Wow, thank you for all the excellent responses! I'll do my best to answer everyone's questions, I really appreciate the advice and insight.
I'm not sure that framing your question with only two answers is super-helpful... it cuts off a bunch of other options.
Are you sure you want to buy with only 5% down, and borrowed at that? Do both the places you're looking at actually cost you less than renting? Why do you need a bigger place? Could you get a tiny place in the East Bay instead, either bought or rented? (After all, if you think you can manage in a small place in SF, you can probably manage in a small place in the East Bay.) How sure are you that you'll continue to work/live in the bay area? What kind of commuting are you talking about -- car or transit? When you say you'll be out of debt in 12-14 months, do you mean out of non-mortgage debt?
We're actually going to end up paying an extra $200-$300 a month to own this condo compared to where we're currently renting. But we'd likely be paying more to move anywhere else, even if we were still renting. We've been in the same small (425 sq ft) studio for 3 years now, and management is raising the rent the legal max (10%) each year on us, but they still haven't caught up with the bay area rental market.
I'm unclear what the disadvantage is to owning without the full 20% down payment. Isn't owning better than renting long term? It's a fixed rate mortgage, so my payment will not go up (unlike the rent). And I'll be building equity on the purchase amount when I decide to sell - isn't this leverage? Or I could rent it out and let someone else pay the mortgage off for me when I decide to move.
We feel fairly confident that we will be in the bay area for the next few years at least, as there are far more employment opportunities here than in our hometown (Sacramento). I work in tech and the jobs in Silicon Valley are plentiful.
Right now all the commuting is done by car. The tiny condo we're planning on buying is in San Bruno, she works in San Francisco and I work in Palo Alto. There would not be public transit options for her either way. I could take the train down to Palo Alto each day, but the monthly pass is comparable to my fuel cost, and the train actually takes longer.
Yes, I meant non-mortgage debt.
I'd say tiny condo and short(er) commute.
I could just be tired but I kinda got the vibe you're maybe trying to justify buying more space than you need and commuting longer for it.
That sounds exactly like something all the unmustachian people in my office would say/do. No offense.
I don't know your salaries or any other information, but if you stick to your guns you'll probably have the condo paid off sooner than you think. (If you choose to go the 'accelerated mortgage payoff' route.) I realize SF Bay area is one of the most expensive in the country, I'm in probably the other most expensive area (NYC Metro)
You're probably right, but I think most off all I'm frustrated with the situation. I wanted to be sure to communicate that the tiny condo isn't in a great location where I can easily walk and bike to stuff, and the large one is out in the suburbs. The tiny condo is also in the suburbs, they are just unreasonably expensive suburbs because they are close to San Francisco and tech jobs. So in my mind there are large drawbacks to both choices.
I make $55k/yr, she makes $50k/yr. So far we've reduced our expenses to the point where $42k/yr can go to debt/stash.
I've been curious about the accelerated mortgage payoff route. When we do pay off our non-mortgage debt next year, should we point the firehose of cash towards a nice Vanguard index fund/REIT portfolio or use it to cut down that mortgage? I really don't know what is best.
We would be mortified at the prospect of moving into 1,100 square feet at this point, as we'd have to buy lots of stuff to fill the extra space, lest we live in a big empty house. We enjoy paying peanuts for our utilities and most importantly, our central, walkable, bikeable location.
We wouldn't trade our location for the East Bay or the South Bay, but that's in large part because our social lives and our extracurricular activities are based here in the city.
We choose to rent our small condo rather than buy, even though at our incomes we could afford a much larger condo in San Francisco. It would take several years to "break even" on the expenses of buying a larger condo, and we don't want the headaches if we decide to relocate. We also feel we get a better return on our investments than we would on a condo, and we don't like the idea of being in debt.
I think there's many options for housing in the Bay Area, not just two. I would say area you live in is very important, if you're young, you should be leading a fairly active life, not staying at home too much. But that's just my two cents.
We're in San Mateo now in a 425sq ft apartment, she commutes to the Sunset, I commute to Palo Alto. The tiny condo is on the other side of 280 in San Bruno, on top of a big hill - which is not a great location for walking and biking to much of anything. If it was a great location, that would make the decision that much easier.
What do you mean it will take several years to break even on buying a larger condo? You say you're getting a better ROI than on a condo, but isn't the ROI on rent 0%?
I wish we had an active life with lots of friends, but unfortunately with my demanding work schedule and not really knowing anyone in town - that really hasn't happened. :(
1. I think Gerard has raised some excellent points about whether either of these two options is best! I would really question if you are ready for this kind of investment with zero down payment saved. And you already have other unspecified debt. It flies in the face of just about everything MMM espouses to go into further debt buying a house with zero down payment saved.
2. You say you already have an accepted offer on the smaller condo. You don't just back out of that and choose a different condo, either legally or ethically. I'm assuming you put up earnest money, which would be rightfully forfeited if you backed out now.
3. I would also highly advise against buying property with a girlfriend. It's a bad decision, fraught with all kinds of peril, but good luck.
Great response!
1. Can you elaborate on this? As I understand it, we're going to be paying a comparable amount each month to own rather than rent. However, the payment is not going to increase and will eventually stop. Also, we have the chance to build equity on the home's full purchase price (leverage), which gives us a nice chunk to add to the stash when we sell. Or we could turn it into a rental property. Many of MMM's articles assume you already have a house, so how does buying one fly in the face of mustachianism?
2. Yes, we are in escrow and have paid earnest money. However, we have inspection and HOA contingencies that allow us to back out of the deal without losing the down payment. The last of those expires at the end of next week, after that we either buy the place or lose our money.
3. That's a great warning. She's more than a girlfriend really, we're domestic partners. We've been together about 4 years, and have been living together for 3.
How long have you two been together?
Personally, I'd have a hard time adjusting to sharing just 490 SF with another person. My bedroom is greater than 300 SF.... However, the area of the country I live in has cheap cheap cheap real estate compared to SF. Sure people share smaller spaces than that... but you gotta be extremely extremely compatible or co-dependent. I'd go bonkers by myself living in such a small place. Then again, I have a decent sized fixer upper house. So I have plenty to do at the house to return it to its glory.
What's the differential between a monthly rent payment on a 490 SF apartment vs. a a mortgage payment on a 490 SF condo?
Living in a cool area will make up for some of the shortfalls of limited space. But it might encourage going out more to enjoy all the stuff you can walk to like bars and restaurants.
I'd rent, and stash money like crazy! How old are you two? Is San Francisco somewhere you see yourself living in ten years?
I used to live in Seattle for seven years and I loved it the first three or four. Then I got tired of the noise, and traffic, and all the people everywhere all the time. And moved somewhere where I could buy a house and pay less on mortgage, insurance, and property taxes, than I did rent.
We've been together for about 4 years, and for three of those we've shared a 425sq ft apartment. I'm not sure if it's compatibility or co-dependence, but it works out. ;)
I wish I could say the tiny condo was in a cool area, but it's on a hill behind some office parks. Granted, one of those offices is YouTube - but the neighborhood isn't a popping urban metropolis, it's just near a lot of good jobs.
I'm 31, she's 27. In 10 years I hope to be almost retired! I'll probably hope to have moved to a more mustachian city like Sacramento by then. I've considered Seattle too. Where did you end up?
You borrowed the down payment from parents? You aren't married and you are buying property together? In your shoes, I would do neither. Rent in SF, pay off all your debt, decide whether this young lady is "the one," save up a down payment, and then look at buying real estate.
The 24 months includes repaying the down payment. Why do I need to pay off all other debt before I can buy? I'm going to have a rent payment whether or not I'm in debt, isn't it better that it goes towards ownership/returns rather than into thin air?
