 day workweeks, and my hospital even allows some people to work 2 shifts every 3-6 months and still maintain their employment. 

I am truly a blank canvas for finance, and am eager to learn.  I have an extra-ordinarily high risk tolerance, and am constantly experimenting with myself mentally and physically.  I am ready to be a guinea pig for young, medium earners with little to no debt.  Thank you for guiding me on this journey and I hope I can turn into a success story.   

[dodojojo]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

[greaper007]

Moving comes to mind also.    Lots of places in Florida have the beach and climate of San Diego (my birth city) with houses that you can buy for less than $200,000 across the street from the beach (check out cities around the Melbourne area, I lived there for a bit).   My dad was a navy pilot and my family loved San Diego.   We left the minute he was out of the service though.    Just too expensive.    Since you're a highly specialized nurse you can go just about anywhere and make a great salary.   Why not leave?   

The second option is to look for perhaps a multi-family home that you can rent out and live in.   The income you generate will offset your mortgage and you'll have a nice investment property when you decide to move on.

Beyond that it might just make sense for you to rent something cheap and keep saving up.    There are some online calculators which break down renting vs buying for specific markets.

I lived in CT for a few years and loved the proximity to NYC and the ocean, but I really got tired of paying $2000 a month on a crappy house that only cost $240,000.    We decided to move and landed in Denver.    Not the cheapest city in the US, but miles better than CT with a lot more opportunity for growth.

[wealthywinters]

I live in Australia and our entire housing market is pretty much like this - or worse.

First, ask yourself if you really want/need to own. It's something personally that's important to me (we have four cats and a baby), but may not be for you. Do you think, down the line, you might travel a lot? Do you think you may get to a point you want to move somewhere else? You mentioned the climate, but plenty of places are warm, so if for some reason down the line the idea opened up, it doesn't sound like you have strong family roots that you have to stay for. It's okay if the answer is yes, but I think a lot of people automatically think they should own, when (I've read) in places like Europe renting is the norm for most people, for life. So perhaps consider it that way - if you keep saving and investing, your money gets bigger, but if you buy, you're paying for it, and when the mortgage is paid off, the house may grow in value but you've not actually got extra money. So that's a thought.

If you do decide that owning is really for you, what timeframe works? It seems for now renting works best and there's no pressure to own - so there's no need to rush. Keep saving, keep investing, and let the money grow. If there's another big dip in housing and suddenly what you want becomes affordable, you'll have the money, but if not, you're making income on the savings that would otherwise be tangled up in an asset.

It sounds like you've laid out your expenses, which is an awesome start - most people don't get that far! And you're investing and saving. Awesome. So keep doing that. Live a young and enjoyable life without a mortgage locking you into any location. Save and save, and things may change over the years, or they may not. Either way you'll benefit, and if you do decide that buying a house is right, you might even have way more than a basic deposit and be saving yourself a heap on interest.

Again, a lot of people assume owning a house is important ... and while it has its benefits, a lot of them don't sound like they're hugely applicable to you right now. You're in an awesome, awesome position financially to be socking away extra cash to let it grow, so why burden yourself with a mortgage? Renting without pets or kids gives you flexibility in that if you change jobs, have a change of heart about location, or want to travel, you can. If it's cheaper to rent than have a mortgage, why would you change that now?

At any rate, best of luck :) I hope you both do fantastically well down the line from making the choices you have now :)
I s

[marty998]

Vanguard Target Retirement 2060 Fund:  $8,136.19. (73%).

I hope you see the irony in posting on this forum about early retirement and telling us you have invested in that fund!

The best thing about a real estate market that is doing well is that (in theory) it should work as a wonderful tax free investment to buy your own place.

THe longer you wait the more you'll end up having to pay. Anyone who has waited for a crash in Sydney these past 12 months is forking over and extra $50k-$100k for a home now.

[Roland of Gilead]

I hope you see the irony in posting on this forum about early retirement and telling us you have invested in that fund!

The best thing about a real estate market that is doing well is that (in theory) it should work as a wonderful tax free investment to buy your own place.

THe longer you wait the more you'll end up having to pay. Anyone who has waited for a crash in Sydney these past 12 months is forking over and extra $50k-$100k for a home now.

I disagree.  In general a home is a horrible investment.  Perhaps in some low cost areas it is worthwhile but in a expensive market all you are doing is gambling that there will be a greater fool to buy your already overpriced house.  When you can rent a place for 0.5% of the purchase cost you are pinning all of your hopes on the market.   With all of the taxes, insurance and transaction costs, buying a home for investment in an expensive city is like buying a tech mutual fund with a 3% expense ratio and a 6% back end load.

[zinnie]

So your take-home is $4800 a month, and you spend $1600, soon to be even less? That is a 66%+ net saving rate; sounds like you are doing awesome.

Housing prices aren't cheap in San Diego, but they aren't exactly insane either. We bought in 2009 which I am now seeing was quite the lucky timing. But, I still see a lot of affordable [on a decent salary] places out there. Yeah, you have to accept that in a higher cost of living area more of your net worth is going to be tied up in your house. But it is what it is. Where are you looking--I assume you are living downtown? A lot of those downtown high-rises were hastily built and suffer in the quality department. Most are not great investments, IMO. And the HOAs--I could never stomach that type of monthly commitment.

It sounds like from your post you feel some urgency to get in before prices go up, but why not just hang out, save your money, and see what things are like with housing when you have a down payment saved up? Your savings rate is fantastic and sounds like you love living here as well. There is no reason you have to buy in San Diego--now, or ever. If it were me I would see if it still makes sense to consider in 4 or so years when I actually had the cash.

[Thegoblinchief]

$900 rent in an expensive city is pretty good, especially since it puts you so close to your work. I'd sit tight and avoid any anxiety over not owning. Maybe identify a couple neighborhoods you might like and ask a realtor to feed you MLS listings within a certain price range?

Home ownership is a lifestyle choice, not an investment vehicle.

$80 gas for a 2 mile commute? Where are you driving to burn all that gas?

Instead of switching to T-Mobile, keep your existing phone and get it unlocked and onto a Verizon MVNO.

Your investments seem a little heavily biased towards international and emerging markets. I tend that way myself, but I typically see most people have less exposure outside of the US.

Keep up the good work!

[homeymomma]

I'm in Dc to those prices seems really low to me. Haha. I'd sit tight and keep renting unless you have some strong emotional pull to buy. Maybe put it off until you know for sure about your future plans with your girlfriend and then make those decisions together. I agree on not seeing a home purchase as an investment but instead an (often rather costly) lifestyle choice. That being said, with our second kid on the way, my husband and I can't wait to buy! Home ownership has a huge pull, and sometimes it's hard to separate out the knowledge that it's not always a financially sound thing to do.

[wickemt]

Home ownership is a lifestyle choice, not an investment vehicle.

$80 gas for a 2 mile commute? Where are you driving to burn all that gas?

The 1993 Jeep, which with proper maintenance will be passed down to his kids. Incredibly capable vehicle and a blast to drive. That said, a total gas guzzler.

I just sold my 1995 Cherokee. Bought in 2011 for $1800, sold a month ago for $1300. Probably put $1k into it in repairs in that time. Loved that truck, but the gas was killing me during winter commutes. Went from 14 MPG in the Jeep to 25 in the Mazda 3 hatchback, and having way more fun on the roads to boot.

With a 66% savings rate, though, I'd say the harm of the increased gas use is outweighed by the upfront cost of buying a car. Run that sucker into the ground.

[Villanelle]

Those prices actually seem pretty low for SD (where I own and currently rent out a place).

Is it important to you for emotional reasons to someday own a home?  If not, then continue renting and don't give it another thought.  If you want to own someday, since you seem fairly certain you will stay in San Diego, you might consider finding a real estate agent with whom you connect and giving him or her your parameters, and telling him to only call you when there is a screaming deal on a place that fits the bill.  (Wait to do this until you have funds that you would feel comfortable using as a down payment.) It can't really hurt to have someone looking out for something for you. 

[AMustachianMurse]

$900 rent in an expensive city is pretty good, especially since it puts you so close to your work. I'd sit tight and avoid any anxiety over not owning. Maybe identify a couple neighborhoods you might like and ask a realtor to feed you MLS listings within a certain price range?

Home ownership is a lifestyle choice, not an investment vehicle.

$80 gas for a 2 mile commute? Where are you driving to burn all that gas?

Instead of switching to T-Mobile, keep your existing phone and get it unlocked and onto a Verizon MVNO.

Your investments seem a little heavily biased towards international and emerging markets. I tend that way myself, but I typically see most people have less exposure outside of the US.

Keep up the good work!

Thanks for the advice!  RE: 2-mile communte...that's a good question.  I looked at my bank statements over the entire 2013 to see my gas average, and it was in fact $80/month....I drive a '93 Jeep Cherokee that I inherited from my grandpa.  It's old, and a V8, so it's a gas hog like no other.  THe place I moved to is a straight shot to my work so I really want to bike to work, but, and this is a horribly embarrassing fact....I don't know how to ride a bike!  As a kid I thought it was more pertinent to ride virtual bikes and sling chains at other riders (Road Rash reference...anyone?....Buehler?).  Is it hard to learn how to ride a bike as an adult? 

Those prices actually seem pretty low for SD (where I own and currently rent out a place).

Is it important to you for emotional reasons to someday own a home?  If not, then continue renting and don't give it another thought.  If you want to own someday, since you seem fairly certain you will stay in San Diego, you might consider finding a real estate agent with whom you connect and giving him or her your parameters, and telling him to only call you when there is a screaming deal on a place that fits the bill.  (Wait to do this until you have funds that you would feel comfortable using as a down payment.) It can't really hurt to have someone looking out for something for you. 

For me there's no reason to own a home other than the old-as-time argument of "you're paying someone else (landlord) when you could be paying yourself!"  Though, since that reasoning is somewhat illogical depending on the market I suppose that qualifies as an emotional reason to own a home.  Do you have to pay real estate agents to look for houses?  Or do they do it for free with the hopes of making the big commission later?

[wickemt]

Thanks for the advice!  RE: 2-mile communte...that's a good question.  I looked at my bank statements over the entire 2013 to see my gas average, and it was in fact $80/month....I drive a '93 Jeep Cherokee that I inherited from my grandpa.  It's old, and a V8, so it's a gas hog like no other.  THe place I moved to is a straight shot to my work so I really want to bike to work, but, and this is a horribly embarrassing fact....I don't know how to ride a bike!  As a kid I thought it was more pertinent to ride virtual bikes and sling chains at other riders (Road Rash reference...anyone?....Buehler?).  Is it hard to learn how to ride a bike as an adult? 

My father and I would play that game networked on two Pentium 100 laptops connected with an RJ45 cable. Good times. Also Duke 3d and Shadow Warrior. (Man with four balls cannot walk, etc).

It is not that hard. My then-girlfriend now-wife taught me how to ride when I was 25. I started bike commuting in the summer shortly thereafter. Start with a beater off of Craigslist, see how you like it and what you want to change, and then upgrade later, also off of craigslist.

Craigslist is like bike mecca, because un-Mustachian people are forever buying expensive bikes, failing to ride them, and selling them. Discounts of 50% or more on hardly-used, nice-ass bikes are commonplace.

[JPinDC]

I'm in Dc to those prices seems really low to me.

It's sad, but that was my reaction too. I'd take a $900 1 bedroom here in DC!

[mnstachian]

I don't think that anyone's mentioned it yet, but when you're doing your calculations, remember that the pre-tax retirement contributions will reduce your taxable income too.

[Thegoblinchief]

Probably the easiest way to learn a bike as an adult would be the "balance" style. That is, set the seat low enough that you can put your feet down, and take the pedals off the crank. Get used to balancing the bike.

With kids, they typically recommend finding a grass hill, not too steep, and letting them go down and wipe out until they get a hang of it.

Heck, a mile is easily walkable.

[greaper007]

Craigslist is like bike mecca, because un-Mustachian people are forever buying expensive bikes, failing to ride them, and selling them. Discounts of 50% or more on hardly-used, nice-ass bikes are commonplace.

Whoa, where do you live?   I can't find any bikes on craigslist that are discounted more than a few hundred dollars off new.    I even broke down the math for a seller with a surly cross check that wanted $950 for a 4-5 year old bike.   He told me I was an idiot because the bike would still be ride able 15 years from now...

I can't bring myself to spend $1000 on a new bike and can't really see upgrading the current (albeit too small) bike with something else in the $350-$450 range.

[dragoncar]

Moving comes to mind also.    Lots of places in Florida have the beach and climate of San Diego (my birth city) with houses that you can buy for less than $200,000 across the street from the beach (check out cities around the Melbourne area, I lived there for a bit). 

Any other locations besides Melbourne?  I always kinda liked the idea of Florida, but I do not like the humidity and crazy critters that I've experienced in the parts I've visited.  Does Melbourne really have similar climate?  SD is slightly more humid than my hometown of SF, but I always thought it was much less humid than Florida.

Edit:

Not sure they are comparable, but I'd love to hear more Florida options:

Melbourne, FL:

Over the course of a year, the dew point typically varies from 44°F (dry) to 77°F (oppressive) and is rarely below 25°F (dry) or above 80°F (very oppressive).

San Diego, CA:

Over the course of a year, the dew point typically varies from 32°F (dry) to 63°F (mildy humid) and is rarely below 15°F (dry) or above 67°F (muggy).

[unpolloloco]

For me there's no reason to own a home other than the old-as-time argument of "you're paying someone else (landlord) when you could be paying yourself!"  Though, since that reasoning is somewhat illogical depending on the market I suppose that qualifies as an emotional reason to own a home.  Do you have to pay real estate agents to look for houses?  Or do they do it for free with the hopes of making the big commission later?

But in your situation, you're paying (at most) $450 a month above the HOA fee.  Factor in maintenance, property taxes, and insurance, and you're paying probably $1-200 a month (at most) to live there.  Factor in interest on a mortgage, and you'd actually be losing net worth compared to renting.  And you'd be tying up cash that could be put to work (investing) making you additional money.

The only way you'd come out ahead financially in your market is if the market continues to appreciate at a fast rate in your area.

That said, there may be other reasons to buy (emotional, family, pets, etc.).  But you're probably better off renting if you stay in San Diego from a purely financial perspective

[AMustachianMurse]

I don't think that anyone's mentioned it yet, but when you're doing your calculations, remember that the pre-tax retirement contributions will reduce your taxable income too.

I literally know next to nothing about taxes.  In fact up until 2 days ago I thought that tax brackets were x% on your entire income, like a millionare would be paying 39.6% on all of his income. 

So let me see if I got this straight, since im reducing my AGI from $81k to ~$46k
Instead of paying the $14,153 that I paid last year in income tax....I would pay.....

$907 + $5,081.25 + (.25 x ($41,000 - $36,900)) = $8263?

Would I qualify for any tax saver credits or any thing else that I should know about?

[bobmarley9993]

Nursing is indeed a great profession for ER.  I am surprised it isn't discussed more often.  I don't know of many other careers that offers the blend of flexibility in hours & locations while paying a high salary that nursing does.

For the problem at hand, I think your plan of saving and waiting for a better price is not a bad bet.  The only caveat I would add is you need to be willing to move if prices rise.   I have seen elevated housing prices get considerably more elevated (I have seen them move up 75%+) and it can be tough if you're on the sidelines.   If you are intent on living in the area and want to own a property what do you do at that point?  Just not many good options.  However, if you are willing to move I am sure you will always be able to find somewhere affordable if you miss out in San Diego.  And given that you're a nurse you always should be able to move from a career perspective.

[Villanelle]

No, you don't pay an agent to help you look for a house.  The only way they make money is if/when you buy, and then they are paid by the seller of the house as a commission. 

So you can contact someone at put them on the hunt without obligating a single penny.  There can be some pressure to buy (since that's how they make money), but finding someone good is key.  If you feel undue pressure, move on.  It's best to meet with them in person to see if you click.  And usually you can "fire" them with no issues, other than the common stipulation that if you buy a property they've shown you, you can't fire them in order to cut them out of the deal.  When you contact them, ask them how it works with them specifically and whether they expect you to sign a contract of any kind. 

[AMustachianMurse]

Nursing is indeed a great profession for ER.  I am surprised it isn't discussed more often.  I don't know of many other careers that offers the blend of flexibility in hours & locations while paying a high salary that nursing does.

For the problem at hand, I think your plan of saving and waiting for a better price is not a bad bet.  The only caveat I would add is you need to be willing to move if prices rise.   I have seen elevated housing prices get considerably more elevated (I have seen them move up 75%+) and it can be tough if you're on the sidelines.   If you are intent on living in the area and want to own a property what do you do at that point?  Just not many good options.  However, if you are willing to move I am sure you will always be able to find somewhere affordable if you miss out in San Diego.  And given that you're a nurse you always should be able to move from a career perspective.

Yeah me too, one major factor is that, for whatever reason, Filipinos (i'm 1st generation american) have this really weird cultural phenomenon where they LOVE mercedes benz.  It's crazy, especially those who were born there and live/work here now.  I know several friends of mine who bought $35k + cars the FIRST YEAR we started working.  Then within 5 years they were married, expensive wedding.  And a House in the afore-mentioned city where houses are $375k+ right now.  And this is the norm in my industry.  Fast-foward and you have an example of the other ate's (tagalog for big sister) that I work with.  These guys are in their 60s still working in the hospital doing literal back-breaking labor, because they dont have enough to retire, and they are waiting till they turn 65 so they can qualify for medicare, otherwise they won't be able to afford their health expenses....it blows my mind every day.  Nursing is one of the BEST vehicles to early retirement, but is one of the saddest in that regards because a clean retirement is hardly ever realized.  The people who spent their lives taking care of other people never stopped to think to take care of themselves....

[ZiziPB]

You are describing perfect examples of lifestyle inflation ;-)  Don't get sucked into it and you will be fine.

As to taxes, this thread may be a good reading for you:

http://forum.mrmoneymustache.com/welcome-to-the-forum/optimize-your-taxable-income/

[Wile E. Coyote]

I don't think that anyone's mentioned it yet, but when you're doing your calculations, remember that the pre-tax retirement contributions will reduce your taxable income too.

I literally know next to nothing about taxes.  In fact up until 2 days ago I thought that tax brackets were x% on your entire income, like a millionare would be paying 39.6% on all of his income. 

So let me see if I got this straight, since im reducing my AGI from $81k to ~$46k
Instead of paying the $14,153 that I paid last year in income tax....I would pay.....

$907 + $5,081.25 + (.25 x ($41,000 - $36,900)) = $8263?

Would I qualify for any tax saver credits or any thing else that I should know about?

Maybe I am missing something here, but isn't there a limit of 17,500 for contributions to 401(k)/403(b) for 2014?

[Daniel]

Man, I relate to this. I live 2 hours north in beautiful Long Beach, California, where the median house (/condo/townhouse) price is $420k and the median household income is $51k, which means people are spending 8x their income on housing. It's just not even possible. Of course my first house will likely be less than average (aka nice house but less square footage), but it's a lot of money to save up just for the down payment. Honestly it boggles my mind how houses stay this expensive. I don't know what advice to give you other than start saving for that 20% down payment, and good luck. I've been trying to talk to other people who bought homes recently to figure out how they did it, though sometimes that leads to depressing answers like parents covered the down-payment or they inherited a large sum of money (or even worse they 5/1 ARM interest-only mortgaged it...). If my wife was ok with renting forever we'd probably just stick with that.

[Eric]

Man, I relate to this. I live 2 hours north in beautiful Long Beach, California, where the median house (/condo/townhouse) price is $420k and the median household income is $51k, which means people are spending 8x their income on housing. It's just not even possible. Of course my first house will likely be less than average (aka nice house but less square footage), but it's a lot of money to save up just for the down payment. Honestly it boggles my mind how houses stay this expensive. I don't know what advice to give you other than start saving for that 20% down payment, and good luck. I've been trying to talk to other people who bought homes recently to figure out how they did it, though sometimes that leads to depressing answers like parents covered the down-payment or they inherited a large sum of money (or even worse they 5/1 ARM interest-only mortgaged it...). If my wife was ok with renting forever we'd probably just stick with that.

It's definitely okay to rent forever, especially if that's the most financially optimal decision.  My wife and I are on pace to FIRE in about 6 or 7 years and we'll have rented the whole time.  (currently in Silicon Valley, so I know about expensive real estate too)  Of course our FIRE plans include re-locating to a lower COL area*, so if your plans are to stay in an expensive California area after FIRE, buying may be more appealing.

Run the numbers here to see how long it would take to come out ahead by buying instead of renting (notice the advance settings tab for more detailed numbers):
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

*We may end up buying our first house after retirement.  Probably a very unusual situation

[AMustachianMurse]

I don't think that anyone's mentioned it yet, but when you're doing your calculations, remember that the pre-tax retirement contributions will reduce your taxable income too.

I literally know next to nothing about taxes.  In fact up until 2 days ago I thought that tax brackets were x% on your entire income, like a millionare would be paying 39.6% on all of his income. 

So let me see if I got this straight, since im reducing my AGI from $81k to ~$46k
Instead of paying the $14,153 that I paid last year in income tax....I would pay.....

$907 + $5,081.25 + (.25 x ($41,000 - $36,900)) = $8263?

Would I qualify for any tax saver credits or any thing else that I should know about?

Maybe I am missing something here, but isn't there a limit of 17,500 for contributions to 401(k)/403(b) for 2014?

From what I understand they each have an individual limit of $17,500.  So you can contribute a total of $35k if you have both options available.

[Daleth]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

The other other solution is to buy a duplex or three-unit and live in one while renting out the other(s). I know people who have made the Bay Area very livable for themselves that way.

[AMustachianMurse]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

The other other solution is to buy a duplex or three-unit and live in one while renting out the other(s). I know people who have made the Bay Area very livable for themselves that way.

But you would need way more up front capital for that purchase right?

[totoro]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

The other other solution is to buy a duplex or three-unit and live in one while renting out the other(s). I know people who have made the Bay Area very livable for themselves that way.

But you would need way more up front capital for that purchase right?

I don't know the mortgage rules in the US, but in Canada you would not need way more up front capital because you are only putting 10% or 20% down.  The difference between a house and multi-family at 10% down is doable.  In addition, part of the rent gets added to income for qualification purposes.

Probably what I would do if I was in your area.

Saying that a house is not an investment is wrong imo.  It is likely the only investment vehicle you will have access to at such low rates for a huge amount of leverage.   The calculation can be rent what you would live in reasonably vs. buy with rental income.   
 
It is an investment you can be hands on with and you can have it pay its own way and give you a place to live for free without paying if off first if you buy carefully.  Once it is paid off it provides a retirement income stream.

Looking at a house as something other than an investment is short-sighted if you would like to retire faster.   

[Daleth]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

The other other solution is to buy a duplex or three-unit and live in one while renting out the other(s). I know people who have made the Bay Area very livable for themselves that way.

But you would need way more up front capital for that purchase right?

If you want to avoid the financial black hole of PMI, then you have to put 20% down, regardless of what it is that you're buying. With single-family residences you may be able to find lenders who will give you two loans--say, an 80% loan at a normal rate and a 10% loan at a higher rate, with you providing the other 10% as a down payment. That may work with a duplex you're planning to move into; it may not. It depends on the lender (some are more into multi-units than others).

And a duplex may or may not be more expensive than an SFR... it probably would be a bit more expensive, all other things (neighborhood etc.) being equal, but it's easier to find duplexes/triplexes in less chi-chi neighborhoods than in more chi-chi ones, so it can come out pretty much equal. You just have to shop around.

In other words you need roughly the same up-front capital, maybe a bit more.

[Zikoris]

Become a rental ninja. I'm in the same type of city, Vancouver, and have consistently paid about half the going rate for the last nine years, by figuring out the tricks of your local market

[Wile E. Coyote]

I don't think that anyone's mentioned it yet, but when you're doing your calculations, remember that the pre-tax retirement contributions will reduce your taxable income too.

I literally know next to nothing about taxes.  In fact up until 2 days ago I thought that tax brackets were x% on your entire income, like a millionare would be paying 39.6% on all of his income. 

So let me see if I got this straight, since im reducing my AGI from $81k to ~$46k
Instead of paying the $14,153 that I paid last year in income tax....I would pay.....

$907 + $5,081.25 + (.25 x ($41,000 - $36,900)) = $8263?

Would I qualify for any tax saver credits or any thing else that I should know about?

Maybe I am missing something here, but isn't there a limit of 17,500 for contributions to 401(k)/403(b) for 2014?

From what I understand they each have an individual limit of $17,500.  So you can contribute a total of $35k if you have both options available.

I don't believe that is correct.  See the following language from this IRS site (http://www.irs.gov/Retirement-Plans/403b-Plan-Fix-It-Guide-Your-403(b)-plan-didnt-limit-elective-deferrals,-including-catch-up-and-designated-Roth-contributions,-to-the-amounts-specified-under-the-law-in-a-calendar-year):

The 402(g) limit is an individual limit. An employee who participates in more than one plan that allows elective salary deferrals is subject to a single 402(g) limit.
An employee who participates in more than one 403(b) plan must combine all elective deferrals to all 403(b) accounts.
An employee who participates in both a 403(b) and a 401(k) plan must combine all elective deferrals to the 403(b) and 401(k) plans.
An employee who participates in both a 403(b) and a 457(b) plan may defer up to $17,500 to the 403(b) plan and another $17,500 to the 457(b) plan in 2014.
To avoid complications with the limitations imposed by IRC Section 415(c), elective deferral contributions may have to be limited to ensure that plan participants stay within the limits.

OP should look into this to avoid a problem.

[AMustachianMurse]

I don't believe that is correct.  See the following language from this IRS site (http://www.irs.gov/Retirement-Plans/403b-Plan-Fix-It-Guide-Your-403(b)-plan-didnt-limit-elective-deferrals,-including-catch-up-and-designated-Roth-contributions,-to-the-amounts-specified-under-the-law-in-a-calendar-year):

The 402(g) limit is an individual limit. An employee who participates in more than one plan that allows elective salary deferrals is subject to a single 402(g) limit.
An employee who participates in more than one 403(b) plan must combine all elective deferrals to all 403(b) accounts.
An employee who participates in both a 403(b) and a 401(k) plan must combine all elective deferrals to the 403(b) and 401(k) plans.
An employee who participates in both a 403(b) and a 457(b) plan may defer up to $17,500 to the 403(b) plan and another $17,500 to the 457(b) plan in 2014.
To avoid complications with the limitations imposed by IRC Section 415(c), elective deferral contributions may have to be limited to ensure that plan participants stay within the limits.

Crap.  I do need to look into this.  I'll report back soon with some answers.  Thank you for pointing this out.
OP should look into this to avoid a problem.
[/quote]

[snareman1]

Phone: $101 (i'm working on switching from Verizon to T-Mobile, but haven't yet) -

Internet: $80 ($40 with gf)

Auto Insurance: $34

Phone - check out Republic Wireless - $25.month plan unlimited no contract (as long as there is decent sprint signal in your area) You can even buy a dual band motorola defy xt off ebay for around $40..and that plan is $19/mo - thats what I did

Internet - see if you can find a cheaper plan

Auto Insurance - If you have a good driving record, check out http://www.wawanesa.com/us/california/ - they have the best pricing in California - I pay less than you

[Wile E. Coyote]

I don't believe that is correct.  See the following language from this IRS site (http://www.irs.gov/Retirement-Plans/403b-Plan-Fix-It-Guide-Your-403(b)-plan-didnt-limit-elective-deferrals,-including-catch-up-and-designated-Roth-contributions,-to-the-amounts-specified-under-the-law-in-a-calendar-year):

The 402(g) limit is an individual limit. An employee who participates in more than one plan that allows elective salary deferrals is subject to a single 402(g) limit.
An employee who participates in more than one 403(b) plan must combine all elective deferrals to all 403(b) accounts.
An employee who participates in both a 403(b) and a 401(k) plan must combine all elective deferrals to the 403(b) and 401(k) plans.
An employee who participates in both a 403(b) and a 457(b) plan may defer up to $17,500 to the 403(b) plan and another $17,500 to the 457(b) plan in 2014.
To avoid complications with the limitations imposed by IRC Section 415(c), elective deferral contributions may have to be limited to ensure that plan participants stay within the limits.

Crap.  I do need to look into this.  I'll report back soon with some answers.  Thank you for pointing this out.
OP should look into this to avoid a problem.

[/quote]


It looks like 457(b) plans are different.  Perhaps that is what you were thinking of.  This is a bit old, so you may want to check to see if anything has changed, but this has a summary:

http://benefitsattorney.com/charts/plancomparison/

[Unique User]

Best Plan For a City Where Homes Too Expensive to Buy?

Rent. In my neighborhood, pay 1,700 mortgage/tax/insurance and $450 HOA (after 10% downpayment) for the dumpiest one bedroom condo.  Or pay $1,300 in rent for a slightly smaller one bedroom apartment  in an amenities-free building.  I rent.

The other solution is to move.

The other other solution is to buy a duplex or three-unit and live in one while renting out the other(s). I know people who have made the Bay Area very livable for themselves that way.

But you would need way more up front capital for that purchase right?

Check out Homepath.com.  It's the Fannie Mae site for foreclosed properties.  If you purchase a property with a Homepath Mortgage (has to be a home that is eligible for a Homepath mortgage, not all are) you can put down 5% and not have to pay PMI. 

[AMustachianMurse]

Even on Homepath a 1br/1ba is $231,000 in my area.  Applying the 2% rule, I would have to rent the place out at $4618/month lol.  I pay $900/month for my 1 br/1ba....this is why when I learned about all the people making money at real estate I simply didn't believe it. 

Frankly I dont understand how any one in SD isn't taking a massive loss in san diego unless they inherited their property from family.

[Daleth]

Even on Homepath a 1br/1ba is $231,000 in my area.  Applying the 2% rule, I would have to rent the place out at $4618/month lol.  I pay $900/month for my 1 br/1ba....this is why when I learned about all the people making money at real estate I simply didn't believe it. 

Frankly I dont understand how any one in SD isn't taking a massive loss in san diego unless they inherited their property from family.

The 2% rule applies to low-cost properties (like under $100k, stuff you won't find in San Diego) and crazy-good deals (also unlikely in SD). So forget the 2% rule. There is a 1% rule that applies more generally--basically, if the property you're considering could generate a monthly rent price of about 1% of its purchase + rehab price (or just purchase price if no rehab is needed), then it is a good deal. So you would need to rent out that 1BR/1ba for $2310/mo, not twice that.

A link on the 2% and 1% rules: http://www.biggerpockets.com/renewsblog/2013/04/14/the-2-percent-rule/

[AMustachianMurse]

Even on Homepath a 1br/1ba is $231,000 in my area.  Applying the 2% rule, I would have to rent the place out at $4618/month lol.  I pay $900/month for my 1 br/1ba....this is why when I learned about all the people making money at real estate I simply didn't believe it. 

Frankly I dont understand how any one in SD isn't taking a massive loss in san diego unless they inherited their property from family.

The 2% rule applies to low-cost properties (like under $100k, stuff you won't find in San Diego) and crazy-good deals (also unlikely in SD). So forget the 2% rule. There is a 1% rule that applies more generally--basically, if the property you're considering could generate a monthly rent price of about 1% of its purchase + rehab price (or just purchase price if no rehab is needed), then it is a good deal. So you would need to rent out that 1BR/1ba for $2310/mo, not twice that.

A link on the 2% and 1% rules: http://www.biggerpockets.com/renewsblog/2013/04/14/the-2-percent-rule/

Ah, thanks Dalek that at least makes things a bit more favorable.  Even at the 1% rule 2300 is still 2.5x what i'm paying for a similar place's rent.  How do HOA fees factor into the rental property calculations?

[malacca]

RE can be a great long term investment - especially if you have cash to buy.

I have a bunch of properties in 3 countries but will be renting when I move to San Diego this winter. In many parts of SD it is cheaper to rent. There is a lot of old money squatting in SD and a big property tax disincentive to sell - so prices in desirable areas are high.

If you want to jump into RE, buy a lower-end property that has decent returns. If you are not handy, I would suggest a condo or town house. You may even want to find a good property manager until you have more experience.

Take the return from the property and use it for your rent.

It is like having an investment that makes 9% a year instead of 3%. Only downside is that you can't blow a bunch of bucks "customizing" your home. Gosh darn.

Malacca

PS Congratulations on moving in the right direction. You will one day reach FI - a great feeling.

[socalwkr]

I too live in San Diego.  I looked into buying in 2007 and it was terribly expensive so sat on the sidelines until late 2009 and was able to get a house as a foreclosure that is now worth a decent amount more.  As you are single and have great rent-very low for downtown, coworkers are paying $1400 +, you should stay put.  No real need to move until you have kids if that is in your plan, and honestly, you may not want to live downtown when you have them. 

You may want to stash your additional savings after gf moves in into a downpayment fund.  We waited to buy a place that we would be happy with indefinitely, and were able to scrape together enough money for a conforming loan and nearly 20% down.  The market is pretty high right now.  I follow real estate closely here and I would start doing research on www.sdlookup.com and/or have a realtor sign you up for alerts. 

I don't think I will ever leave San Diego!  I also agree about a duplex/triplex for buying but my husband wasn't too interested in that :(

[AMustachianMurse]

I too live in San Diego.  I looked into buying in 2007 and it was terribly expensive so sat on the sidelines until late 2009 and was able to get a house as a foreclosure that is now worth a decent amount more.  As you are single and have great rent-very low for downtown, coworkers are paying $1400 +, you should stay put.  No real need to move until you have kids if that is in your plan, and honestly, you may not want to live downtown when you have them. 

You may want to stash your additional savings after gf moves in into a downpayment fund.  We waited to buy a place that we would be happy with indefinitely, and were able to scrape together enough money for a conforming loan and nearly 20% down.  The market is pretty high right now.  I follow real estate closely here and I would start doing research on www.sdlookup.com and/or have a realtor sign you up for alerts. 

I don't think I will ever leave San Diego!  I also agree about a duplex/triplex for buying but my husband wasn't too interested in that :(

Yeah, especially because the only possible places a non multi-millionaire can buy a duplex or triplex in SD (not including south bay) is in normal heights or barrio logan...and you do not want to raise children in the schools of those area.  However, solely as an investment property without regards to children, I think buying in those places is a super solid investment.  I see barrio logan turning into what North Park is now, in like 10-20 years.  And a lot of prominent architects are setting up shop in Barrio which is one good indicator of how things are trending.  But property in Barrio Logan is like...a super long term investment for sure.  And it may never get cleaned up and you will just have a property in an area where people don't play safe and where no family wants to rent because the schools are riddled with gangs. 

[Goldielocks]

Rent.

Save $$'s, then MOVE and retire to a lower cost area where you can perhaps be a landlord with good buy versus rent $$ returns.  Depending on how you like your work, this may be 10 years or more from now.